cvly-20230930x10q

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 September 30, 2023

☐ 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, York, Pennsylvania 17403

(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 October 27, 2023, 9,611,110 shares of common stock, par value $2.50, were outstanding.

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Codorus Valley Bancorp, Inc.

Form 10-Q Index


PART I – FINANCIAL INFORMATION		Page #

Item 1.	Financial statements (unaudited):
	Consolidated balance sheets	3
	Consolidated statements of income	4
	Consolidated statements of comprehensive income (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	40

Item 3.	Quantitative and qualitative disclosures about market risk	57

Item 4.	Controls and procedures	58

PART II – OTHER INFORMATION

Item 1.	Legal proceedings	58

Item 1A.	Risk factors	59

Item 2.	Unregistered sales of equity securities and use of proceeds	59

Item 3.	Defaults upon senior securities	59

Item 4.	Mine safety disclosures	59

Item 5.	Other information	59

Item 6.	Exhibits	60

SIGNATURES		61

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)




	September 30,		December 31,
(dollars in thousands, except per share data)	2023		2022
Assets
Interest bearing deposits with banks	$	28,858		$	99,777
Cash and due from banks		22,449			20,662
Total cash and cash equivalents		51,307			120,439
Securities, available-for-sale, at fair value (amortized cost $391,694 net of
allowance for credit losses of $0)		335,656			345,457
Restricted investment in bank stocks, at cost		2,152			955
Loans held for sale		1,103			154
Loans (net of deferred fees of $3,718 - 2023 and $3,813 - 2022)		1,704,380			1,632,857
Less-allowance for credit losses ⁽¹⁾		(21,449)			(20,736)
Net loans		1,682,931			1,612,121
Premises and equipment, net		19,562			21,136
Operating leases right-of-use assets		2,618			3,072
Goodwill		2,301			2,301
Other assets		92,962			89,417
Total assets	$	2,190,592		$	2,195,052

Liabilities
Deposits
Noninterest bearing	$	398,486		$	463,853
Interest bearing		1,507,892			1,479,366
Total deposits		1,906,378			1,943,219
Short-term borrowings		39,099			11,605
Long-term debt and junior subordinated debt		11,528			11,550
Subordinated notes - face amount $31,000 (less discount and debt
issuance cost of $175 at September 30, 2023 and $236 at December 31, 2022)		30,825			30,764
Operating leases liabilities		2,726			3,204
Allowance for credit losses on off-balance sheet credit exposures		2,212			0
Other liabilities		14,461			17,410
Total liabilities		2,007,229			2,017,752

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at September 30, 2023 and 0 at December 31, 2022		0			0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
shares issued: 9,883,660 at September 30, 2023 and December 31, 2022;
and shares outstanding: 9,618,854 at September 30, 2023 and 9,581,230 at December 31, 2022		24,709			24,709
Additional paid-in capital		142,525			141,896
Retained earnings		64,816			52,146
Accumulated other comprehensive loss		(42,869)			(34,764)
Treasury stock shares outstanding, at cost: 264,806 shares at September 30, 2023
and 302,430 at December 31, 2022		(5,818)			(6,687)
Total shareholders' equity		183,363			177,300
Total liabilities and shareholders' equity	$	2,190,592		$	2,195,052

(1) Results of reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

See accompanying notes.
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Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2023		2022		2023		2022
Interest income
Loans, including fees	$	26,000	$	18,994	$	73,837	$	51,463
Investment securities:
Taxable		2,562		2,069		7,511		5,081
Tax-exempt		106		113		306		317
Dividends		44		11		112		30
Other		361		1,486		1,590		2,362
Total interest income		29,073		22,673		83,356		59,253
Interest expense
Deposits		8,740		1,807		20,954		3,879
Federal funds purchased and other short-term borrowings		377		13		852		35
Long-term debt and junior subordinated debt		215		133		617		441
Subordinated notes		369		369		1,107		1,107
Total interest expense		9,701		2,322		23,530		5,462
Net interest income		19,372		20,351		59,826		53,791
Provision for (recovery of) credit losses - loans (1)		128		(567)		589		3,434
Provision for credit losses - unfunded commitments (1)		123		0		323		0
Net interest income after provision for (recovery of) credit losses		19,121		20,918		58,914		50,357

Noninterest income
Trust and investment services fees		1,293		1,141		3,770		3,440
Income from mutual fund, annuity and insurance sales		315		283		1,007		958
Service charges on deposit accounts		1,598		1,395		4,624		4,045
Income from bank owned life insurance		396		322		1,047		941
Other income		549		528		1,998		1,479
Gain on sales of loans held for sale		42		42		48		621
(Loss) gain on sales of assets held for sale		0		(100)		118		(100)
Loss on sales of securities		0		0		(388)		0
Total noninterest income		4,193		3,611		12,224		11,384

Noninterest expense
Personnel		9,412		9,243		27,943		26,124
Occupancy of premises, net		853		943		2,711		2,844
Furniture and equipment		798		852		2,514		2,551
Professional and legal		549		367		1,395		2,281
Marketing		347		507		1,010		1,340
FDIC insurance		245		190		739		617
Debit card processing		546		455		1,456		1,222
Charitable donations		62		56		993		971
External data processing		974		981		3,027		2,820
Impaired loan carrying costs (recovery)		107		217		(229)		512
Other		2,003		1,511		4,624		4,939
Total noninterest expense		15,896		15,322		46,183		46,221
Income before income taxes		7,418		9,207		24,955		15,520
Provision for income taxes		1,501		2,053		5,435		3,360
Net income	$	5,917	$	7,154	$	19,520	$	12,160
Net income per share, basic	$	0.62	$	0.75	$	2.03	$	1.28
Net income per share, diluted	$	0.61	$	0.75	$	2.03	$	1.27

(1) Results of reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior amounts continue to be reported in accordance with previously applicable GAAP.

See accompanying notes.
‎

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three months ended
	September 30,
(dollars in thousands)	2023		2022
Net income	$	5,917	$	7,154
Other comprehensive income (loss):
Securities available for sale:
Net unrealized holding losses arising during the period
(net of tax benefit of $2,218 and $4,005, respectively)		(7,219)		(13,037)
Net unrealized losses		(7,219)		(13,037)
Comprehensive loss	$	(1,302)	$	(5,883)

	Nine months ended
	September 30,
(dollars in thousands)	2023		2022
Net income	$	19,520	$	12,160
Other comprehensive income (loss):
Securities available for sale:
Net unrealized holding losses arising during the period
(net of tax benefit of $2,581 and $11,162, respectively)		(8,402)		(36,335)
Reclassification adjustment for losses included in net income
(net of tax benefit of $91 and $0, respectively) (a) (b)		297		0
Net unrealized losses		(8,105)		(36,335)
Comprehensive income (loss)	$	11,415	$	(24,175)

