c279-20220630x10q

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, 2022

☐ 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 17405-2887

(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 29, 2022, 9,540,770 shares of common stock, par value $2.50, were outstanding.

‎

- 1 -

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 loss	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	37

Item 3.	Quantitative and qualitative disclosures about market risk	51

Item 4.	Controls and procedures	52

PART II – OTHER INFORMATION

Item 1.	Legal proceedings	53

Item 1A.	Risk factors	53

Item 2.	Unregistered sales of equity securities and use of proceeds	54

Item 3.	Defaults upon senior securities	54

Item 4.	Mine safety disclosures	54

Item 5.	Other information	55

Item 6.	Exhibits	56

SIGNATURES		57

‎

- 2 -

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)	2022		2021
Assets
Interest bearing deposits with banks	$	262,122	$	525,644
Cash and due from banks		21,847		19,850
Total cash and cash equivalents		283,969		545,494
Securities, available-for-sale		329,032		254,285
Restricted investment in bank stocks, at cost		955		1,311
Loans held for sale		1,154		7,876
Loans (net of deferred fees of $3,964 - 2022 and $4,368 - 2021)		1,584,532		1,529,751
Less-allowance for loan losses		(22,865)		(22,782)
Net loans		1,561,667		1,506,969
Premises and equipment, net		21,534		21,955
Operating leases right-of-use assets		3,412		1,697
Goodwill		2,301		2,301
Other assets		84,699		76,684
Total assets	$	2,288,723	$	2,418,572

Liabilities
Deposits
Noninterest bearing	$	497,396	$	524,609
Interest bearing		1,542,179		1,619,156
Total deposits		2,039,575		2,143,765
Short-term borrowings		14,249		10,761
Long-term debt		11,565		21,579
Subordinate debentures - face amount $31,000 (less discount and debt
issuance cost of $277 at June 30, 2022 and $317 at December 31, 2021)		30,723		30,683
Operating leases liabilities		3,559		1,803
Other liabilities		13,770		14,476
Total liabilities		2,113,441		2,223,067

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at June 30, 2022 and 0 at December 31, 2021		0		0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
shares issued: 9,883,187 at June 30, 2022 and December 31, 2021; and shares
outstanding: 9,540,803 at June 30, 2022 and 9,472,404 at December 31, 2021		24,708		24,708
Additional paid-in capital		141,678		142,067
Retained earnings		39,926		37,769
Accumulated other comprehensive loss		(23,462)		(164)
Treasury stock shares outstanding, at cost: 342,384 shares at June 30, 2022
and 410,783 at December 31, 2021		(7,568)		(8,875)
Total shareholders' equity		175,282		195,505
Total liabilities and shareholders' equity	$	2,288,723	$	2,418,572

See accompanying notes.
‎

- 3 -

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)	2022		2021		2022		2021
Interest income
Loans, including fees	$	16,788	$	16,492	$	32,469	$	34,084
Investment securities:
Taxable		1,732		790		3,012		1,372
Tax-exempt		105		86		204		180
Dividends		10		23		19		49
Other		648		105		876		186
Total interest income		19,283		17,496		36,580		35,871
Interest expense
Deposits		1,010		1,949		2,072		4,169
Federal funds purchased and other short-term borrowings		12		10		22		18
Long-term debt		83		205		188		457
Subordinated debentures		439		418		858		836
Total interest expense		1,544		2,582		3,140		5,480
Net interest income		17,739		14,914		33,440		30,391
Provision for loan losses		2,974		352		4,001		1,583
Net interest income after provision for loan losses		14,765		14,562		29,439		28,808

Noninterest income
Trust and investment services fees		1,137		1,143		2,299		2,195
Income from mutual fund, annuity and insurance sales		345		344		675		644
Service charges on deposit accounts		1,368		1,319		2,650		2,540
Income from bank owned life insurance		308		427		619		697
Other income		532		359		951		922
Gain on sales of loans held for sale		221		933		579		1,983
Loss on write down of assets held for sale		0		(1,174)		0		(1,174)
Loss on sales of securities		0		0		0		(23)
Total noninterest income		3,911		3,351		7,773		7,784

Noninterest expense
Personnel		8,491		8,268		16,881		16,696
Occupancy of premises, net		922		856		1,901		1,829
Furniture and equipment		812		793		1,699		1,631
Professional and legal		1,055		253		1,914		604
Marketing		433		438		833		703
FDIC insurance		188		192		427		418
Debit card processing		385		397		767		677
Charitable donations		885		750		915		938
External data processing		1,018		858		1,839		1,678
Impaired loan carrying costs		157		87		295		187
Other		1,877		888		3,428		2,125
Total noninterest expense		16,223		13,780		30,899		27,486
Income before income taxes		2,453		4,133		6,313		9,106
Provision for income taxes		500		851		1,307		1,924
Net income	$	1,953	$	3,282	$	5,006	$	7,182
Net income per share, basic	$	0.20	$	0.33	$	0.53	$	0.73
Net income per share, diluted	$	0.20	$	0.33	$	0.52	$	0.73

See accompanying notes.
‎

- 4 -

Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Loss

(Unaudited)



	Three months ended
	June 30,
(dollars in thousands)	2022		2021
Net income	$	1,953	$	3,282
Other comprehensive income:
Securities available for sale:
Net unrealized holding (losses) gains arising during the period
(net of tax (benefit) expense of ($3,497) and $170, respectively)		(9,505)		640
Net unrealized (losses) gains		(9,505)		640
Comprehensive (loss) income	$	(7,552)	$	3,922

	Six months ended
	June 30,
(dollars in thousands)	2022		2021
Net income	$	5,006	$	7,182
Other comprehensive income:
Securities available for sale:
Net unrealized holding losses arising during the period
(net of tax benefit of $7,163 and $391, respectively)		(23,298)		(1,472)
Reclassification adjustment for losses included in net income
(net of tax benefit of $0 and $5, respectively) (a) (b)		0		18
Net unrealized losses		(23,298)		(1,454)
Comprehensive (loss) income	$	(18,292)	$	5,728

(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.

‎

- 5 -

Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



	Six months ended
	June 30,
(dollars in thousands)	2022		2021
Cash flows from operating activities
Net income	$	5,006	$	7,182
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/amortization		1,260		1,317
Net amortization of premiums on securities		438		524
Amortization of deferred loan origination fees and costs		(1,605)		(3,725)
Net amortization of operating lease right of use assets		346		299
Net amortization of finance lease right of use assets		24		24
Amortization of subordinated debentures issuance fees		40		41
Net change in operating lease liabilities		(305)		(307)
Provision for loan losses		4,001		1,583
Writedown of assets held for sale		0		1,174
Increase in bank owned life insurance		(619)		(697)
Originations of mortgage loans held for sale		(13,895)		(54,122)
Originations of SBA loans held for sale		(1,226)		(515)
Proceeds from sales of mortgage loans held for sale		16,348		60,170
Proceeds from sales of SBA loans held for sale		6,067		7,606
Gain on sales of mortgage loans held for sale		(422)		(1,769)
Gain on sales of SBA loans held for sale		(157)		(214)
Loss on disposal of premises and equipment		9		(25)
Loss on sales of securities, available-for-sale		0		23
Stock-based compensation		497		395
(Increase) decrease in interest receivable		(369)		3,058
Decrease (increase) in other assets		617		(761)
Decrease in interest payable		(45)		(203)
(Decrease) increase in other liabilities		(663)		1,503
Net cash provided by operating activities		15,347		22,561
Cash flows from investing activities
Purchases of securities, available-for-sale		(126,719)		(207,323)
Maturities, repayments and calls of securities, available-for-sale		21,074		177,523
Sales of securities, available-for-sale		0		3,803
Net decrease in restricted investment in bank stock		356		1,282
Net (increase) decrease in loans made to customers		(67,870)		3,667
Proceeds from sale of commercial loans held for sale		10,298		0
Purchases of premises and equipment		(867)		(543)
Investment in bank owned life insurance		0		(7,000)
Proceeds from bank owned life insurance		0		450
Net cash used in investing activities		(163,728)		(28,141)
Cash flows from financing activities
Net (decrease) increase in demand and savings deposits		(53,835)		114,372
Net decrease in time deposits		(50,355)		(22,581)
Net increase in short-term borrowings		3,488		4,853
Repayment of long-term debt		(10,000)		(25,000)
Net change in finance lease liabilities		(14)		(14)
Cash dividends paid to shareholders		(2,849)		(2,562)
Payment of taxes related to stock withheld		(70)		(5)
Treasury stock reissued		525		188
Treasury stock repurchased		(34)		(2,672)
Proceeds from issuance of stock, net		0		240
Net cash (used in) provided by financing activities		(113,144)		66,819
Net (decrease) increase in cash and cash equivalents		(261,525)		61,239
Cash and cash equivalents at beginning of year		545,494		335,793
Cash and cash equivalents at end of period	$	283,969	$	397,032

See accompanying notes.

- 6 -

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		(Loss) Income		Stock		Total
Balance, January 1, 2022	$	24,708	$	142,067	$	37,769	$	(164)	$	(8,875)	$	195,505
Net income						3,053						3,053
Other comprehensive loss, net of tax								(13,793)				(13,793)
Cash dividends ($0.15 per share)						(1,421)						(1,421)
Stock-based compensation				289								289
Repurchased stock - 1,535 shares										(34)		(34)
Withheld stock - 3,177 shares										(70)		(70)
Issuance and reissuance of stock:
6,734 shares under the dividend reinvestment and stock purchase plan				20						126		146
3,137 shares under the employee stock option plan				(15)						59		44
50,559 shares of stock-based compensation awards				(952)						952		0
Balance, March 31, 2022	$	24,708	$	141,409	$	39,401	$	(13,957)	$	(7,842)	$	183,719
Balance, April 1, 2022	$	24,708	$	141,409	$	39,401	$	(13,957)	$	(7,842)	$	183,719
Net income						1,953						1,953
Other comprehensive loss, net of tax								(9,505)				(9,505)
Cash dividends ($0.15 per share)						(1,428)						(1,428)
Stock-based compensation				208								208
Forfeiture of restricted stock and withheld shares - 6,659 shares				91						(91)		0
Issuance and reissuance of stock:
6,348 shares under the dividend reinvestment and stock purchase plan				22						120		142
5,769 shares under the stock option plan				(48)						109		61
7,223 shares under employee stock purchase plan				(4)						136		132
Balance, June 30, 2022	$	24,708	$	141,678	$	39,926	$	(23,462)	$	(7,568)	$	175,282
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 ($0.13 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 ($0.13 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 the stock option plan				(41)						183		142
Balance, June 30, 2021	$	24,708	$	141,940	$	33,000	$	2,114	$	(2,489)	$	199,273

See accompanying notes.