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

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

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



	Nine months ended
	September 30,
(dollars in thousands)	2023		2022
Cash flows from operating activities
Net income	$	19,520	$	12,160
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/software amortization		1,764		1,879
Net amortization expense		(482)		(886)
Net change in operating lease liabilities		(478)		(483)
Provision for credit losses on off-balance sheet credit exposures		323		0
Provision for credit losses on loans		589		3,434
Writedown of assets held for sale		95		91
Deferred income tax expense		(667)		0
Increase in bank owned life insurance		(1,047)		(941)
Originations of loans held for sale		(3,447)		(16,633)
Proceeds from sales of loans held for sale		2,547		24,259
Gain on sales of loans held for sale		(48)		(621)
(Gain) loss on disposal of premises and equipment		(118)		9
Loss on sales of securities, available-for-sale		388		0
Stock-based compensation		995		737
Increase in interest receivable		(235)		(854)
Decrease in other assets		1,297		3,058
Increase in interest payable		967		419
(Decrease) increase in other liabilities		(4,239)		2,232
Net cash provided by operating activities		17,724		27,860
Cash flows from investing activities
Purchases of securities, available-for-sale		(30,474)		(170,715)
Maturities, repayments and calls of securities, available-for-sale		24,745		33,653
Sales of securities, available-for-sale		4,253		0
Purchase of restricted investment in bank stock		(6,677)		0
Redemption of restricted investment in bank stock		5,480		356
Net increase in loans made to customers		(71,409)		(71,657)
Proceeds from sale of commercial loans held for sale		1,336		0
Purchases of premises and equipment		(1,503)		(1,170)
Investment in bank owned life insurance		0		(7)
Proceeds from bank owned life insurance		275		0
Proceeds from sale of fixed assets		685		0
Net cash used in investing activities		(73,289)		(209,540)
Cash flows from financing activities
Net decrease in demand and savings deposits		(98,430)		(61,206)
Net increase (decrease) in time deposits		61,589		(68,552)
Net increase in short-term borrowings		27,494		2,490
Repayment of long-term debt		0		(10,000)
Net change in finance lease liabilities		(22)		(21)
Cash dividends paid to shareholders		(4,701)		(4,281)
Payment of taxes related to stock withheld		(146)		(78)
Treasury stock reissued		1,040		664
Treasury stock repurchased		0		(34)
Proceeds from issuance of stock, net		(391)		0
Net cash used in financing activities		(13,567)		(141,018)
Net decrease in cash and cash equivalents		(69,132)		(322,698)
Cash and cash equivalents at beginning of year		120,439		545,494
Cash and cash equivalents at end of period	$	51,307	$	222,796

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)


							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Treasury
(dollars in thousands, except per share data)	Stock		Capital		Earnings		Loss		Stock		Total
Balance, January 1, 2023	$	24,709	$	141,896	$	52,146	$	(34,764)	$	(6,687)	$	177,300
Cumulative change in adoption of accounting principle ASC 326 as discussed in Note 1						(2,149)						(2,149)
Balance, January 1, 2023 (as adjusted for change in accounting principle)	$	24,709	$	141,896	$	49,997	$	(34,764)	$	(6,687)	$	175,151
Net income						6,992						6,992
Other comprehensive income, net of tax								3,823				3,823
Cash dividends ($0.16 per share)						(1,533)						(1,533)
Stock-based compensation				454								454
Forfeiture of restricted stock and withheld shares - 8,039 shares				25						(164)		(139)
Issuance and reissuance of stock:
6,079 shares under the dividend reinvestment and stock purchase plan				15						137		152
3,131 shares under the employee stock option plan				(25)						71		46
11,816 shares of stock-based compensation awards				(267)						267		0
Balance, March 31, 2023	$	24,709	$	142,098	$	55,456	$	(30,941)	$	(6,376)	$	184,946
Balance, April 1, 2023	$	24,709	$	142,098	$	55,456	$	(30,941)	$	(6,376)	$	184,946
Net income						6,611						6,611
Other comprehensive loss, net of tax								(4,709)				(4,709)
Cash dividends ($0.16 per share)						(1,535)						(1,535)
Stock-based compensation				276								276
Issuance and reissuance of stock:
9,021 shares under the dividend reinvestment and stock purchase plan				(55)						204		149
7,871 shares under employee stock purchase plan				(47)						178		131
Balance, June 30, 2023	$	24,709	$	142,272	$	60,532	$	(35,650)	$	(5,994)	$	185,869
Balance, July 1, 2023	$	24,709	$	142,272	$	60,532	$	(35,650)	$	(5,994)	$	185,869
Net income						5,917						5,917
Other comprehensive loss, net of tax								(7,219)				(7,219)
Cash dividends ($0.17 per share)						(1,633)						(1,633)
Stock-based compensation				265								265
Withheld stock - 358 shares										(7)		(7)
Issuance and reissuance of stock:
7,297 shares under the dividend reinvestment and stock purchase plan				(6)						165		159
805 shares under the stock option plan				(6)						18		12
Balance, September 30, 2023	$	24,709	$	142,525	$	64,816	$	(42,869)	$	(5,818)	$	183,363
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, July 1, 2022	$	24,708	$	141,678	$	39,926	$	(23,462)	$	(7,568)	$	175,282
Net income						7,154						7,154
Other comprehensive loss, net of tax								(13,037)				(13,037)
Cash dividends ($0.15 per share)						(1,432)						(1,432)
Stock-based compensation				240								240
Withheld stock - 375 shares										(8)		(8)
Issuance and reissuance of stock:
6,751 shares under the dividend reinvestment and stock purchase plan				12						128		140
473 shares of stock-based compensation awards		1		(1)								0
Balance, September 30, 2022	$	24,709	$	141,929	$	45,648	$	(36,499)	$	(7,448)	$	168,339

See accompanying notes.

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Note 1—Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2022 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 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 September 30, 2023, 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 Board of Governors of the Federal Reserve System 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 September 30, 2023. The accounts of CVB Statutory Trust No. I and No. II are not included in the consolidated financial statements as discussed in Note 6—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, 2022.

The results of operations for the three and nine months ended September 30, 2023 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 September 30, 2023 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Allowance for Credit Losses—Available-for-Sale Securities

For available-for-sale debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities, which totaled $1.6 million as of September 30, 2023, is excluded from the estimate of credit losses.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of deferred loan fees and costs. Accrued interest receivable totaled $5.3 million at September 30, 2023 and was reported in other assets on the consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The loans receivable portfolio is disaggregated into segments. The segments include commercial,

- 8 -

commercial real estate – construction, commercial real estate – owner occupied, commercial real estate – non-owner occupied, residential real estate – construction, residential real estate – revolving, residential real estate – multi family, residential real estate - other, and consumer loans.

Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Mortgage loans are charged off at 180 days past due, and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Consumer loans continue to accrue interest until they are charged off no later than 120 days past due unless the loan is in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

As disclosed in Note 4—Loans and Allowance for Credit Losses, 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.

Allowance for credit losses – loans

The allowance for credit losses (“ACL”) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These adjustments are commonly known as the Qualitative Framework.

In addition to the estimated quantitative credit loss for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, competition, model imprecision, and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on management’s knowledge of the portfolio and the markets in which the Corporation operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results including loans in process.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans evaluated collectively for expected credit losses include loans on accrual status and loans initially evaluated individually but determined to not to have enhanced credit risk characteristics. The Corporation has identified the following portfolio segments:

Commercial loans

Commercial real estate – construction

Commercial real estate – owner occupied

Commercial real estate – non-owner occupied

Residential real estate – construction

Residential real estate – revolving

Residential real estate – multi family

Residential real estate – other

Consumer loans

The Corporation measures the allowance for credit losses using the following methods.

• Loans are aggregated into pools based on similar risk characteristics.

• The Probability of Default (PD) and Loss Given Default (LGD) CECL model components are determined based on loss estimates driven by historical experience at the input level.

• The PD model component uses "through the economic cycle transition" matrices based on the Corporation’s and peer group historical loan and transaction data across each pool of loans.

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• The LGD model component calculates a lifetime estimate across each pool of loans utilizing a nonparametric loss curve modeling approach.

• Reasonable and supportable forecasts are incorporated into the PD model component that are based on different economic forecasts and scenarios sourced from external parties. A future loss forecast over the reasonable and supportable forecast period of one year is based on the projected performance of specific economic variables that statistically correlate with the PD and LGD pools. After the reasonable and supportable forecast period, credit loss estimates revert over four quarters to input-level.

• Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.

• A constant prepayment rate is calculated for each loan pool in the CECL model.

Loans that do not share similar risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Loans are modified if the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted under a modification may involve a reduction of the interest rate, forgiveness of principal, extension of the term of the loan, and/or other-than-insignificant payment delays.

Allowance for credit losses – off-balance sheet credit exposures

Effective January 1, 2023, the Corporation adopted ASC 326, at which time the Corporation estimated expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The allowance represents management’s estimate of expected losses in unfunded loan commitments and other noncancellable off-balance sheet credit exposures, such as letters of credit. The ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates, i.e., the likelihood of draws taken. Adjustments to the reserve for unfunded off-balance sheet credit exposures are recorded in provision for credit losses - unfunded off-balance sheet credit exposures in the Consolidated Statements of Income.

Loan-Level Interest Rate Swaps

PeoplesBank enters 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, which would be accounted for using hedge accounting. 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 approved by the Board of Directors.

Interest rate swaps, recorded at fair value, are included in other assets on the Consolidated Balance Sheets. Additional information is provided in Note 14 – 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 September 30, 2023 consisted of a banking property totaling $1,269,000 and is included in other assets on the Consolidated Balance Sheets. The balance of $567,000 at December 31, 2022 consisted of one retail banking property, which closed in the second quarter of 2022.

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 credit losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After

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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 income or expense. At September 30, 2023 there was $383,000 of foreclosed commercial real estate compared to $479,000 at December 31, 2022. As of September 30, 2023, there was $219,000 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 $124,000 as of December 31, 2022.

Mortgage Servicing Rights

Mortgage servicing rights (MSRs) associated with 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. An independent third party firm 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 September 30, 2023, the balance of residential mortgage loans serviced for third parties was $52,129,000 compared to $55,708,000 at December 31, 2022.



		Three months ended				Nine months ended
		September 30,				September 30,
(dollars in thousands)		2023		2022		2023		2022
Amortized cost:
Balance at beginning of period	$	248	$	315	$	279	$	380
Originations of mortgage servicing rights		0		0		0		6
Amortization expense		(10)		(20)		(41)		(91)
Balance at end of period	$	238	$	295	$	238	$	295

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, 2023. There were no conditions or events that would trigger an analysis or impairment since October 1, 2023.

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. The core deposit intangible asset is included in other assets on the Consolidated Balance Sheets

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:

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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 referral agreement with a third party service provider. Amounts paid to the Corporation under the agreement are from fees charged to merchants for processing 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				Nine months ended
	September 30,				September 30,
(in thousands, except per share data)	2023		2022		2023		2022
Net income	$	5,917	$	7,154	$	19,520	$	12,160

Weighted average shares outstanding (basic)		9,616		9,545		9,600		9,521
Effect of dilutive stock options		15		23		18		29
Weighted average shares outstanding (diluted)		9,631		9,568		9,618		9,550

Basic earnings per share	$	0.62	$	0.75	$	2.03	$	1.28
Diluted earnings per share	$	0.61	$	0.75	$	2.03	$	1.27

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.

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Supplemental cash flow information is provided in the table below.



		Nine months ended
		September 30,
(dollars in thousands)		2023		2022
Cash paid during the period for:
Income taxes	$	7,630	$	531
Interest	$	22,563	$	5,044

Noncash investing and financing activities:
Transfer of loans to foreclosed real estate	$	0	$	479
Transfer of loans to held for sale	$	2,018	$	16,617
Transfer of premises and equipment to assets held for sale	$	1,269	$	109
Initial recognition of operating lease right-of-use assets	$	0	$	2,061
Initial recognition of operating lease liabilities	$	0	$	2,061

Recent Accounting Pronouncements

Pronouncements Adopted in 2023

On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. The Corporation adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Corporation recorded a net decrease to retained earnings of $2.1 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment included a $927,000 increase to ACL for loans, a $1.9 million increase in the ACL for unfunded commitments and a $667,000 increase in deferred tax assets.

At adoption, the Corporation changed the way the loan portfolio is segmented and now segments the portfolio based on collateral. Previously the Corporation segmented the loan portfolio based on industry.

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The following table illustrates the impact of ASC 326.


			January 1, 2023
					Reclassification to CECL		Post-CECL Adoption
(dollars in thousands)			Pre-CECL Adoption		Portfolio Segmentation		Portfolio Segmentation
Loans:
	Builder & developer	$	128,327	$	(128,327)	$	0
	Commercial real estate investor		367,366		(367,366)		0
	Commercial real estate-construction		0		144,782		144,782
	Commercial real estate-owner occupied		0		344,941		344,941
	Commercial real estate-non-owner occupied		0		445,408		445,408
	Residential real estate investor		263,262		(263,262)		0
	Residential real estate-construction		0		26,055		26,055
	Residential real estate-revolving		0		103,509		103,509
	Residential real estate-multi family		0		118,141		118,141
	Residential real estate-other		0		243,092		243,092
	Commercial		0		191,665		191,665
	Hotel/Motel		94,471		(94,471)		0
	Wholesale & retail		60,672		(60,672)		0
	Manufacturing		86,593		(86,593)		0
	Agriculture		91,449		(91,449)		0
	Service		73,094		(73,094)		0
	Commercial other		209,116		(209,116)		0
	Consumer		0		15,264		15,264
	Residential mortgage		135,340		(135,340)		0
	Home equity		98,030		(98,030)		0
	Consumer other		25,137		(25,137)		0
	Total	$	1,632,857	$	0	$	1,632,857

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 did not have a material impact on the Corporation’s consolidated financial statements.

Note 2 – Securities

A summary of securities available-for-sale at September 30, 2023 and December 31, 2022 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, investments in the obligations of states and municipalities and selected corporate securities, including subordinated debt. At September 30, 2023 and December 31, 2022, 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			Allowance for	Gross Unrealized				Fair
(dollars in thousands)	Cost			Credit Losses	Gains		Losses		Value
September 30, 2023
Debt securities:
U.S. Treasury notes	$	19,804	$	0	$	0	$	(595)	$	19,209
U.S. agency		13,951		0		0		(1,518)		12,433
U.S. agency mortgage-backed, residential		284,345		0		4		(40,770)		243,579
State and municipal		35,399		0		3		(7,336)		28,066
Corporates		38,195		0		0		(5,826)		32,369

Total debt securities	$	391,694	$	0	$	7	$	(56,045)	$	335,656

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	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
December 31, 2022
Debt securities:
U.S. Treasury notes	$	19,688	$	0	$	(588)	$	19,100
U.S. agency		12,750		0		(1,470)		11,280
U.S. agency mortgage-backed, residential		283,436		43		(33,377)		250,102
State and municipal		35,517		37		(6,155)		29,399
Corporates		39,531		0		(3,955)		35,576
Total debt securities	$	390,922	$	80	$	(45,545)	$	345,457

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				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2023		2022		2023		2022
Proceeds	$	0	$	0	$	4,253	$	0
Gross gains		0		0		0		0
Gross losses		0		0		(388)		0
Tax benefit		0		0		91		0

The amortized cost and estimated fair value of debt securities at September 30, 2023 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	$	9,908	$	9,698
Due after one year through five years		112,944		103,561
Due after five years through ten years		230,190		191,357
Due after ten years		38,652		31,040
Total debt securities	$	391,694	$	335,656

Investment securities having a carrying value of $227,602,000 and $204,887,000 on September 30, 2023 and December 31, 2022, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

- 15 -

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, for which an allowance for credit losses has not been recorded, at September 30, 2023 and December 31, 2022.


	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
September 30, 2023
Debt securities:
U.S. Treasury notes	0	$	0	$	0	4	$	19,209	$	(595)	4	$	19,209	$	(595)
U.S. agency	3		1,913		(38)	9		10,520		(1,480)	12		12,433		(1,518)
U.S. agency mortgage-backed, residential	39		31,338		(1,065)	206		205,626		(39,705)	245		236,964		(40,770)
State and municipal	7		2,608		(215)	33		24,065		(7,121)	40		26,673		(7,336)
Corporates	2		1,169		(40)	30		29,699		(5,786)	32		30,868		(5,826)
Total temporarily impaired debt
securities, available-for-sale	51	$	37,028	$	(1,358)	282	$	289,119	$	(54,687)	333	$	326,147	$	(56,045)
December 31, 2022
Debt securities:
U.S. Treasury notes	4	$	19,100	$	(588)	0	$	0	$	0	4	$	19,100	$	(588)
U.S. agency	7	$	7,594	$	(656)	3	$	3,685	$	(814)	10	$	11,279	$	(1,470)
U.S. agency mortgage-backed, residential	147		140,409		(11,071)	72		102,061		(22,284)	219		242,470		(33,355)
State and municipal	6		2,334		(210)	35		25,121		(5,945)	41		27,455		(6,155)
Corporates	11		11,610		(831)	20		20,665		(3,124)	31		32,275		(3,955)
Total temporarily impaired debt
securities, available-for-sale	175	$	181,047	$	(13,356)	130	$	151,532	$	(32,167)	305	$	332,579	$	(45,523)

Securities available-for-sale are analyzed quarterly for 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.