- 7 -

Note 1—Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2021 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, 2022, 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, 2022. 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, 2021.

The results of operations for the three and six months ended June 30, 2022 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, 2022 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.

While the Corporation continues to evaluate the disruption caused by the pandemic, these events may have a material adverse impact on the Corporation’s results of future operations, financial position, capital, and liquidity in fiscal year 2022. 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.

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,

- 8 -

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 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.

- 9 -

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. Generally 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). This program ended December 31, 2021.

Loan-Level Interest Rate Swaps

During the second quarter of 2021, PeoplesBank entered into loan-level interest rate swaps (“swaps”) to facilitate certain client transactions and to 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 clients, 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 client pays a fixed interest rate and PeoplesBank receives a floating interest rate. The swap positions with clients 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.

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 client, 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 clients may only be executed with clients 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.

- 10 -

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, 2022 and December 31, 2021 consisted of one retail banking property which was closed in the second quarter of 2022, totaling $567,000 and is included in other assets on the Consolidated Balance Sheets.

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, 2022 there was $479,000 of foreclosed real estate, none of which was residential real estate compared to no foreclosed real estate at December 31, 2021. As of June 30, 2022, there were no 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 $102,000 as of December 31, 2021.

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, 2022, the balance of residential mortgage loans serviced for third parties was $59,585,000 compared to $66,885,000 at December 31, 2021.



		Three months ended				Six months ended
		June 30,				June 30,
(dollars in thousands)		2022		2021		2022		2021
Amortized cost:
Balance at beginning of period	$	345	$	524	$	380	$	511
Originations of mortgage servicing rights		1		15		6		31
Amortization expense		(31)		(83)		(71)		(174)
Valuation allowance		0		2		0		90
Balance at end of period	$	315	$	458	$	315	$	458

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 analysis of goodwill, the Corporation concluded that the amount of recorded goodwill was not impaired as of October 1, 2021. There were no conditions or events that would trigger an anlysis or impairment since October 1, 2021.

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.

- 11 -

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 clients. 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 clients. 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 client 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 clients’ 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.

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)	2022		2021		2022		2021
Net income	$	1,953	$	3,282	$	5,006	$	7,182

Weighted average shares outstanding (basic)		9,532		9,816		9,509		9,829
Effect of dilutive stock options		33		32		32		29
Weighted average shares outstanding (diluted)		9,565		9,848		9,541		9,858

Basic earnings per share	$	0.20	$	0.33	$	0.53	$	0.73
Diluted earnings per share	$	0.20	$	0.33	$	0.52	$	0.73

- 12 -

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)		2022		2021
Cash paid during the period for:
Income taxes	$	393	$	2,385
Interest	$	3,184	$	5,682

Noncash investing and financing activities:
Transfer of loans to foreclosed real estate	$	479	$	0
Transfer of loans to held for sale	$	16,617		0
Transfer of premises and equipment to assets held for sale	$	0	$	2,119
Initial recognition of operating lease right-of-use assets	$	2,061	$	18
Initial recognition of operating lease liabilities	$	2,061	$	18

Recent Accounting Pronouncements

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 selected a third party vendor solution to assist with the application of ASU 2016-013 and the loss estimation models are materially complete. As the related data governance documentation is finalized, a third party will be contracted to perform a model validation prior to adoption. While the Corporation anticipates the allowance for loan losses will increase under its current assumptions, the impact of adopting ASU 2016-013 will be influenced by the composition, characteristics and quality of its loan and investment securities portfolios, as well as general economic conditions and forecasts at the adoption date.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (TDRs), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. ASU 2022-02 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Staff Accounting Bulletin No. 121 (SAB 121) was issued on March 31, 2022 by the Securities and Exchange Commission to provide interpretive guidance for a reporting entity performing certain custodial type activities and maintaining the private, cryptographic key information. The Corporation has reviewed the guidance and concluded there is not an obligation or perception to safeguard the crypto-assets. In addition, there are no crypto-assets specifically identified as collateral for any loan. The Corporation has also concluded there is no requirement to record a safeguarding asset or corresponding safeguarding liability.

- 13 -

Note 2 – Securities

A summary of securities available-for-sale at June 30, 2022 and December 31, 2021 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. Corporates include subordinated debt issued by domestic community banks. 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, 2022, 81 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania. The portfolio was intentionally distributed to limit exposure with the largest issuer at $1.9 million. At June 30, 2022 and December 31, 2021, 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, 2022
Debt securities:
U.S. Treasury notes	$	14,693	$	0	$	(67)	$	14,626
U.S. agency		10,500		0		(964)		9,536
U.S. agency mortgage-backed, residential		258,411		131		(21,976)		236,566
State and municipal		38,237		44		(5,537)		32,744
Corporates		37,860		7		(2,307)		35,560
Total debt securities	$	359,701	$	182	$	(30,851)	$	329,032
December 31, 2021
Debt securities:
U.S. agency	$	3,500	$	0	$	(104)	$	3,396
U.S. agency mortgage-backed, residential		181,783		2,148		(1,996)		181,935
State and municipal		36,319		250		(413)		36,156
Corporates		32,891		166		(259)		32,798
Total debt securities	$	254,493	$	2,564	$	(2,772)	$	254,285

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)	2022		2021		2022		2021
Proceeds	$	0	$	0	$	0	$	3,803
Gross gains		0		0		0		24
Gross losses		0		0		0		(47)
Tax benefit		0		0		0		5

The amortized cost and estimated fair value of debt securities at June 30, 2022 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	$	2,541	$	2,539
Due after one year through five years		115,607		110,675
Due after five years through ten years		199,076		178,880
Due after ten years		42,477		36,938
Total debt securities	$	359,701	$	329,032

Investment securities having a carrying value of $197,965,000 and $184,938,000 on June 30, 2022 and December 31, 2021, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

- 14 -

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, 2022 and December 31, 2021.


	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, 2022
Debt securities:
U.S. Treasury notes	3	$	14,626	$	(67)	0	$	0	$	0	3	$	14,626	$	(67)
U.S. agency	7		7,852		(648)	1		1,684		(316)	8		9,536		(964)
U.S. agency mortgage-backed, residential	169		197,138		(16,799)	20		30,548		(5,177)	189		227,686		(21,976)
State and municipal	32		18,831		(2,896)	10		10,316		(2,641)	42		29,147		(5,537)
Corporates	28		32,584		(2,281)	1		474		(26)	29		33,058		(2,307)
Total temporarily impaired debt
securities, available-for-sale	239	$	271,031	$	(22,691)	32	$	43,022	$	(8,160)	271	$	314,053	$	(30,851)
December 31, 2021
Debt securities:
U.S. agency	2	$	3,396	$	(104)	0	$	0	$	0	2	$	3,396	$	(104)
U.S. agency mortgage-backed, residential	62		112,395		(1,665)	5		12,373		(331)	67		124,768		(1,996)
State and municipal	22		20,481		(355)	2		2,749		(58)	24		23,230		(413)
Corporates	13		15,737		(244)	1		485		(15)	14		16,222		(259)
Total temporarily impaired debt
securities, available-for-sale	99	$	152,009	$	(2,368)	8	$	15,607	$	(404)	107	$	167,616	$	(2,772)

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, 2022 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, 2022 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, 2022 and December 31, 2021, 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, 2022 and 2021. 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)

- 15 -

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, 2022 and 2021.

Note 4—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at June 30, 2022 and December 31, 2021. 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.

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)	2022		Loans		2021		Loans
Builder & developer	$	151,749		9.6	$	156,462		10.2
Commercial real estate investor		377,800		23.8		322,887		21.1
Residential real estate investor		237,899		15.0		227,017		14.8
Hotel/Motel		69,525		4.4		70,254		4.6
Wholesale & retail		66,312		4.2		76,340		5.0
Manufacturing		80,933		5.1		72,720		4.8
Agriculture		95,025		6.0		95,317		6.2
Service		67,919		4.3		65,163		4.3
Other		208,222		13.1		222,179		14.5
Total commercial related loans		1,355,384		85.5		1,308,339		85.5
Residential mortgages		111,704		7.0		103,741		6.8
Home equity		94,453		6.0		94,842		6.2
Other		22,991		1.5		22,829		1.5
Total consumer related loans		229,148		14.5		221,412		14.5
Total loans	$	1,584,532		100.0	$	1,529,751		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 Watch and Special Asset Committees, which includes senior management. The Committees, which typically meet at least quarterly, make changes, as appropriate, to these risk ratings. In addition to review by the Committees, 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 President/CEO or CFO may approve a downgrade of a loan to non-accrual status. The Special Asset Committee or President/CEO may upgrade a loan that is criticized or classified.

The Corporation uses eleven risk ratings to grade commercial loans. The first six 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.

- 16 -

The table below presents a summary of loan risk ratings by loan class at June 30, 2022 and December 31, 2021.



			Special
(dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total
June 30, 2022
Builder & developer	$	134,874	$	5,450	$	9,099	$	2,326	$	151,749
Commercial real estate investor		374,413		614		223		2,550		377,800
Residential real estate investor		236,524		0		391		984		237,899
Hotel/Motel		64,700		0		4,825		0		69,525
Wholesale & retail		63,832		319		2,161		0		66,312
Manufacturing		76,003		0		679		4,251		80,933
Agriculture		81,772		11,711		386		1,156		95,025
Service		61,320		395		6,204		0		67,919
Other		191,657		1,270		11,083		4,212		208,222
Total commercial related loans		1,285,095		19,759		35,051		15,479		1,355,384
Residential mortgage		111,601		0		0		103		111,704
Home equity		93,977		0		0		476		94,453
Other		22,903		0		0		88		22,991
Total consumer related loans		228,481		0		0		667		229,148
Total loans	$	1,513,576	$	19,759	$	35,051	$	16,146	$	1,584,532

December 31, 2021
Builder & developer	$	142,983	$	6,016	$	6,656	$	807	$	156,462
Commercial real estate investor		316,976		929		1,039		3,943		322,887
Residential real estate investor		226,126		0		611		280		227,017
Hotel/Motel		40,789		0		17,273		12,192		70,254
Wholesale & retail		73,821		1,346		1,173		0		76,340
Manufacturing		67,544		0		51		5,125		72,720
Agriculture		90,226		80		714		4,297		95,317
Service		57,667		404		6,121		971		65,163
Other		201,226		1,384		14,197		5,372		222,179
Total commercial related loans		1,217,358		10,159		47,835		32,987		1,308,339
Residential mortgage		103,669		0		10		62		103,741
Home equity		94,358		47		0		437		94,842
Other		22,733		0		0		96		22,829
Total consumer related loans		220,760		47		10		595		221,412
Total loans	$	1,438,118	$	10,206	$	47,845	$	33,582	$	1,529,751

Impaired Loans

The table below presents a summary of impaired loans at June 30, 2022 and December 31, 2021. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for those individual loans 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.

‎

- 17 -




	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, 2022
Builder & developer	$	984	$	1,072	$	1,520	$	1,537	$	435	$	2,504	$	2,609
Commercial real estate investor		2,878		4,105		0		0		0		2,878		4,105
Residential real estate investor		769		907		215		215		163		984		1,122
Hotel/Motel		0		0		0		0		0		0		0
Wholesale & retail		0		0		0		0		0		0		0
Manufacturing		4,251		4,776		0		0		0		4,251		4,776
Agriculture		408		482		748		930		400		1,156		1,412
Service		0		0		0		0		0		0		0
Other commercial		0		0		4,212		5,075		3,263		4,212		5,075
Total impaired commercial related loans		9,290		11,342		6,695		7,757		4,261		15,985		19,099
Residential mortgage		874		103		0		0		0		874		103
Home equity		476		521		0		0		0		476		521
Other consumer		88		99		0		0		0		88		99
Total impaired consumer related loans		1,438		723		0		0		0		1,438		723
Total impaired loans	$	10,728	$	12,065	$	6,695	$	7,757	$	4,261	$	17,423	$	19,822



December 31, 2021
Builder & developer	$	991	$	1,078	$	0	$	0	$	0	$	991	$	1,078
Commercial real estate investor		2,834		2,854		1,878		1,878		1,464		4,712		4,732
Residential real estate investor		280		438		0		0		0		280		438
Hotel/Motel		12,192		12,754		0		0		0		12,192		12,754
Wholesale & retail		0		0		0		0		0		0		0
Manufacturing		5,125		5,501		0		0		0		5,125		5,501
Agriculture		2,709		2,893		1,588		1,784		467		4,297		4,677
Service		0		0		971		1,061		377		971		1,061
Other commercial		3,622		4,376		1,750		2,389		1,750		5,372		6,765
Total impaired commercial related loans		27,753		29,894		6,187		7,112		4,058		33,940		37,006
Residential mortgage		62		64		0		0		0		62		64
Home equity		437		474		0		0		0		437		474
Other consumer		96		104		0		0		0		96		104
Total impaired consumer related loans		595		642		0		0		0		595		642
Total impaired loans	$	28,348	$	30,536	$	6,187	$	7,112	$	4,058	$	34,535	$	37,648

‎

- 18 -

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, 2022 and 2021. 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, 2022
Builder & developer	$	986	$	0	$	760	$	0	$	1,746	$	0
Commercial real estate investor		3,153		14		0		0		3,153		14
Residential real estate investor		466		0		107		0		573		0
Hotel/Motel		6,037		0		0		0		6,037		0
Wholesale & retail		0		0		0		0		0		0
Manufacturing		4,495		16		0		0		4,495		16
Agriculture		1,409		315		374		0		1,783		315
Service		0		0		486		0		486		0
Other commercial		181		62		4,243		0		4,424		62
Total impaired commercial related loans		16,727		407		5,970		0		22,697		407
Residential mortgage		468		7		559		8		1,027		15
Home equity		467		27		0		0		467		27
Other consumer		90		0		0		0		90		0
Total impaired consumer related loans		1,025		34		559		8		1,584		42
Total impaired loans	$	17,752	$	441	$	6,529	$	8	$	24,281	$	449

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

- 19 -



	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, 2022
Builder & developer	$	988	$	0		507	$	0	$	1,495	$	0
Commercial real estate investor		3,047		14		626		0		3,673		14
Residential real estate investor		404		23		72		0		476		23
Hotel/Motel		8,090		0		0		0		8,090		0
Wholesale & retail		0		0		0		0		0		0
Manufacturing		4,705		37		0		0		4,705		37
Agriculture		1,842		501		779		0		2,621		501
Service		0		0		647		0		647		0
Other commercial		1,328		177		3,412		0		4,740		177
Total impaired commercial related loans		20,404		752		6,043		0		26,447		752
Residential mortgage		333		7		372		8		705		15
Home equity		457		27		0		0		457		27
Other consumer		91		0		0		0		91		0
Total impaired consumer related loans		881		34		372		8		1,253		42
Total impaired loans	$	21,285	$	786		6,415	$	8	$	27,700	$	794

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

‎

- 20 -

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, 2022 and December 31, 2021.



					≥ 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, 2022
Builder & developer	$	418	$	0	$	0	$	2,326	$	2,744	$	149,005	$	151,749
Commercial real estate investor		0		0		0		2,550		2,550		375,250		377,800
Residential real estate investor		0		0		0		984		984		236,915		237,899
Hotel/Motel		0		0		0		0		0		69,525		69,525
Wholesale & retail		0		0		0		0		0		66,312		66,312
Manufacturing		0		0		0		4,251		4,251		76,682		80,933
Agriculture		0		0		0		1,156		1,156		93,869		95,025
Service		4,505		0		0		0		4,505		63,414		67,919
Other		0		0		0		4,212		4,212		204,010		208,222
Total commercial related loans		4,923		0		0		15,479		20,402		1,334,982		1,355,384
Residential mortgage		0		0		0		103		103		111,601		111,704
Home equity		307		114		0		476		897		93,556		94,453
Other		9		0		0		88		97		22,894		22,991
Total consumer related loans		316		114		0		667		1,097		228,051		229,148
Total loans	$	5,239	$	114	$	0	$	16,146	$	21,499	$	1,563,033	$	1,584,532

December 31, 2021
Builder & developer	$	0	$	0	$	0	$	807	$	807	$	155,655	$	156,462
Commercial real estate investor		0		812		0		3,943		4,755		318,132		322,887
Residential real estate investor		0		0		0		280		280		226,737		227,017
Hotel/Motel		0		0		0		12,192		12,192		58,062		70,254
Wholesale & retail		0		183		0		0		183		76,157		76,340
Manufacturing		0		0		0		5,125		5,125		67,595		72,720
Agriculture		0		0		324		4,297		4,621		90,696		95,317
Service		0		0		0		971		971		64,192		65,163
Other		9		34		0		5,372		5,415		216,764		222,179
Total commercial related loans		9		1,029		324		32,987		34,349		1,273,990		1,308,339
Residential mortgage		0		308		0		62		370		103,371		103,741
Home equity		193		0		0		437		630		94,212		94,842
Other		5,869		132		0		96		6,097		16,732		22,829
Total consumer related loans		6,062		440		0		595		7,097		214,315		221,412
Total loans	$	6,071	$	1,469	$	324	$	33,582	$	41,446	$	1,488,305	$	1,529,751

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 $2,967,000 at June 30, 2022 and $954,000 at December 31, 2021. There was a $1,690,000 allowance allocated at June 30, 2022 and none at December 31, 2021. 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 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 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.

- 21 -

As of June 30, 2022, there are no modifications for consumer loans, no modifications for mortgage loans and three commercial loans totaling approximately $26,298,000 under the CARES Act, which are not considered TDRs. As of June 30, 2021, there were 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.

The below table shows loans whose terms have been modified as TDRs during the three and six months ended June 30, 2022 and 2021. TDR concessions include maturity extensions, below market interest rates relative to new debt with similar risk and interest or principal forgiveness. There were no defaults for the three and six months ended June 30, 2022 and June 30, 2021 for TDRs entered into during the previous 12 month period.



	TDR Modifications

	Number	Recorded
	of	Investment
(dollars in thousands)	Contracts	at Period End
Three months ended:

June 30, 2022
Consumer related loans accruing	1	$	638

June 30, 2021
None

Six months ended:

June 30, 2022
Commercial related loans nonaccrual	2	$	0
Consumer related loans accruing	2	$	771
Consumer related loans nonaccrual	1	$	0

June 30, 2021
None

- 22 -

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, 2022 and 2021.



	Allowance for Loan Losses
	April 1, 2022								June 30, 2022
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,275	$	0	$	0	$	15	$	2,290
Commercial real estate investor		5,082		0		0		684		5,766
Residential real estate investor		3,202		0		3		278		3,483
Hotel/Motel		565		(1,659)		0		2,356		1,262
Wholesale & retail		1,983		0		0		(1,465)		518
Manufacturing		999		0		0		(141)		858
Agriculture		1,205		0		0		249		1,454
Service		976		(488)		0		339		827
Other commercial		5,112		0		5		819		5,936
Total commercial related loans		21,399		(2,147)		8		3,134		22,394
Residential mortgage		363		0		0		(151)		212
Home equity		190		(4)		1		8		195
Other consumer		73		(1)		7		(4)		75
Total consumer related loans		626		(5)		8		(147)		482
Unallocated		2		0		0		(13)		(11)
Total	$	22,027	$	(2,152)	$	16	$	2,974	$	22,865



	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
	January 1, 2022								June 30, 2022
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,408	$	0	$	0	$	(118)	$	2,290
Commercial real estate investor		5,647		(1,227)		0		1,346		5,766
Residential real estate investor		3,493		0		9		(19)		3,483
Hotel/Motel		968		(1,659)		0		1,953		1,262
Wholesale & retail		1,989		0		0		(1,471)		518
Manufacturing		883		0		0		(25)		858
Agriculture		1,307		(535)		0		682		1,454
Service		981		(488)		0		334		827
Other commercial		4,656		(3)		24		1,259		5,936
Total commercial related loans		22,332		(3,912)		33		3,941		22,394
Residential mortgage		186		0		0		26		212
Home equity		191		(49)		2		51		195
Other consumer		74		(3)		11		(7)		75
Total consumer related loans		451		(52)		13		70		482
Unallocated		(1)		0		0		(10)		(11)
Total	$	22,782	$	(3,964)	$	46	$	4,001	$	22,865



	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 -

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, 2022 and December 31, 2021.