As of September 30, 2023, the Corporation’s security portfolio consisted of 344 securities, 333 of which were in an unrealized loss position. Through September 30, 2023 the Corporation has collected all interest and principal on its investment securities as scheduled. The majority of the unrealized losses are related to the Corporation’s mortgage-backed securities, as discussed below:

Mortgage-Backed Securities

At September 30, 2023, 100% of the mortgage-backed securities held by the Corporation were issued by U.S. government-sponsored entities and agencies. The decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Corporation does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to have credit impairment at September 30, 2023.

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 September 30, 2023 and December 31, 2022, 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.

- 16 -

The FHLBP paid dividends during the periods ended September 30, 2023 and 2022. 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 the 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; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes no impairment charge was necessary related to the restricted stock during the periods ended September 30, 2023 and 2022.

Note 4—Loans and Allowance for Credit Losses

At adoption, the Corporation changed the way the loan portfolio is segmented and now segments the portfolio based on collateral using federal call code targeting similar risk characteristics. Previously the Corporation segmented the loan portfolio based on industry. Management selected national civilian unemployment rates, housing price index and real gross domestic product (GDP) as the drivers of the quantitative portion of the collectively evaluated reserves. These third party supplied economic driver forecasts are updated within the model quarterly to calculate expected life and related loan default rates.

Loans that do not share similar risk characteristics are evaluated on an individual basis and are excluded from the quantitative calculations for the ACL. Loans that are individually evaluated under CECL will include loans in nonaccrual status and may include accruing loans that do not share similar risk characteristics within the evaluation. All individually evaluated loans in the current period were in nonaccrual status.

The ACL also includes a qualitative adjustment for risk factors that are not considered within the quantitative component or where the Company’s risk factors differ from the utilized peer data. Management may consider additional or reduced reserves to be warranted based on current and expected conditions. During the current quarter factors that were considered relevant by management in determining expected credit losses beyond the qualitative assessment include changes in:

Differences in lending policies, procedures, underwriting standards, charge off and recovery practices;

Changes in the nature and volume of the portfolio and terms of loans;

Changes in the experience, depth, and ability of lending management;

Delinquency trends;

Quality of the loan review system;

Value of underlying collateral;

Existence and effect of concentrations of credit and changes in the levels of such concentrations; and

The effect of other external factors including legal, competition, local economic and their impact on credit losses.

The qualitative adjustments and projected impact are reviewed and considered by the Corporation’s Chief Credit Officer in discussion with the appropriate finance and executive personnel. During the quarter ending September 30, 2023, the quantitative allowance was positively impacted by forecasted improvements in the macroeconomic conditions such as national civilian unemployment rates and GDP. While these changes project an improvement in credit conditions, a decrease was experienced in commercial real estate prices. This resulted in a decision to increase the qualitative loss risk related to changes in national, regional and local conditions along with changes in the value of underlying collateral for commercial real estate loans. This increased risk will continue to be monitored and would expect to remain until forecasts for the unemployment rate and GDP again align with projections for commercial real estate pricing. While other areas of risk beyond the quantitative risk have been identified within the model, no additional changes were considered warranted in the allocated reserve ratios within the current quarter.

- 17 -

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at September 30, 2023. The portfolio is comprised of nine segments, commercial, commercial real estate construction, commercial real estate owner occupied, commercial real estate non-owner occupied, residential real estate construction, residential real estate revolving, residential real estate multi family, residential real estate other and consumer as presented in the table below. Certain portfolio segments are further disaggregated for the purpose of estimating credit losses. The Corporation has not engaged in sub-prime residential mortgage originations.



	September 30,		% Total
(dollars in thousands)	2023		Loans
Commercial loans	$	171,490		10.1
Commercial real estate:
Construction		184,960		10.9
Owner occupied		347,857		20.4
Non-owner occupied		455,584		26.7
Residential real estate:
Construction		29,132		1.7
Revolving		105,169		6.2
Multi family		123,465		7.2
Other		273,170		16.0
Consumer		13,553		0.8
Gross Loans		1,704,380		100.0
Less: Allowance for credit losses		21,449
Net Loans	$	1,682,931

The table below provides the composition of the loan portfolio at December 31, 2022. 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.



	December 31,		% Total
(dollars in thousands)	2022		Loans
Builder & developer	$	128,327		7.9
Commercial real estate investor		367,366		22.5
Residential real estate investor		263,262		16.1
Hotel/Motel		94,471		5.8
Wholesale & retail		60,672		3.7
Manufacturing		86,593		5.3
Agriculture		91,449		5.6
Service		73,094		4.5
Other		209,116		12.8
Total commercial related loans		1,374,350		84.2
Residential mortgages		135,340		8.3
Home equity		98,030		6.0
Other		25,137		1.5
Total consumer related loans		258,507		15.8
Total loans	$	1,632,857		100.0

- 18 -

business conditions in the economy, credit concentrations, competition, model imprecision, and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on management’s knowledge of the portfolio and the markets in which the Corporation operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results including loans in process.

The following tables presents the activity in the allowance for credit losses by segment as of and for the three and nine months ended September 30, 2023.


(dollars in thousands)		Balance, July 1, 2023		Provision for credit losses		Loan charge-offs		Loan recoveries		Balance, September 30, 2023

Commercial loans	$	3,041	$	(614)	$	(190)	$	768	$	3,005
Commercial real estate:
Construction		3,542		451		0		0		3,993
Owner occupied		3,877		236		0		1		4,114
Non-owner occupied		6,125		36		0		0		6,161
Residential real estate:
Construction		93		(5)		0		0		88
Revolving		476		5		0		1		482
Multi family		1,907		75		0		0		1,982
Other		1,448		(43)		0		51		1,456
Consumer		172		(13)		(3)		12		168
Total	$	20,681	$	128	$	(193)	$	833	$	21,449


(dollars in thousands)		Balance, January 1, 2023 - Pre ASC 326 Adoption		Impact of adopting ASC 326		Provision for credit losses		Loan charge-offs		Loan recoveries		Balance, September 30, 2023

Commercial loans	$	4,783	$	(235)	$	(1,212)	$	(1,248)	$	917	$	3,005
Commercial real estate:
Construction		1,829		1,121		1,043		0		0		3,993
Owner occupied		4,341		(69)		484		(683)		41		4,114
Non-owner occupied		6,387		(468)		242		0		0		6,161
Residential real estate:
Construction		230		(144)		2		0		0		88
Revolving		417		192		(234)		(27)		134		482
Multi family		1,205		194		583		0		0		1,982
Other		1,511		169		(293)		0		69		1,456
Consumer		33		167		(26)		(27)		21		168
Total	$	20,736	$	927	$	589	$	(1,985)	$	1,182	$	21,449

- 19 -

The following table presents the activity in and the composition of the allowance for loan losses in accordance with previously applicable GAAP by loan segment and class detail as of and for the three and nine months ended September 30, 2022.



	Allowance for Loan Losses
	July 1, 2022								September 30, 2022
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,290	$	0	$	12	$	(176)	$	2,126
Commercial real estate investor		5,766		(22)		0		(13)		5,731
Residential real estate investor		3,483		(52)		1		(670)		2,762
Hotel/Motel		1,262		(10)		179		(345)		1,086
Wholesale & retail		518		0		0		17		535
Manufacturing		858		0		0		128		986
Agriculture		1,454		0		40		150		1,644
Service		827		(248)		1		443		1,023
Other commercial		5,936		0		6		(126)		5,816
Total commercial related loans		22,394		(332)		239		(592)		21,709
Residential mortgage		212		0		0		31		243
Home equity		195		0		24		(19)		200
Other consumer		75		(3)		6		2		80
Total consumer related loans		482		(3)		30		14		523
Unallocated		(11)		0		0		11		0
Total	$	22,865	$	(335)	$	269	$	(567)	$	22,232



	Allowance for Loan Losses
	January 1, 2022								September 30, 2022
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,408	$	0	$	12	$	(294)	$	2,126
Commercial real estate investor		5,647		(1,249)		0		1,333		5,731
Residential real estate investor		3,493		(52)		10		(689)		2,762
Hotel/Motel		968		(1,669)		179		1,608		1,086
Wholesale & retail		1,989		0		0		(1,454)		535
Manufacturing		883		0		0		103		986
Agriculture		1,307		(535)		40		832		1,644
Service		981		(736)		1		777		1,023
Other commercial		4,656		(3)		30		1,133		5,816
Total commercial related loans		22,332		(4,244)		272		3,349		21,709
Residential mortgage		186		0		0		57		243
Home equity		191		(49)		26		32		200
Other consumer		74		(6)		17		(5)		80
Total consumer related loans		451		(55)		43		84		523
Unallocated		(1)		0		0		1		0
Total	$	22,782	$	(4,299)	$	315	$	3,434	$	22,232

- 20 -

Non-accrual Loans

The table below presents a summary of non-accrual loans at September 30, 2023. An allowance is established for those individual loans where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, individually evaluated consumer related loans are partially or fully charged-off eliminating the need for specific allowance. Interest income on loans with no related allowance is the result of interest collected on a cash basis.


		With a		Without a		Related		Interest Income
(dollars in thousands)		Related Allowance		Related Allowance		Allowance		Three months ended		Nine months ended
September 30, 2023
Commercial loans	$	1,988	$	1,996	$	1,092	$	136	$	381
Commercial real estate:
Construction				40		0		0		107
Owner occupied		0		2,043		0		0		53
Non-owner occupied		0		204		0		0		0
Residential real estate:
Construction		0		0		0		0		36
Revolving		0		506		0		0		27
Multi family		0		0		0		0		0
Other		0		828		0		0		38
Consumer		0		0		0		0		0
Total	$	1,988	$	5,617	$	1,092	$	136	$	642

The table below presents a summary of impaired loans at December 31, 2022 . 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 charged-offs.



	With No Allowance				With A Related Allowance						Total
	Recorded		Unpaid		Recorded		Unpaid		Related		Recorded		Unpaid
(dollars in thousands)	Investment		Principal		Investment		Principal		Allowance		Investment		Principal
December 31, 2022
Builder & developer	$	1,901	$	2,644	$	44	$	44	$	44	$	1,945	$	2,688
Commercial real estate investor		500		500		0		0		0		500		500
Residential real estate investor		647		665		209		215		152		856		880
Hotel/Motel		0		0		0		0		0		0		0
Wholesale & retail		0		0		0		0		0		0		0
Manufacturing		2,783		2,877		182		183		33		2,965		3,060
Agriculture		164		210		748		930		655		912		1,140
Service		0		0		0		0		0		0		0
Other commercial		1,836		3,037		1,600		2,338		1,600		3,436		5,375
Total impaired commercial related loans		7,831		9,933		2,783		3,710		2,484		10,614		13,643
Residential mortgage		1,112		1,115		0		0		0		1,112		1,115
Home equity		457		512		0		0		0		457		512
Other consumer		0		0		0		0		0		0		0
Total impaired consumer related loans		1,569		1,627		0		0		0		1,569		1,627
Total impaired loans	$	9,400	$	11,560	$	2,783	$	3,710	$	2,484	$	12,183	$	15,270

- 21 -

The tables below presents a summary of average impaired loans and related interest income that was included for the three and nine months ended September 30, 2022. Interest income on loans with no related allowance is the result of interest collected on a cash basis.



	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 September 30, 2022
Builder & developer	$	982	$	0	$	1,492	$	0	$	2,474	$	0
Commercial real estate investor		2,855		4		0		0		2,855		4
Residential real estate investor		711		4		213		0		924		4
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		0		0		0		0		0		0
Manufacturing		4,023		0		0		0		4,023		0
Agriculture		405		0		748		0		1,153		0
Service		0		0		0		0		0		0
Other commercial		0		0		4,179		0		4,179		0
Total impaired commercial related loans		8,976		8		6,632		0		15,608		8
Residential mortgage		842		6		0		0		842		6
Home equity		470		0		0		0		470		0
Other consumer		44		15		0		0		44		15
Total impaired consumer related loans		1,356		21		0		0		1,356		21
Total impaired loans	$	10,332	$	29	$	6,632	$	0	$	16,964	$	29



	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
Nine months ended September 30, 2022
Builder & developer	$	986	$	0	$	746	$	0	$	1,732	$	0
Commercial real estate investor		2,993		18		469		0		3,462		18
Residential real estate investor		466		27		106		0		572		27
Hotel/Motel		6,067		0		0		0		6,067		0
Wholesale & retail		0		0		0		0		0		0
Manufacturing		4,478		37		0		0		4,478		37
Agriculture		1,482		501		771		0		2,253		501
Service		0		0		486		0		486		0
Other commercial		996		177		3,596		0		4,592		177
Total impaired commercial related loans		17,468		760		6,174		0		23,642		760
Residential mortgage		452		13		280		8		732		21
Home equity		459		27		0		0		459		27
Other consumer		69		15		0		0		69		15
Total impaired consumer related loans		980		55		280		8		1,260		63
Total impaired loans	$	18,448	$	815	$	6,454	$	8	$	24,902	$	823

As of September 30, 2023 and December 31, 2022, there were approximately $5,600,000 and $9,400,000, respectively, of non-accrual loans that did not have a related allowance for credit losses. The estimated fair value of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no allowance for credit losses was considered to be necessary.

- 22 -

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for December 31, 2022.



	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
December 31, 2022
Builder & developer	$	44	$	1,725	$	1,769	$	1,945	$	126,382	$	128,327
Commercial real estate investor		0		4,858		4,858		500		366,866		367,366
Residential real estate investor		152		2,661		2,813		856		262,406		263,262
Hotel/Motel		0		1,658		1,658		0		94,471		94,471
Wholesale & retail		0		488		488		0		60,672		60,672
Manufacturing		33		897		930		2,965		83,628		86,593
Agriculture		655		990		1,645		912		90,537		91,449
Service		0		1,064		1,064		0		73,094		73,094
Other commercial		1,600		3,352		4,952		3,436		205,680		209,116
Total commercial related		2,484		17,693		20,177		10,614		1,363,736		1,374,350
Residential mortgage		0		270		270		1,112		134,228		135,340
Home equity		0		207		207		457		97,573		98,030
Other consumer		0		82		82		0		25,137		25,137
Total consumer related		0		559		559		1,569		256,938		258,507
Unallocated		0		0		0		0		0		0
Total	$	2,484	$	18,252	$	20,736	$	12,183	$	1,620,674	$	1,632,857

Asset Quality

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 portfolio risk management 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 net 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.

‎

- 23 -

The following table summarizes designated internal risk rating categories by portfolio segment, by origination year, in the current period. It 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.