	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, 2022
Builder & developer	$	435	$	1,855	$	2,290	$	2,504	$	149,245	$	151,749
Commercial real estate investor		0		5,766		5,766		2,878		374,922		377,800
Residential real estate investor		163		3,320		3,483		984		236,915		237,899
Hotel/Motel		0		1,262		1,262		0		69,525		69,525
Wholesale & retail		0		518		518		0		66,312		66,312
Manufacturing		0		858		858		4,251		76,682		80,933
Agriculture		400		1,054		1,454		1,156		93,869		95,025
Service		0		827		827		0		67,919		67,919
Other commercial		3,263		2,673		5,936		4,212		204,010		208,222
Total commercial related		4,261		18,133		22,394		15,985		1,339,399		1,355,384
Residential mortgage		0		212		212		103		111,601		111,704
Home equity		0		195		195		476		93,977		94,453
Other consumer		0		75		75		88		22,903		22,991
Total consumer related		0		482		482		667		228,481		229,148
Unallocated		0		(11)		(11)		0		0		0
Total	$	4,261	$	18,604	$	22,865	$	16,652	$	1,567,880	$	1,584,532



December 31, 2021
Builder & developer	$	0	$	2,408	$	2,408	$	991	$	155,471	$	156,462
Commercial real estate investor		1,464		4,183		5,647		4,712		318,175		322,887
Residential real estate investor		0		3,493		3,493		280		226,737		227,017
Hotel/Motel		0		968		968		12,192		58,062		70,254
Wholesale & retail		0		1,989		1,989		0		76,340		76,340
Manufacturing		0		883		883		5,125		67,595		72,720
Agriculture		467		840		1,307		4,297		91,020		95,317
Service		377		604		981		971		64,192		65,163
Other commercial		1,750		2,906		4,656		5,372		216,807		222,179
Total commercial related		4,058		18,274		22,332		33,940		1,274,399		1,308,339
Residential mortgage		0		186		186		62		103,679		103,741
Home equity		0		191		191		437		94,405		94,842
Other consumer		0		74		74		96		22,733		22,829
Total consumer related		0		451		451		595		220,817		221,412
Unallocated		0		(1)		(1)		0		0		0
Total	$	4,058	$	18,724	$	22,782	$	34,535	$	1,495,216	$	1,529,751

Note 6—Deposits

The composition of deposits as of June 30, 2022 and December 31, 2021 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $65,000 at June 30, 2022, compared to $55,000 at December 31, 2021.



	June 30,		December 31,
(dollars in thousands)	2022		2021
Noninterest bearing demand	$	497,396	$	524,609
Interest bearing demand		280,164		261,945
Money market		684,305		744,224
Savings		166,350		151,272
Time deposits less than $100		225,036		247,398
Time deposits $100 to $250		130,038		151,377
Time deposits $250 or more		56,286		62,940
Total deposits	$	2,039,575	$	2,143,765

- 25 -

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, 2022, the balance of securities sold under agreements to repurchase was $14,249,000 compared to $10,761,000 at December 31, 2021. At June 30, 2022 and December 31, 2021, there were no other short-term borrowings.

The following table presents a summary of long-term debt as of June 30, 2022 and December 31, 2021. 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)	2022		2021
PeoplesBank’s obligations:
Federal Home Loan Bank of Pittsburgh (FHLBP)
Due May 2022, 2.93%		0		10,000
Total FHLBP	$	0	$	10,000
Codorus Valley Bancorp, Inc. obligations:
Junior subordinated debt
Due 2034, 3.85%, floating rate based on 3 month
LIBOR plus 2.02%, callable quarterly		3,093		3,093
Due 2036, 2.58% 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		30,723		30,683
Total junior subordinated debt	$	41,033	$	40,993
Lease obligations included in long-term debt:
Finance lease liabilities		1,255		1,269
Total long-term debt	$	42,288	$	52,262

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.

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

- 26 -

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)	2022		2021
Operating lease cost	$	195	$	169

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	$	219	$	193



	Six months ended
	June 30,
(dollars in thousands)	2022		2021
Operating lease cost	$	391	$	338

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	$	439	$	386

Supplemental cash flow information related to leases was as follows:



	Six months ended
	June 30,
	2022		2021
Operating cash flows from operating leases	$	346	$	347
Operating cash flows from financing leases		24		24
Financing cash flows from financing leases		14		14

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		2,061		18
Finance leases		0		0

- 27 -

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,
	2022		2021
Assets:
Operating leases right-of-use assets	$	3,412	$	1,697
Finance leases assets		1,017		1,041
Total lease assets	$	4,429	$	2,738

Liabilities:
Operating	$	3,559	$	1,803
Financing		1,255		1,269
Total lease liabilities	$	4,814	$	3,072

Weighted Average Remaining Lease Term (years)
Operating leases		7.2		4.3
Finance leases		21.7		22.2

Weighted Average Discount Rate
Operating leases		2.17%		2.58%
Finance leases		3.69%		3.69%

Future minimum payments for financing leases and operating leases as of June 30, 2022 and December 31, 2021 were as follows:



(dollars in thousands:)	June 30, 2022
Year Ending December 31,	Operating Leases		Finance Leases
2022	$	392	$	38
2023		701		75
2024		638		75
2025		417		79
2026		324		80
Thereafter		1,350		1,509
Total lease payments		3,822		1,856
Less imputed interest		(263)		(601)
Total	$	3,559	$	1,255



(dollars in thousands:)	December 31, 2021
Year Ending December 31,	Operating Leases		Finance Leases
2022	$	558	$	75
2023		463		75
2024		400		75
2025		179		79
2026		86		80
Thereafter		221		1,509
Total lease payments		1,907		1,893
Less imputed interest		(104)		(624)
Total	$	1,803	$	1,269

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.

- 28 -

Banks 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, 2022, the Bank met all capital adequacy requirements to which it is 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, 2022 and December 31, 2021, 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.

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, 2022
Capital ratios:
Common equity Tier 1	$	196,218	11.63	%	$	118,059	7.00	%	$	n/a	n/a	%
Tier 1 risk based		206,218	12.23			143,357	8.50			n/a	n/a
Total risk based		258,045	15.30			177,088	10.50			n/a	n/a
Leverage		206,218	8.79			93,893	4.00			n/a	n/a

at December 31, 2021
Capital ratios:
Common equity Tier 1	$	193,142	12.11	%	$	111,612	7.00	%	$	n/a	n/a	%
Tier 1 risk based		203,142	12.74			135,529	8.50			n/a	n/a
Total risk based		253,791	15.92			167,418	10.50			n/a	n/a
Leverage		203,142	8.59			94,596	4.00			n/a	n/a

PeoplesBank, A Codorus Valley Company
at June 30, 2022
Capital ratios:
Common equity Tier 1	$	231,927	13.78	%	$	117,802	7.00	%	$	109,387	6.50	%
Tier 1 risk based		231,927	13.78			143,045	8.50			134,631	8.00
Total risk based		252,986	15.03			176,703	10.50			168,288	10.00
Leverage		231,927	9.90			93,747	4.00			117,184	5.00

at December 31, 2021
Capital ratios:
Common equity Tier 1	$	230,162	14.47	%	$	111,348	7.00	%	$	103,395	6.50	%
Tier 1 risk based		230,162	14.47			135,208	8.50			127,255	8.00
Total risk based		250,081	15.72			167,022	10.50			159,069	10.00
Leverage		230,162	9.75			94,457	4.00			118,071	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.

- 29 -

Note 10—Shareholders’ Equity

Share Repurchase

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in January 2021. Under the 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 program. The program was successfully completed in August 2021, after the Corporation purchased 242,148 shares at an average price of $20.29 for a total of $4,912,000.

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in August 2021. Under the 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 the 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. The program was successfully completed in January 2022, after the Corporation purchased 224,821 shares at an average price of $22.24 for a total of $5,000,000.

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in January 2022. Under the approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of the common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for the purpose as and when determined by the Board of Directors including, without limitation to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation plan. There was no activity under the Program during the three and six months ended June 30, 2022.

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. 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 $19,342,000 of standby letters of credit outstanding on June 30, 2022, compared to $14,688,000 on December 31, 2021. 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, 2022 and December 31, 2021, 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.

- 30 -

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.

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 markets. 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, 2022
Securities available-for-sale:
U.S. Treasury notes	$	14,626	$	14,626	$	0	$	0
U.S. agency	$	9,536	$	0	$	9,536	$	0
U.S. agency mortgage-backed, residential		236,566		0		236,566		0
State and municipal		32,744		0		32,744		0
Corporates		35,560		0		35,560		0
Other assets:
Loan-level interest rate swaps		0		0		0		0

December 31, 2021
Securities available-for-sale:
U.S. agency	$	3,396	$	0	$	3,396	$	0
U.S. agency mortgage-backed, residential		181,935		0		181,935		0
State and municipal		36,156		0		36,156		0
Corporates		32,798		0		32,798		0
Other assets:
Loan-level interest rate swaps		(51)		0		(51)		0

- 31 -

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, 2022, the fair value of impaired loans with a valuation allowance or partial charge-off was $2,495,000, net of valuation allowances of $4,261,000 and partial charge-offs of $1,817,000. At December 31, 2021 the fair value of impaired loans with a valuation allowance or charge-off was $3,142,000, net of valuation allowances of $4,058,000 and charge-offs of $957,000.

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, 2022 the fair value of foreclosed real estate asset with a write-down was $479,000, net of a write-down of $488,000 compared to no foreclosed real estate assets with a write-down or valuation allowance at December 31, 2021.

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.



			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, 2022
Impaired builder & developer loans	$	178	$	0	$	0	$	178
Impaired residential real estate investor loans		52		0		0		52
Impaired commercial real estate loans		651		0		0		651
Impaired agriculture loans		666		0		0		666
Impaired other commercial loans		948		0		0		948
Impaired other real estate owned		479		0		0		479

December 31, 2021
Impaired builder & developer loans	$	224	$	0	$	0	$	224
Impaired residential real estate investor loans		89		0		0		89
Impaired commercial real estate loans		414		0		0		414
Impaired agriculture loans		1,121		0		0		1,121
Impaired service loans		594		0		0		594
Impaired other loans		700		0		0		700
Mortgage servicing rights		380		0		0		380

‎

- 32 -

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, 2022
Impaired builder & developer loans	$	178	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% -39%	37%
Impaired residential real estate investor loans		52	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15%-25%	17%
Impaired commercial real estate loans		651	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15%-15%	15%
Impaired agriculture loans		666	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% -24%	20%
Impaired other commercial loans		948	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	23% -50%	23%
Impaired other real estate owned		479	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15%-15%	15%

December 31, 2021
Impaired builder & developer loans	$	224	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired residential real estate investor loans		89	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired commercial real estate		414	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired agriculture loans		1,121	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 20%	18%
Impaired service loans		594	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Impaired other loans		700	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Mortgage servicing rights		380	Multiple of annual service fee	Estimated prepayment speed based on rate and term	14.9% - 14.9%	14.9%

(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.

- 33 -

The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of June 30, 2022 and December 31, 2021.



						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, 2022
Financial assets
Cash and cash equivalents	$	283,969	$	283,969	$	283,969	$	0	$	0
Securities available-for-sale		329,032		329,032		14,626		314,406		0
Restricted investment in bank stocks		955		N/A		N/A		N/A		N/A
Loans held for sale		1,154		1,299		0		1,299		0
Loans, net		1,561,667		1,493,617		0		0		1,493,617
Interest receivable		4,931		4,931		0		1,114		3,817

Financial liabilities
Deposits	$	2,039,575	$	2,030,991	$	0	$	2,030,991	$	0
Short-term borrowings		14,249		14,249		0		14,249		0
Long-term debt (1)		10,310		8,944		0		0		8,944
Subordinated debentures		30,723		30,031		0		30,031		0
Interest payable		171		171		0		171		0
Off-balance sheet instruments		0		0		0		0		0

December 31, 2021
Financial assets
Cash and cash equivalents	$	545,494	$	545,494	$	545,494	$	0	$	0
Securities available-for-sale		254,285		254,285		0		254,285		0
Restricted investment in bank stocks		1,311		N/A		N/A		N/A		N/A
Loans held for sale		7,876		8,271		0		8,271		0
Loans, net		1,506,969		1,498,388		0		0		1,498,388
Interest receivable		4,562		4,562		0		752		3,810

Financial liabilities
Deposits	$	2,143,765	$	2,143,187	$	0	$	2,143,187	$	0
Short-term borrowings		10,761		10,761		0		10,761		0
Long-term debt (1)		20,310		18,999		0		10,109		8,890
Subordinated debentures		30,683		32,578		0		32,578		0
Interest payable		216		216		0		216		0
Off-balance sheet instruments		0		0		0		0		0

(1) Exclude leases included in Long-term debt

- 34 -

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, 2022
Repurchase Agreements	$	14,249	$	0	$	14,249	$	(15,370)	$	0	$	0	$	(1,121)

December 31, 2021
Repurchase Agreements	$	10,761	$	0	$	10,761	$	(12,268)	$	0	$	0	$	(1,507)

Note 15 – Interest Rate Swaps

Loan Level Interest Rate Swaps

PeoplesBank enters into loan-level interest rate swaps with certain qualifying, creditworthy commercial loan clients to provide a loan pricing structure that meets the interest rate risk management needs of both PeoplesBank as well as the client. PeoplesBank simultaneously enters into parallel interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net results of the offsetting client and deal counterparty swap agreements is that the client 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, 2022		December 31, 2021
Interest Rate Swap Contracts - Commercial Loans:
Fair Value (a)	$	0	$	(51)
Notional Amount		6,638		7,266
Cash Collateral Posted (b)		0		0

(a)Included in other assets and other non-interest income as of June 30, 2022 and December 31, 2021 on the Consolidated Balance Sheets and Consolidated Statements of Income, respectively.

(b)No cash collateral was posted as of June 30, 2022 and December 31, 2021.

‎

- 35 -

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, 2022		December 31, 2021
Interest Rate Swap Contracts - Commercial Loans:
Gross amounts recognized	$	0	$	(51)
Gross amounts offset		0		(51)
Net amounts presented in the Consolidated Balance Sheets	$	0	$	0

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

‎

- 36 -

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 client 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.

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 which requires management to make significant judgments, estimates and assumptions that have a material impact on the carrying value of certain 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, 2021.

- 37 -

Three Months Ended June 30, 2022 vs. Three Months Ended June 30, 2021

The schedule below presents selected performance metrics for the second quarter of both 2022 and 2021.



	Three months ended
	June 30,
	2022			2021
Basic earnings per share	$	0.20		$	0.33
Diluted earnings per share	$	0.20		$	0.33
Cash dividend payout ratio		73.17	%		39.12	%
Return on average assets		0.34	%		0.58	%
Return on average equity		4.31	%		6.56	%
Net interest margin (tax equivalent basis)		3.18	%		2.80	%
Net overhead ratio		2.11	%		1.85	%
Efficiency ratio		74.43	%		74.81	%
Average equity to average assets		7.78	%		8.88	%

The Corporation’s net income (earnings) was $1,953,000 for the quarter ended June 30, 2022, as compared to $3,282,000 for the quarter ended June 30, 2021, a decrease of $1,329,000 or 40 percent.

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, 2022 was $17,739,000, an increase of $2,825,000 or 19 percent compared to net interest income of $14,914,000 for the second quarter 2021.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 3.18 percent for the second quarter 2022 compared to 2.80 percent for the second quarter 2021. The net interest margin expansion was a result of higher levels and rates on investment securities and higher rates on commercial loans, partially offset by a lower volume of commercial loans. Net interest margin also benefited from lower rates on time deposits.

Total interest income for the second quarter 2022 totaled $19,283,000, an increase of $1,787,000 or 10 percent above the amount of total interest income for the second quarter 2021. The change was primarily a result of higher rates on interest bearing deposits with banks, investment securities and commercial loans, partially offset by a lower volume of commercial loans.

Interest and dividend income on investments increased $1,491,000 or 149 percent in the second quarter 2022 compared to the same period in 2021. The average balance of the investment securities portfolio increased $151,889,000 or 79 percent when comparing the second quarter 2022 to the same period in 2021. The tax-equivalent yield on investments for the second quarter 2022 was 2.19 percent or 26 basis points higher than the 1.93 percent realized in the second quarter 2021. The average balance of interest bearing deposits with bank decreased $52,105,000 or 14 percent in the second quarter 2022 compared to the second quarter 2021. Depsite the decrease, the yield on the interest bearing deposits with banks increased 67 basis points when comparing the second quarter 2022 to the same period in 2021.

Interest income on loans increased $296,000 or 2 percent in the second quarter 2022 compared to the same period in 2021. The average balance of outstanding loans, primarily commercial loans, decreased approximately $56,000 or less than 1 percent comparing the second quarter 2022 to the same period in 2021. Higher rates on commercial loans was the primary driver of the increase in interest income on loans, offset by lower fees recognized due to PPP loan forgiveness. The tax-equivalent yield on loans for the second quarter 2022 was 4.29 percent or 8 basis points higher than the 4.21 percent experienced in the second quarter 2021.

Total interest expense for the second quarter 2022 was $1,544,000, a decrease of $1,038,000 or 40 percent as compared to total interest expense of $2,582,000 for the second quarter 2021. The change was primarily the result of a decrease in the volume and cost of time deposits.

Interest expense on deposits decreased $939,000 or 48 percent in the second quarter 2022 compared to the same period in 2021. The average rate paid on interest bearing deposits was 0.26 percent in the second quarter 2022 or 27 basis points lower than the average rate paid of 0.53 percent in the second quarter 2021. The average balance of interest bearing deposits for the second quarter 2022 increased by $83,704,000 or 6 percent compared to the second quarter 2021. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the second quarter 2022 increasing 7 percent to $503,211,000 as compared

- 38 -

to $470,530,000 for the second quarter 2021. The increase was primarily related to deposits associated with new commercial client relationships.

For the second quarter 2022 interest expense on borrowings decreased $99,000 or 16 percent compared to the second quarter 2021. Short-term borrowings consisting of repurchase agreements and other short-term borrowings averaged $12,080,000 for the second quarter 2022, compared to an average balance of $10,617,000 for the second quarter 2021. The rate on average short-term borrowings for the second quarter 2022 was 0.40 percent, an increase as compared to a rate of 0.38 percent for the second quarter 2021. 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 $52,545,000 for the second quarter 2022 and $71,249,000 for the second quarter 2021. The decrease was attributable to FHLBP advances totaling $25,000,000 which matured and were repaid in the second quarter of 2021 and $10,000,000 in the second quarter 2022. For the second quarter 2022, the rate on average long-term borrowings was 3.98 percent, an increase of 47 basis points as compared to a rate of 3.51 percent for the second quarter 2021. The increase was related to maturing FHLBP advances, which were at lower rates than the remaining long-term borrowings.



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

	Three months ended June 30,
	2022							2021
	Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	331,335	$	648		0.78	%	$	383,440	$	105		0.11	%
Investment securities:
Taxable		317,889		1,742		2.20			170,961		813		1.91
Tax-exempt		25,561		132		2.07			20,600		108		2.10
Total investment securities		343,450		1,874		2.19			191,561		921		1.93

Loans:
Taxable (1)		1,557,857		16,648		4.29			1,564,672		16,419		4.21
Tax-exempt		15,837		176		4.46			9,078		91		4.02
Total loans		1,573,694		16,824		4.29			1,573,750		16,510		4.21
Total earning assets		2,248,479		19,346		3.45			2,148,751		17,536		3.27
Other assets (2)		82,763							103,034
Total assets	$	2,331,242						$	2,251,785
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	981,025	$	431		0.18	%	$	836,011	$	426		0.20	%
Savings		165,245		12		0.03			131,528		17		0.05
Time		423,298		567		0.54			518,325		1,506		1.17
Total interest bearing deposits		1,569,568		1,010		0.26			1,485,864		1,949		0.53
Short-term borrowings		12,080		12		0.40			10,617		10		0.38
Long-term debt		52,545		522		3.98			71,249		623		3.51
Total interest bearing liabilities		1,634,193		1,544		0.38			1,567,730		2,582		0.66


Noninterest bearing deposits		503,211							470,530
Other liabilities		12,531							13,529
Shareholders' equity		181,307							199,996

Total liabilities and
shareholders' equity	$	2,331,242						$	2,251,785
Net interest income (tax equivalent basis)			$	17,802						$	14,954
Net interest margin (3)						3.18	%						2.80	%
Tax equivalent adjustment				(63)							(40)
Net interest income			$	17,739						$	14,914

(1)Average balance includes average nonaccrual loans of $30,986,000 for 2022 and $38,801,000 for 2021.