	Term Loans Amortized Cost Basis by Origination Year															Revolving Loans
														Revolving Loans		converted to Term
														Amortized Cost		Loans Amortized
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Basis		Cost Basis		Total
Commercial loans
Pass	$	14,196	$	44,255	$	15,949	$	4,712	$	10,760	$	9,893	$	51,716	$	0	$	151,481
Special Mention		0		0		50		0		563		137		3,374		0		4,124
Substandard		38		649		2,784		13		12		1,168		7,237		0		11,901
Nonaccrual		0		360		599		0		625		1,000		1,400		0		3,984
Total		14,234		45,264		19,382		4,725		11,960		12,198		63,727		0		171,490
Gross write-offs		0		(26)		0		(15)		0		(968)		(239)		0		(1,248)

Commercial real estate:
Construction
Pass	$	41,980	$	74,921	$	31,133	$	11,922	$	7,966	$	8,474	$	2,831	$	0	$	179,227
Special Mention		0		605		0		1,679		0		0		1,000		0		3,284
Substandard		0		0		0		2,409		0		0		0		0		2,409
Nonaccrual		0		0		0		0		0		40		0		0		40
Total		41,980		75,526		31,133		16,010		7,966		8,514		3,831		0		184,960
Gross write-offs		0		0		0		0		0		0		0		0		0

Owner occupied
Pass	$	33,433	$	60,051	$	66,381	$	24,657	$	34,689	$	94,644	$	16,803	$	0	$	330,658
Special Mention		140		0		0		2,519		0		4,151		0		0		6,810
Substandard		250		0		1,263		0		0		6,404		429		0		8,346
Nonaccrual		0		0		1,785		0		0		258		0		0		2,043
Total		33,823		60,051		69,429		27,176		34,689		105,457		17,232		0		347,857
Gross write-offs		0		0		0		0		0		(683)		0		0		(683)

Non-owner occupied
Pass	$	33,056	$	120,640	$	111,199	$	63,341	$	11,542	$	111,059	$	1,439	$	0	$	452,276
Special Mention		0		0		1,197		0		0		950		0		0		2,147
Substandard		0		0		0		0		0		957		0		0		957
Nonaccrual		0		0		0		50		0		154		0		0		204
Total		33,056		120,640		112,396		63,391		11,542		113,120		1,439		0		455,584
Gross write-offs		0		0		0		0		0		0		0		0		0

Residential real estate:
Construction
Pass	$	8,388	$	13,824	$	2,155	$	972	$	1,556	$	540	$	1,697	$	0	$	29,132
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0		0
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		8,388		13,824		2,155		972		1,556		540		1,697		0		29,132
Gross write-offs		0		0		0		0		0		0		0		0		0

Revolving
Pass	$	9,616	$	16,462	$	1,099	$	333	$	638	$	2,102	$	74,413	$	0	$	104,663
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0		0
Nonaccrual		0		34		0		0		0		0		472		0		506
Total		9,616		16,496		1,099		333		638		2,102		74,885		0		105,169
Gross write-offs		0		0		0		0		0		(8)		(19)		0		(27)

- 24 -

Multi family
Pass	$	5,418	$	26,836	$	32,980	$	19,625	$	23,934	$	9,442	$	1,003	$	0	$	119,238
Special Mention		0		0		0		0		0		1,800		0		0		1,800
Substandard		0		0		0		0		0		2,427		0		0		2,427
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		5,418		26,836		32,980		19,625		23,934		13,669		1,003		0		123,465
Gross write-offs		0		0		0		0		0		0		0		0		0

Other
Pass	$	50,055	$	63,283	$	43,265	$	38,398	$	18,221	$	56,723	$	956	$	0	$	270,901
Special Mention		0		0		0		52		0		1,012		42		0		1,106
Substandard		0		0		0		130		0		205		0		0		335
Nonaccrual		0		0		292		0		0		536		0		0		828
Total		50,055		63,283		43,557		38,580		18,221		58,476		998		0		273,170
Gross write-offs		0		0		0		0		0		0		0		0		0

Consumer
Pass	$	3,843	$	3,622	$	1,708	$	204	$	111	$	277	$	3,788	$	0	$	13,553
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0		0
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		3,843		3,622		1,708		204		111		277		3,788		0		13,553
Gross write-offs		0		(2)		0		(2)		0		(1)		(22)		0		(27)

Total Loans
Pass	$	199,985	$	423,894	$	305,869	$	164,164	$	109,417	$	293,154	$	154,646	$	0	$	1,651,129
Special Mention		140		605		1,247		4,250		563		8,050		4,416		0		19,271
Substandard		288		649		4,047		2,552		12		11,161		7,666		0		26,375
Nonaccrual		0		394		2,676		50		625		1,988		1,872		0		7,605
Total		200,413		425,542		313,839		171,016		110,617		314,353		168,600		0		1,704,380

Total Gross Charge-Offs	$	0	$	(28)	$	0	$	(17)	$	0	$	(1,660)	$	(280)	$	0	$	(1,985)



			Special
(dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total
December 31, 2022
Builder & developer	$	124,572	$	1,010	$	972	$	1,773	$	128,327
Commercial real estate investor		367,144		0		0		222		367,366
Residential real estate investor		262,406		0		0		856		263,262
Hotel/Motel		89,710		0		4,761		0		94,471
Wholesale & retail		59,930		56		686		0		60,672
Manufacturing		81,552		1,444		632		2,965		86,593
Agriculture		87,896		2,260		381		912		91,449
Service		68,373		384		4,337		0		73,094
Other		192,194		4,934		8,552		3,436		209,116
Total commercial related loans		1,333,777		10,088		20,321		10,164		1,374,350
Residential mortgage		134,850		0		141		349		135,340
Home equity		97,573		0		0		457		98,030
Other		25,137		0		0		0		25,137
Total consumer related loans		257,560		0		141		806		258,507
Total loans	$	1,591,337	$	10,088	$	20,462	$	10,970	$	1,632,857

- 25 -

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 class segment at September 30, 2023.


						≥ 90 Days				Total Past
		30-59 Days		60-89 Days		Past Due				Due and
(dollars in thousands)		Past Due		Past Due		and Accruing		Nonaccrual		Nonaccrual		Current		Total Loans
September 30, 2023
Commercial loans	$	50	$	0	$	0	$	3,984	$	4,034	$	167,456	$	171,490
Commercial real estate:
Construction		0		1,679		0		40		1,719		183,241		184,960
Owner occupied		0		0		0		2,043		2,043		345,814		347,857
Non-owner occupied		0		0		0		204		204		455,380		455,584
Residential real estate:
Construction		0		0		0		0		0		29,132		29,132
Revolving		246		0		0		506		752		104,417		105,169
Multi family		0		0		0		0		0		123,465		123,465
Other		3		0		0		828		831		272,339		273,170
Consumer		24		0		0		0		24		13,529		13,553
Total	$	323	$	1,679	$	0	$	7,605	$	9,607	$	1,694,773	$	1,704,380



					≥ 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
December 31, 2022
Builder & developer	$	3,500	$	0	$	0	$	1,773	$	5,273	$	123,054	$	128,327
Commercial real estate investor		0		0		0		222		222		367,144		367,366
Residential real estate investor		0		0		0		856		856		262,406		263,262
Hotel/Motel		0		0		0		0		0		94,471		94,471
Wholesale & retail		0		0		0		0		0		60,672		60,672
Manufacturing		0		0		0		2,965		2,965		83,628		86,593
Agriculture		8		0		0		912		920		90,529		91,449
Service		0		0		0		0		0		73,094		73,094
Other		0		0		0		3,436		3,436		205,680		209,116
Total commercial related loans		3,508		0		0		10,164		13,672		1,360,678		1,374,350
Residential mortgage		207		0		0		349		556		134,784		135,340
Home equity		345		94		0		457		896		97,134		98,030
Other		7		42		0		0		49		25,088		25,137
Total consumer related loans		559		136		0		806		1,501		257,006		258,507
Total loans	$	4,067	$	136	$	0	$	10,970	$	15,173	$	1,617,684	$	1,632,857

Collateral Dependent Loans

A loan is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Corporation elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Corporation records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists of various types of real estate, including residential properties, commercial properties, such as retail centers, office buildings, lodging, agriculture land, and vacant land. At September 30, 2023 collateral dependent loans totaled $7,600,000.

- 26 -

Modifications

Occasionally, the Corporation modifies loans to borrowers in financial distress by providing principal forgiveness, other-than-insignificant payment delay, term extension or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Corporation provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction.

The following table presents the amortized costs basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the prior 3 months, by segment and type of modification. The percentage of the amortized costs basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of loan is also presented below:




		Payment Delay &
(dollars in thousands)		Term Extension	Total Loan Class
September 30, 2023
Commercial real estate:
Construction	$	1,679	0.91	%
Residential real estate:
Multi family		1,800	1.46
Total	$	3,479	0.20	%

The following table presents the amortized costs basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the prior nine months, by segment and type of modification. The percentage of the amortized costs basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of loan is also presented below:


		Payment Delay &		Term
(dollars in thousands)		Term Extension		Extension	Total Loan Class
September 30, 2023
Commercial loans	$	0	$	1,748	1.02	%
Commercial real estate:
Construction		1,679		0	0.91
Owner occupied		0		1,785	0.51
Residential real estate:
Multi family		1,800		0	1.46
Total	$	3,479	$	3,533	0.41	%

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three months ended September 30, 2023:


		Weighted-Average
		Payment Delay &
(dollars in thousands)		Term Extension (months)
September 30, 2023
Commercial real estate:
Construction		4
Residential real estate:
Multi family		4

The Corporation has not committed to lend additional amounts to the borrowers included in the previous table.

- 27 -

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the nine months ended September 30, 2023:


		Weighted-Average
	Weighted-Average	Payment Delay &
(dollars in thousands)	Term Extension (months)	Term Extension (months)
September 30, 2023
Commercial loans	8	0
Commercial real estate:
Construction	0	4
Owner occupied	8	0
Residential real estate:
Multi family	0	4

The Corporation has committed to lend additional amounts totaling $231,000 to the borrowers included in the previous table.

The Corporation closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. None of the loans that have been modified in the last three and nine months were past due or had a payment default at September 30, 2023.

Note 5—Deposits

The composition of deposits as of September 30, 2023 and December 31, 2022 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $96,000 at September 30, 2023, compared to $122,000 at December 31, 2022.



	September 30,		December 31,
(dollars in thousands)	2023		2022
Noninterest bearing demand	$	398,486	$	463,853
Interest bearing demand		271,192		289,298
Money market		651,655		646,702
Savings		141,316		161,228
Time deposits less than $100		229,638		210,331
Time deposits $100 to $250		145,467		123,002
Time deposits $250 or more		68,624		48,805
Total deposits	$	1,906,378	$	1,943,219

Note 6—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 September 30, 2023, the balance of securities sold under agreements to repurchase was $13,224,000 compared to $11,605,000 at December 31, 2022. At September 30, 2023, the balance of other short-term borrowings was $25,875,000 compared to $0 at December 31, 2022. Short-term borrowings at September 30, 2023 consisted of FHLB Open Repo Line of Credit advances at a variable rate. The rate at September 30, 2023 was 5.68 percent.

The following table presents a summary of long-term debt as of September 30, 2023 and December 31, 2022.



	September 30,		December 31,
(dollars in thousands)	2023		2022
Junior subordinated debt
Due 2034, 7.69%, floating rate based on 3 month
SOFR plus 2.02%, callable quarterly	$	3,093	$	3,093
Due 2036, 7.11% floating rate based on 3 month
SOFR plus 1.54%, callable quarterly		7,217		7,217
Lease obligations included in long-term debt:
Finance lease liabilities		1,218		1,240
Total long term debt and junior subordinated debt	$	11,528	$	11,550
Subordinated notes
Due 2030, 4.50% fixed rate, callable on or after December 2025		30,825		30,764
Total long-term debt	$	42,353	$	42,314

- 28 -

In June 2006, Codorus Valley formed CVB Statutory Trust No. II, a wholly-owned special purpose entity 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. I to facilitate a pooled trust preferred debt issuance of $3,093,000. The Corporation owns all of the common stock of these nonbank entities, 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 Overnight Financing Rate) plus 404 basis points.

Note 7—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. 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 right-of-use (“ROU”) assets and corresponding lease liabilities. The Corporation also has one finance lease for one financial center.

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

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

The components of lease expense were as follows:



	Three months ended
	September 30,
(dollars in thousands)	2023		2022
Operating lease cost	$	171	$	190

Finance lease cost:
Amortization of right-of-use assets	$	12	$	12
Interest on lease liability		11		12
Total finance lease cost	$	23	$	24

Total lease cost	$	194	$	214

- 29 -


	Nine months ended
	September 30,
(dollars in thousands)	2023		2022
Operating lease cost	$	519	$	581

Finance lease cost:
Amortization of right-of-use assets	$	36	$	36
Interest on lease liability		33		36
Total finance lease cost	$	69	$	72

Total lease cost	$	588	$	653

Supplemental cash flow information related to leases was as follows:



	Nine months ended
	September 30,
	2023		2022
Operating cash flows from operating leases	$	540	$	547
Operating cash flows from financing leases		33		35
Financing cash flows from financing leases		24		21

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

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



	September 30,		December 31,
	2023		2022
Assets:
Operating leases right-of-use assets	$	2,618	$	3,072
Finance leases assets		959		994
Total lease assets	$	3,577	$	4,066

Liabilities:
Operating	$	2,726	$	3,204
Financing		1,218		1,240
Total lease liabilities	$	3,944	$	4,444

Weighted Average Remaining Lease Term (years)
Operating leases		6.6		6.9
Finance leases		20.4		21.2

Weighted Average Discount Rate
Operating leases		2.08%		2.14%
Finance leases		3.69%		3.69%

- 30 -

Future minimum payments for financing leases and operating leases as of September 30, 2023 and December 31, 2022 were as follows:



(dollars in thousands:)	September 30, 2023
Year Ending December 31,	Operating Leases		Finance Leases
2023	$	162	$	19
2024		638		75
2025		430		79
2026		324		80
2027		314		80
Thereafter		1,037		1,429
Total lease payments		2,905		1,762
Less imputed interest		(179)		(544)
Total	$	2,726	$	1,218



(dollars in thousands:)	December 31, 2022
Year Ending December 31,	Operating Leases		Finance Leases
2023	$	701	$	75
2024		638		75
2025		417		79
2026		324		80
2027		314		80
Thereafter		1,036		1,429
Total lease payments		3,430		1,818
Less imputed interest		(226)		(578)
Total	$	3,204	$	1,240

Note 8—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 the making of a dividend payment if such payment would render the Corporation insolvent or result in it having negative net worth. Federal and state banking regulations also 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 would be to cause PeoplesBank’s capital to fall below applicable minimum capital requirements as discussed below. Loans and advances by PeoplesBank to affiliates, including the Corporation, are limited to 10 percent of PeoplesBank’s capital stock and contributed capital on a secured basis.

Banks are also 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 of a bank to meet capital requirements can cause bank regulators to initiate certain regulatory actions. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2023, 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 September 30, 2023 and December 31, 2022, 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.

- 31 -

The table below sets for the Corporation’s and PeoplesBank’s capital positive relative to its respective regulatory capital requirements at September 30, 2023 and December 31, 2022.



									To Be Well Capitalized Under
					Required for Capital				Prompt Corrective Action
	Actual (1)				Adequacy Purposes (2) (3)				Provisions (2)
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Codorus Valley Bancorp, Inc. (consolidated)
at September 30, 2023
Capital ratios:
Common equity Tier 1	$	223,708	12.52	%	$	125,037	7.00	%	$	n/a	n/a	%
Tier 1 risk based		233,708	13.08			151,831	8.50			n/a	n/a
Total risk based		285,982	16.01			187,556	10.50			n/a	n/a
Leverage		233,708	10.50			88,992	4.00			n/a	n/a

at December 31, 2022
Capital ratios:
Common equity Tier 1	$	209,540	12.04	%	$	121,871	7.00	%	$	n/a	n/a	%
Tier 1 risk based		219,540	12.61			147,986	8.50			n/a	n/a
Total risk based		271,040	15.57			182,806	10.50			n/a	n/a
Leverage		219,540	9.77			89,863	4.00			n/a	n/a

PeoplesBank, A Codorus Valley Company
at September 30, 2023
Capital ratios:
Common equity Tier 1	$	260,933	14.63	%	$	124,818	7.00	%	$	115,903	6.50	%
Tier 1 risk based		260,933	14.63			151,565	8.50			142,649	8.00
Total risk based		282,382	15.84			187,227	10.50			178,312	10.00
Leverage		260,933	11.75			88,852	4.00			111,065	5.00

at December 31, 2022
Capital ratios:
Common equity Tier 1	$	245,896	14.15	%	$	121,667	7.00	%	$	112,976	6.50	%
Tier 1 risk based		245,896	14.15			147,738	8.50			139,048	8.00
Total risk based		266,632	15.34			182,500	10.50			173,810	10.00
Leverage		245,896	10.96			89,705	4.00			112,131	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) The Corporation is currently not subject to the regulatory capital requirements imposed by Basel III on bank holding companies because the Corporation's consolidated assets did not exceed $3.0 billion as of September 30, 2023 and therefore qualified as a small bank holding company.