Interest includes net loan fees of $1,218,000 for 2022 and $1,956,000 for 2021.

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

- 39 -

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



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

	Three months ended
	June 30,
	2022 vs. 2021
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate			Net

Interest Income
Interest bearing deposits with banks	$	(14)	$	557	$	543
Investment securities:
Taxable		690		239		929
Tax-exempt		24		0		24
Loans:
Taxable		(820)		1,049		229
Tax-exempt		68		17		85
Total interest income		(52)		1,862		1,810
Interest Expense
Deposits:
Interest bearing demand		74		(69)		5
Savings		4		(9)		(5)
Time		(276)		(663)		(939)
Short-term borrowings		2		0		2
Long-term debt		(126)		25		(101)
Total interest expense		(322)		(716)		(1,038)
Net interest income (tax equivalent basis)	$	270	$	2,578	$	2,848

*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 2022 was $2,974,000, a $2,622,000 increase as compared to $352,000 provision for the second quarter 2021. The increased provision expense in the second quarter 2022 was impacted by the sale of two nonperforming commercial loan relationships, reducing nonperforming assets by $16,617,000 at a loss of $1,659,000. In addition, another nonperforming commercial loan relationship totaling $967,000 was transferred to other real estate owned during the current period at a loss of $488,000. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions may require future adjustments. The allowance as a percentage of total loans was 1.44 percent at June 30, 2022, as compared to 1.39 percent at December 31, 2021 and 1.43 percent at June 30, 2021.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 50.

‎

- 40 -

Noninterest Income

The following table presents the components of total noninterest income for the second quarter 2022, compared to the second quarter 2021.



Table 3 - Noninterest income

		Three months ended				Change
		June 30,				Increase (Decrease)
(dollars in thousands)	2022		2021		$		%

Trust and investment services fees	$	1,137	$	1,143	$	(6)	(1)	%
Income from mutual fund, annuity and insurance sales		345		344		1	0
Service charges on deposit accounts		1,368		1,319		49	4
Income from bank owned life insurance		308		427		(119)	(28)
Other income		532		359		173	48
Gain on sales of loans held for sale		221		933		(712)	(76)
Loss on write down of assets held for sale		0		(1,174)		1,174	*nm
Total noninterest income	$	3,911	$	3,351	$	560	17	%

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

Income from bank owned life insurance—The $119,000 or 28 percent decrease in income from bank owned life insurance is due to the recognition of a one-time premium on the purchase of additional bank owned life insurance in the second quarter 2021.

Other income—The $173,000 or 48 percent increase in other income is primarily due to sales tax refunds obtained during the second quarter 2022.

Gain on sales of loans held for sale—The $712,000 or 76 percent decrease in gain on sales of loans was due to the sale of a smaller volume of mortgage loans to the secondary market during the second quarter 2022 compared to the second quarter 2021.

Loss on write down of assets held for sale—The $1,174,000 decrease in loss on write down of assets held for sale was due to the write down in the second quarter 2021 on assets held for sale, compared to none in the second quarter 2022.

Noninterest Expense

The following table presents the components of total noninterest expense for the second quarter 2022, compared to the second quarter 2021.



Table 4 - Noninterest expense

		Three months ended				Change
		June 30,				Increase (Decrease)
(dollars in thousands)	2022		2021		$		%

Personnel	$	8,491	$	8,268	$	223	3	%
Occupancy of premises, net		922		856		66	8
Furniture and equipment		812		793		19	2
Professional and legal		1,055		253		802	317
Marketing		433		438		(5)	(1)
FDIC insurance		188		192		(4)	(2)
Debit card processing		385		397		(12)	(3)
Charitable donations		885		750		135	18
External data processing		1,018		858		160	19
Impaired loan carrying costs		157		87		70	80
Other		1,877		888		989	111
Total noninterest expense	$	16,223	$	13,780	$	2,443	18	%

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

Professional and legal—The $802,000 or 317 percent increase in professional and legal expense is attributed to corporate matters in the current period related to the “Agreement,” as discussed in Item 1A on page 53.

- 41 -

Charitable donations—The $135,000 or 18 percent increase in charitable donations expense is attributed to timing of charitable donations in 2022 compared to the prior period. Charitable donations that occurred in the first quarter 2021 occurred during the second quarter 2022.

External data processing—The $160,000 or 19 percent increase in external data processing expense is attributed to increased reliance on technology.

Impaired loan carrying costs—The $70,000 or 80 percent increase in impaired loan carrying costs expense is primarily attributed to an increase in expenses associated with impaired loans compared to the prior period.

Other—The $989,000 or 111 percent increase in other expense is primarily related to corporate matters in the current period related to the “Agreement,” as discussed in Item 1A on page 53.

Provision for Income Taxes

The provision for income taxes for the second quarter 2022 was $500,000 a decrease of $351,000 or 41 percent as compared to the second quarter 2021. The decrease was attributed to lower pre-tax net income for the second quarter 2022 compared to the second quarter 2021. The effective tax rate for the three months ended June 30, 2022 and June 30, 2021 was 20.4 percent and 20.6 percent, respectively. 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.

Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021

The Corporation’s net income (earnings) was $5,006,000 for the first six months of 2022 compared to $7,182,000 for the first six months of 2021, a decrease of $2,176,000.

The schedule below presents selected performance metrics for the first six months of both 2022 and 2021.



	Six months ended
	June 30,
	2022			2021
Basic earnings per share	$	0.53		$	0.73
Diluted earnings per share	$	0.52		$	0.73
Cash dividend payout ratio		56.93	%		35.67	%
Return on average assets		0.42	%		0.65	%
Return on average equity		5.35	%		7.25	%
Net interest margin (tax equivalent basis)		2.98	%		2.91	%
Net overhead ratio		1.96	%		1.77	%
Efficiency ratio		74.47	%		71.45	%
Average equity to average assets		7.93	%		8.93	%

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, 2022 was $33,440,000, an increase of $3,049,000 or 10 percent compared to net interest income of $30,391,000 for the first six months of 2021. Interest rates on interest bearing deposits with banks, investment securities and loans and lower cost of time deposits contributed to the increase and were partially offset by decreased volume of commercial loans.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 2.98 percent for the first six months of 2022, representing an increase compared to the 2.91 percent net interest margin for the first six months of 2021. The net interest margin expansion was a result of higher levels and rates on investment securities and higher rates on commercial loans, partially offset by a lower volume of commercial loans. Net interest margin also benefited from lower rates on time deposits.

- 42 -

Total interest income for the first six months of 2022 totaled $36,580,000, an increase of $709,000 or 2 percent above the amount of total interest income for the first six months of 2021. The change was primarily a result of higher rates on commercial loans, investment securities and interest bearing deposits with banks, partially offset by a lower volume of commercial loans.

Interest income on loans decreased $1,615,000 or 5 percent in the first six months of 2022 compared to the same period in 2021. The average balance of outstanding loans decreased $25,222,000 or 2 percent in the first six months of 2022 compared to the first six months of 2021, reflecting forgiveness on SBA PPP loans, which also reduced the amount of origination fees recognized between the two periods.

Investment income for the first six months of 2022 increased $2,324,000 or 130 percent compared to the first six months of 2021. The average balance of investment securities increased $130,001,000 or 71 percent in the first six months of 2022 compared to the first six months of 2021, reflecting the change in mix of earning assets from interest bearing deposits with banks to investment securities. The tax-equivalent yield on investments for the first six months of 2022 was 2.12 percent or 31 basis points higher than the 1.81 percent experienced during the first six months of 2021. The average balance of interest bearing deposits with banks increased $52,547,000 or 15 percent in the first six months of 2022 compared to the first six months of 2021. The yield on interest bearing deposits with banks was 0.43 percent for the first six months of 2022, an increase of 32 basis points from 0.11 percent in the first six months of 2021.

Total interest expense for the first six months of 2022 was $3,140,000, a decrease of $2,340,000 or 43 percent as compared to total interest expense of $5,480,000 for the first six months of 2021. The change in interest expense was primarily a result of a decrease in the volume and cost of time deposits.

Interest expense on deposits decreased $2,097,000 or 50 percent in the first six months of 2022 compared to the same period in 2021. The change was due primarily to a decrease in the volume and cost of time deposits. The average balance of interest-bearing deposits for the first six months of 2022, primarily in lower cost core deposits, increased by $113,358,000 or 8 percent compared to the average for the first six months of 2021. The average rate paid on interest-bearing deposits in the first six months of 2022 was 0.26 percent, a decrease from the average rate of 0.57 percent paid on interest-bearing deposits during the first six months of 2021. The average balance of time deposits for the first six months of 2022 decreased $86,727,000 or 17 percent compared to the average time deposits in the first six months of 2021. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the first six months of 2022 increasing 13 percent to $507,162,000, as compared to $447,259,000 for the first six months of 2021. The increase was primarily related to deposits associated with new commercial client relationships.

Interest expense on borrowings for the first six months of 2022 decreased 19 percent compared to the first six months of 2021, due to a lower volume of long-term debt. Outstanding long-term debt, consisting primarily of subordinated debentures and Federal Home Loan Bank of Pittsburgh (FHLBP) advances, averaged $53,297,000 for the first six months of 2022, compared to an average balance of approximately $75,430,000 for the same period of 2021. The rate on average long-term debt for the first six months of 2022 was 3.96 percent, an increase as compared to the rate of 3.46 percent for the same period of 2021.

- 43 -







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

			Six months ended June 30,
	2022										2021
	Average						Yield/				Average					Yield/
(dollars in thousands)	Balance			Interest			Rate				Balance		Interest			Rate

Assets
Interest bearing deposits with banks	$	407,024			$	876		0.43	%	$		354,477		$	186		0.11	%
Investment securities:
Taxable		288,164				3,031		2.12				163,224			1,421		1.76
Tax-exempt		25,075				256		2.06				20,014			226		2.28
Total investment securities		313,239				3,287		2.12				183,238			1,647		1.81

Loans:
Taxable (1)		1,537,122				32,241		4.23				1,566,236			33,934		4.37
Tax-exempt		13,378				287		4.33				9,486			188		4.00
Total loans		1,550,500				32,528		4.23				1,575,722			34,122		4.37
Total earning assets		2,270,763				36,691		3.26				2,113,437			35,955		3.43
Other assets (2)		87,410										105,481
Total assets	$	2,358,173								$		2,218,918
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	989,158			$	761		0.16	%	$		825,096		$	856		0.21	%
Savings		160,639				24		0.03				124,616			31		0.05
Time		437,138				1,287		0.59				523,865			3,282		1.26
Total interest bearing deposits		1,586,935				2,072		0.26				1,473,577			4,169		0.57
Short-term borrowings		11,029				22		0.40				9,184			18		0.40
Long-term debt		53,297				1,046		3.96				75,430			1,293		3.46
Total interest bearing liabilities		1,651,261				3,140		0.38				1,558,191			5,480		0.71

Noninterest bearing deposits		507,162										447,259
Other liabilities		12,649										15,427
Shareholders' equity		187,101										198,041

Total liabilities and
shareholders' equity	$	2,358,173								$		2,218,918
Net interest income (tax equivalent basis)					$	33,551								$	30,475
Net interest margin (3)								2.98	%								2.91	%
Tax equivalent adjustment						(111)									(84)
Net interest income					$	33,440								$	30,391

(1)Average balance includes average nonaccrual loans of $31,514,000 for 2022 and $38,259,000 for 2021.

Interest includes net loan fees of $2,647,000 for 2022 and $4,660,000 for 2021.

(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.

- 44 -



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

	Six months ended
	June 30,
	2022 vs. 2021
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate		Net

Interest Income
Interest bearing deposits with banks	$	27	$	663	$	690
Investment securities:
Taxable		1,201		409		1,610
Tax-exempt		56		(26)		30
Loans:
Taxable		(2,652)		959		(1,693)
Tax-exempt		77		22		99
Total interest income		(1,291)		2,027		736
Interest Expense
Deposits:
Interest bearing demand		171		(266)		(95)
Savings		9		(16)		(7)
Time		(543)		(1,452)		(1,995)
Short-term borrowings		4		0		4
Long-term debt		(292)		45		(247)
Total interest expense		(651)		(1,689)		(2,340)
Net interest income (tax equivalent basis)	$	(640)	$	3,716	$	3,076

*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 2022, the provision for loan losses was $4,001,000, as compared to a provision of $1,583,000 for the first six months of 2021, an increase of $2,418,000. The increased provision expense in the first six months of 2022 was impacted by the sale of two nonperforming commercial loan relationships, reducing nonperforming assets by $16,617,000 at a loss of $1,659,000. In addition, another nonperforming commercial loan relationship totaling $967,000 was transferred to other real estate owned during the current period at a loss of $488,000. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions may require future adjustments. The allowance as a percentage of total loans was 1.44 percent at June 30, 2022, as compared to 1.39 percent at December 31, 2021 and 1.43 percent at June 30, 2021.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 50.

- 45 -

Noninterest Income

The following table presents the components of total noninterest income for the first six months of 2022, compared to the first six months of 2021.



Table 7 - Noninterest income

	Six months ended				Change
	June 30,				Increase (Decrease)
(dollars in thousands)	2022		2021		$		%

Trust and investment services fees	$	2,299	$	2,195	$	104		5	%
Income from mutual fund, annuity and insurance sales		675		644		31		5
Service charges on deposit accounts		2,650		2,540		110		4
Income from bank owned life insurance		619		697		(78)		(11)
Other income		951		922		29		3
Gain on sales of loans held for sale		579		1,983		(1,404)		(71)
Loss on write down of assets held for sale		0		(1,174)		1,174		*nm
Loss on sales of securities		0		(23)		23		*nm
Total noninterest income	$	7,773	$	7,784	$	(11)		0	%

*nm – not meaningful

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

Gain on sales of loans held for sale—The $1,404,000 or 71 percent decrease in gain on sales of loans is due to the sale of a smaller volume of mortgage loans to the secondary market.

Noninterest Expense

The following table presents the components of total noninterest expense for the first six months of 2022, compared to the first six months of 2021.



Table 8 - Noninterest expense

	Six months ended				Change
	June 30,				Increase (Decrease)
(dollars in thousands)	2022			2021		$	%

Personnel	$	16,881	$	16,696	$	185		1	%
Occupancy of premises, net		1,901		1,829		72		4
Furniture and equipment		1,699		1,631		68		4
Professional and legal		1,914		604		1,310		217
Marketing		833		703		130		18
FDIC insurance		427		418		9		2
Debit card processing		767		677		90		13
Charitable donations		915		938		(23)		(2)
External data processing		1,839		1,678		161		10
Impaired loan carrying costs		295		187		108		58
Other		3,428		2,125		1,303		61
Total noninterest expense	$	30,899	$	27,486	$	3,413		12	%

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

- 46 -

Professional and legal—The $1,310,000 or 217 percent increase in professional and legal expense is primarily due to corporate matters in the current period related to the “Agreement,” as discussed in Item 1A on page 53.

Marketing—The $130,000 or 18 percent increase in marketing expense is due to increased activity with branding and marketing campaigns.

Impaired loan carrying costs—The $108,000 or 58 percent increase in impaired loan carrying costs is attributed to higher costs associated with impaired loans incurred during the current period.

Oher—The $1,303,000 or 61 percent increase in other expense is primarily related to corporate matters in the current period related to the “Agreement,” as discussed in Item 1A on page 53.

Provision for Income Taxes

The income tax expense for the first six months of 2022 was $1,307,000, a decrease of $617,000 or 32 percent as compared to the first six months of 2021. The effective tax rate for the six months ended June 30, 2022 and June 30, 2021 was 20.7 percent and 21.1 percent, respectively. 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.

BALANCE SHEET REVIEW

Interest Bearing Deposits with Banks

On June 30, 2022, interest bearing deposits with banks totaled $262,122,000, a decrease of $263,522,000 or 50 percent, compared to the level at year-end 2021. The decrease is primarily the result of the purchase of investment securities, an increase in commercial loans and a decrease in client deposits.

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, 2022, the fair value of investment securities available-for-sale totaled $329,032,000, which represented an increase of $74,747,000 as compared to the fair value of investment securities at year-end 2021. Purchases of securities exceeded the cash flows from principal reductions, sales and maturities during the first six months of 2022.

Loans Held For Sale

On June 30, 2022, loans held for sale were $1,154,000, which was $6,722,000 or 85 percent lower than the level at year-end 2021. This was attributable to lower secondary market mortgage volume and few SBA loans sold in the first half of 2022.

Loans

On June 30, 2022, total loans, net of deferred fees, were $1.56 billion, which was $54,781,000 or 4 percent higher than the level at year-end 2021. New loan originations were offset by a decrease in PPP loans, which totaled $923,000 at June 30, 2022, compared to $27,662,000 at December 31, 2021. 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.

Operating Leases Right-of-Use Assets

On June 30, 2022, operating leases right-of-use assets totaled $3,412,000, which was $1,715,000 or 101 percent higher than the level at year-end 2021. The increase was primarily the result of the new Hunt Valley Connections Center, which opened in the first quarter 2022. The composition of the Corporation’s leases is provided in Note 8—Leases.

Other Assets

On June 30, 2022, other assets totaled $84,699,000, which was $8,015,000 or 10 percent higher than the level at year-end 2021. The increase was primarily the result of the deferred tax asset associated with available-for-sale investment securities, which increased $7,200,000 between the two periods due to change in market conditions.

- 47 -

Deposits

Deposits are the Corporation’s principal source of funding for earning assets. On June 30, 2022, deposits totaled $2.04 billion, which reflected a $104,190,000 or 5 percent decrease compared to the level at year-end 2021. Of the decrease in total deposits, $27,213,000 is attributable to noninterest bearing deposits and $76,977,000 is related to interest bearing deposits, primarily time 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 $14,249,000 at June 30, 2022, which reflected a $3,488,000 or 32 percent increase compared to the level at year-end 2021.

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, 2022, long-term debt, including subordinated debentures totaled $42,288,000 compared to $52,262,000 at year-end 2021. A listing of outstanding long-term debt obligations is provided in Note 7—Short-Term Borrowings and Long-Term Debt.

Operating Leases Liabilities

On June 30, 2022, operating leases liabilities totaled $3,559,000, which was $1,756,000 or 97 percent higher than the level at year-end 2021. The increase was primarily the result of the new Hunt Valley Connections Center, which opened in the first quarter 2022. The composition of the Corporation’s leases is provided in Note 8—Leases.

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 $175,282,000 on June 30, 2022, a decrease of $20,223,000 or 10 percent compared to the level at year-end 2021. The decrease was primarily related to the higher accumulated other comprehensive loss caused by changing market rate conditions impacting the investment securities portfolio.

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 $0.15 per share on July 12, 2022, payable on August 9, 2022, to shareholders of record at the close of business on July 26, 2022. The cash dividend follows a quarterly cash dividend of $0.15 per share distributed in February 2022 and May 2022.

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, 2022 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, 2022 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, 2021, 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, 2022 has decreased $17,281,000 or 51 percent when compared to year-end 2021.

- 48 -

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.

The paragraphs and table below address significant changes in the nonperforming asset categories as of June 30, 2022 compared to December 31, 2021.

Table 9 – Nonperforming assets



		June 30,			December 31,
(dollars in thousands)	2022			2021
Nonaccrual loans:
Builder & developer	$	2,326		$	807
Commercial real estate investor		2,550			3,943
Residential real estate investor		984			280
Hotel/Motel		0			12,192
Wholesale & retail		0			0
Manufacturing		4,251			5,125
Agriculture		1,156			4,297
Service		0			971
Commercial other		4,212			5,372
Residential mortgages		103			62
Home equity		476			437
Consumer other		88			96
Total nonaccrual loans	$	16,146		$	33,582
Accruing loans that are contractually past due 90 days or more as to principal and interest:
Agriculture		0			324
Total accruing loans past due 90 days or more	$	0		$	324

Other Real Estate Owned:	$	479		$	0
Total Nonperforming assets	$	16,625		$	33,906

Troubled debt restructurings (TDRs):
Accruing TDRs	$	1,277		$	954
TDRs included with nonaccrual loans above		1,690			0
Total TDRs	$	2,967		$	954

Impaired loans without a valuation allowance	$	10,728		$	28,348
Impaired loans with a valuation allowance		6,695			6,187
Total impaired loans	$	17,423		$	34,535
Valuation allowance related to impaired loans	$	4,261		$	4,058

Nonaccrual loans as a % of total loans		1.02	%		2.20	%
Nonperforming loans as a % of total loans		1.05	%		2.22	%
Nonperforming assets as a % of total period-end assets		0.73	%		1.40	%
ALL as a % of nonaccrual loans		141.61	%		67.84	%
ALL as a % of nonperforming assets		141.62	%		67.19	%
ALL as a % of total loans		1.44	%		1.39	%

Nonaccrual loans as a % of applicable portfolio:
Builder & developer		1.53	%		0.52	%
Commercial real estate investor		0.67	%		1.22	%
Residential real estate investor		0.41	%		0.12	%
Hotel/Motel		0.00	%		17.35	%
Manufacturing		5.25	%		7.05	%
Agriculture		1.22	%		4.51	%
Service		0.00	%		1.49	%
Commercial other		2.02	%		2.42	%
Residential mortgages		0.09	%		0.06	%
Home equity		0.50	%		0.46	%
Consumer other		0.38	%		0.42	%

- 49 -

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, 2022, the nonperforming loan portfolio balance totaled $16,146,000, compared to $33,906,000 at year-end 2021. During the first six months of 2022, loans totaling $7,563,000 were transferred to nonaccrual status. Reductions in nonperforming loans through sale totaled $16,600,000, transfers to other real estate owned totaled $967,000 and other payments totaled $7,756,000, representing a net decrease in nonaccrual loans of $17,760,000. In addition, accruing loans 90 days or more past due decreased $324,000 since year-end 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. Foreclosed real estate as of June 30, 2022 was $479,000. At December 31, 2021 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.

The principal balance of all outstanding TDRs was $2,967,000 at June 30, 2022 and $954,000 at December 31, 2021. There was a $1,690,000 allowance allocated to TDRs at June 30, 2022 and none at December 31, 2021. Included in the total TDRs at June 30, 2022, the accruing TDR portfolio balance totaled $1,277,000, compared to $954,000 at year-end 2021.

As of June 30, 2022, there are no modifications for consumer loans, no mortgage loans and three commercial loans totaling $26,298,000 under the CARES Act, which are not considered TDRs. As of June 30, 2021, there were no modifications for consumer loans, four mortgage loans totaling $1,422,000 and 16 commercial loans totaling $67,734,000 under the CARES Act, which are not considered TDRs.

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 allowance for loan losses increased $83,000 from December 31, 2021 to June 30, 2022. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions may require future adjustments.

- 50 -

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, 2022, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately $197,965,000 and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately $599,439,000. The Corporation’s loan-to-deposit ratio was 77.7 percent as of June 30, 2022, 71.4 percent as of December 31, 2021 and 78.7 percent as of June 30, 2021.

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, 2022, totaled $626,284,000 and consisted of $562,963,000 in unfunded commitments under existing loan facilities, $43,979,000 to grant new loans and $19,342,000 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.

Recent Legislative Developments

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 continues 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 were not simulated at this time due to the current interest rate environment.

- 51 -

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 with the exception of a decrease of 100 and 200 basis points were within policy limits at June 30, 2022.



Change in Interest Rates	Annual Change in Net		% Change in Net		% Change
(basis points)	Interest Income (in thousands)		Interest Income		Policy Limit
+100	$	5,602	6.77	%	(5.00)	%
(100)	$	(7,166)	(8.65)	%	(5.00)	%

+200	$	11,051	13.35	%	(15.00)	%
(200)	$	(14,229)	(17.18)	%	(15.00)	%

+300	$	16,683	20.15	%	(25.00)	%

+400	$	22,377	27.02	%	(35.00)	%

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 Officer and Treasurer concluded that, as of June 30, 2022, 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, 2022, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

- 52 -

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, 2021.

On April 12, 2022, Codorus Valley Bancorp, Inc. (the "Company") entered into a Cooperation Agreement (the "Agreement") with Driver Opportunity Partners I LP, Driver Management Company LLC and J. Abbott R. Cooper (collectively, "Driver"). Pursuant to the Agreement, and concurrently with the execution of the Agreement, the Company appointed John E. Kiernan to the Company's board of directors (the "Board") and the Corporate Governance and Nominating Committee (the "Nominating Committee"), the Compensation Committee ("Compensation Committee") and the Audit Committee ("Audit Committee") of the Board. Additionally, Mr. Kiernan was elected as Class B director at the Company's 2022 annual meeting of stockholders (the "2022 Annual Meeting") to serve a three-year term. In accordance with the Agreement, on June 14, 2022, the Companyappointed two additional new independent directors to the Board. Current PeoplesBank director Kent K. Matsumoto, Esq. was appointed as a Class A director of the Company and Scott V. Fainor was appointed as a Class C director of the Company. In addition, Mr. Matsumoto was appointed to the Corporate Governance and Nominating Committee of the Board and Mr. Fainor was appointed to the Risk Management Committee of the Board. Additionally, the Audit Committee of the Board engaged Chain Bridge Partners, LLC ("Chain Bridge") to undertake a comprehensive review of the Company's credit risk policies and practices (the "Credit Risk Study"). The review will include (i) an evaluation of the adequacy of the Board's level governance of the Company's lending program, (ii) an assessment of managerial compliance with the Board's approved policies and procedures, including loan underwriting documentation and support, and (iii) a credit review. At the conclusion of the Credit Risk Study, Chain Bridge will issue recommendations for strengthening the Company's credit and underwriting risk management policies and practices.

Furthermore, the Company will hire independent third-party advisors to perform a comprehensive study of the Company’s executive compensation (the “Compensation Study”), including the executive compensation initiatives previously proposed by Driver, and any recommendations contained in the Credit Risk Study. The Compensation Study will also solicit feedback from the Company’s shareholders, and evaluate stock ownership guidelines for the Company’s directors.

In accordance with the Agreement, Driver withdrew its notice of intent to nominate director candidates for election at the 2022 Annual Meeting. With respect to each annual or special meeting of the Company's stockholders during the term of the Agreement, Driver has agreed to vote the shares of the Company's common stock then held by it in accordance with the Board's recommendations on director election proposals and any other proposals submitted by the Company or a stockholder, except that Driver may vote in its discretion on extraordinary transactions and, other than with respect to certain proposals relating to Board composition, in accordance with the recommendations of Institutional Shareholder Services, Inc. or Glass Lewis & Co. if either of them recommends differently from the

Board. Further, Driver has agreed to a general release of claims with respect to the Company and its affiliates and to voluntarily dismiss with prejudice any and all claims asserted in any actions against the Company or its affiliates in their entirety. During the term of the Agreement, the Company and Driver have agreed that they will not disparage each other.

Driver has also agreed to certain customary standstill provisions prohibiting it from, among other things, (i) making certain announcements regarding the Company's transactions, (ii) soliciting proxies, (iii) purchasing or otherwise acquiring ownership of any securities of the Company, (iv) advising, encouraging or intentionally influencing any person with respect to disposition of any securities of the Company, (v) taking actions to change or influence the Board, Company management or the direction of certain Company matters, and (vi) exercising certain stockholder rights.

The Agreement will terminate upon five business days' written notice by either party, except that the Agreement shall not terminate until the date that is 30 days prior to the opening of the window for submission of stockholder nominations for the Company's 2024 annual meeting of stockholders pursuant to the Company's Amended and Restated By-Laws. Each of the Company and Driver has the right to terminate the Agreement earlier if the other party commits a material breach of the Agreement and such breach is not cured within 15 days after notice or, if such breach is not curable within 15 days, the breaching party has not taken any substantive action to cure within such 15-day period.

- 53 -

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, 2021.



				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	$	2,327,356
June 1 - 30, 2021	0	$	0		0	$	2,327,356
July 1 - 31, 2021	0	$	0		0	$	2,327,356
August 1 - 31, 2021	99,607	$	22.49		99,607	$	0
September 1 - 30, 2021	65,213	$	22.10		65,213	$	3,558,793
October 1 - 31, 2021	59,585	$	22.63		59,585	$	2,210,384
November 1 - 30, 2021	66,113	$	22.28		66,113	$	737,387
December 1 - 31, 2021	32,375	$	21.72		32,375	$	34,202



				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, 2022	1,535	$	22.00		1,535	$	5,000,000
February 1 - 28, 2022	0	$	0		0	$	5,000,000
March 1 - 31, 2022	0	$	0		0	$	5,000,000
April1 - 30, 2022	0	$	0		0	$	5,000,000
May 1 - 31, 2022	0	$	0		0	$	5,000,000
June 1 - 30, 2022	0	$	0		0	$	5,000,000

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in January 2021. 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. The program was completed in August 2021.

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in August 2021. 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. The program was completed in January 2022.

The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in January 2022. 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 program. There was no activity under the new Program during the three and six months ended June 30, 2022.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

This Item 4 is not applicable to the Corporation.

- 54 -

Item 5. Other Information

None

‎

- 55 -

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 and Restated By-laws (Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the Commission on December 20, 2021)
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, 2022, 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)

‎

- 56 -

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 8, 2022		/s/ Craig L. Kauffman
Date		Craig L. Kauffman,
		President
		and Chief Executive Officer (Principal Executive Officer)


August 8, 2022		/s/ Larry D. Pickett
Date		Larry D. Pickett
		Treasurer
		(Principal Financial and Accounting Officer)

- 57 -

CODORUS VALLEY BANCORP INC - Quarter Report: 2022 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