(3) Ratio includes Capital Conservation Buffer of 2.50%, except Leverage Ratio, for which the Capital Conservation Buffer does not apply.

Note 9—Shareholders’ Equity

Share Repurchase

The Corporation’s Board of Directors approved share repurchase programs in August 2021 ($5 million) and January 2022 ($5 million). In 2022 a total of 1,535 shares were purchased at an average price of $22.00 under the program approved in August 2021. There was no activity under the program approved in January 2022, which expired by its own terms in December 2022.

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in January 2023. 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 pursuant 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 nine months ended September 30, 2023.

- 32 -

Note 10—Contingent Liabilities

The Corporation is involved in pending and threatened claims and other legal proceedings from time to time in the ordinary course of its business activities. Management evaluates the possible impact of these matters taking into consideration the most recent information available. A loss reserve is established for any matter for which it is believed that a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated. For any matter for which a loss is not probable, or the amount of the loss cannot reasonably be estimated, no loss reserve is established.

In addition, the Corporation may be involved in legal proceedings in the form of investigations or regulatory or governmental inquiries covering a range of possible issues. These could be specific to the Corporation, or part of more wide-spread inquires by regulatory authorities. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation and could result in fines, penalties, restitution, or other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices.

Management believes that any liabilities, individually or in the aggregate, that may result from the final outcomes of pending or threatened legal proceedings will not have a material adverse effect on the financial condition of the Corporation or upon its results of operations.

Note 11—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 $16,699,000 of standby letters of credit outstanding on September 30, 2023, compared to $23,601,000 on December 31, 2022. 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 September 30, 2023 and December 31, 2022, 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 12—Fair Value of Assets and Liabilities

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

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

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

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

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

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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
September 30, 2023
Securities available-for-sale:
U.S. Treasury notes	$	19,209	$	19,209	$	0	$	0
U.S. agency		12,433		0		12,433		0
U.S. agency mortgage-backed, residential		243,579		0		243,579		0
State and municipal		28,066		0		28,066		0
Corporates		32,369		0		32,369		0
Other assets:
Loan-level interest rate swaps		851		0		851		0

December 31, 2022
Securities available-for-sale:
U.S. Treasury notes	$	19,100	$	19,100	$	0	$	0
U.S. agency		11,280		0		11,280		0
U.S. agency mortgage-backed, residential		250,102		0		250,102		0
State and municipal		29,399		0		29,399		0
Corporates		35,576		0		35,576		0
Other assets:
Loan-level interest rate swaps		8		0		8		0

Assets Measured at Fair Value on a Nonrecurring Basis

Individually evaluated loans

Individually evaluated 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 September 30, 2023, the fair value of individually evaluated loans with a valuation allowance or partial charge-off was $1,434,000, net of valuation allowances of $1,092,000 and charge-offs of $340,000. At December 31, 2022 the fair value of impaired loans with a valuation allowance or charge-off was $2,742,000, net of valuation allowances of $2,484,000 and charge-offs of $1,916,000.

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

- 34 -

sales offer. At September 30, 2023 the fair value of foreclosed real estate assets was $383,000, net of a write-down down of $584,000. At December 31, 2022 the fair value of foreclosed real estate assets was $479,000, net of a write-down of $488,000.

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 by an independent third party 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
September 30, 2023
Individually evaluated commercial loans	$	1,368	$	0	$	0	$	1,368
Individually evaluated residential real estate:
Individually evaluated other		66		0		0		66
Impaired other real estate owned		383		0		0		383

December 31, 2022
Impaired builder & developer loans	$	1,194	$	0	$	0	$	1,194
Impaired residential real estate investor loans		57		0		0		57
Impaired agriculture loans		228		0		0		228
Impaired manufacture loans		150		0		0		150
Impaired other loans		1,114		0		0		1,114
Impaired other real estate owned		479		0		0		479

‎

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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
September 30, 2023
Individually evaluated commercial loans	$	446	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	0%-9%	9%
Individually evaluated residential real estate:
Individually evaluated other		66	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	16%-16%	16%
Individually evaluated commercial loans		922	Business asset valuation ⁽³⁾	Business asset valuation adjustments ⁽⁴⁾	20%-50%	29%
Impaired other real estate owned		383	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	20%-25%	22%

December 31, 2022
Impaired builder & developer loans	$	1,194	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	2%-22%	5%
Impaired residential real estate investor loans		57	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	6%-10%	8%
Impaired agriculture loans		228	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	5%-13%	9%
Impaired manufacturer loans		150	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	67%-67%	67%
Impaired other loans		1,114	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	0%-25%	5%
Impaired other real estate owned		479	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	0%-25%	22%

(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.

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

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

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The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of September 30, 2023 and December 31, 2022.



						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
September 30, 2023
Financial assets
Cash and cash equivalents	$	51,307	$	51,307	$	51,307	$	0	$	0
Securities available-for-sale		335,656		335,656		19,209		316,447		0
Restricted investment in bank stocks		2,152		N/A		N/A		N/A		N/A
Loans held for sale		1,103		1,125		0		1,125		0
Loans, net		1,682,931		1,570,158		0		0		1,570,158
Interest receivable		6,859		6,859		0		1,567		5,292
Interest rate swaps		851		851		0		851		0

Financial liabilities
Deposits	$	1,906,378	$	1,899,852	$	0	$	1,899,852	$	0
Short-term borrowings		39,099		39,099		0		39,099		0
Long-term debt and junior subordinated debt (1)		10,310		9,239		0		0		9,239
Subordinated notes		30,825		28,531		0		28,531		0
Interest payable		1,458		1,458		0		1,458		0
Interest rate swaps		851		851		0		851		0
Off-balance sheet instruments		0		0		0		0		0

December 31, 2022
Financial assets
Cash and cash equivalents	$	120,439	$	120,439	$	120,439	$	0	$	0
Securities available-for-sale		345,457		345,457		19,100		326,357		0
Restricted investment in bank stocks		955		N/A		N/A		N/A		N/A
Loans held for sale		154		157		0		157		0
Loans, net		1,612,121		1,503,440		0		0		1,503,440
Interest receivable		6,624		6,624		0		948		5,676

Financial liabilities
Deposits	$	1,943,219	$	1,932,689	$	0	$	1,932,689	$	0
Short-term borrowings		11,605		11,605		0		11,605		0
Long-term debt and junior subordinated debt (1)		10,310		10,165		0		0		10,165
Subordinated notes		30,764		29,145		0		29,145		0
Interest payable		492		492		0		492		0
Off-balance sheet instruments		0		0		0		0		0

(1) Exclude leases included in Long-term debt

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Note 13—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
September 30, 2023
Repurchase Agreements	$	13,224	$	0	$	13,224	$	(13,030)	$	0	$	0	$	194

December 31, 2022
Repurchase Agreements	$	11,605	$	0	$	11,605	$	(13,767)	$	0	$	0	$	(2,162)

Note 14 – 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 offsetting 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 and notional amount related to loan-level interest rate swaps are presented below:


		September 30, 2023				December 31, 2022
		Notional		Asset (Liability)		Notional		Asset (Liability)
(dollars in thousands)		Amount		Fair Value		Amount		Fair Value
Interest Rate Swap with Customers
Positive Fair Values	$	34,173	$	851	$	5,992	$	8
Interest Rate Swaps with Counterparties
Negative Fair Values	$	34,173	$	(851)	$	5,992	$	(8)

‎

- 38 -

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)		September 30, 2023		December 31, 2022
Interest Rate Swap Contracts - Commercial Loans:
Gross amounts recognized	$	851	$	8
Gross amounts offset		851		8
Net amounts presented in the Consolidated Balance Sheets	$	0	$	0

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

‎

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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.

Cautionary Note Regarding Forward-looking Statements

Management of the Corporation has made forward-looking statements in this Form 10-Q. Forward-looking statements may include information concerning the financial condition, results of operations and business of the Corporation and its subsidiaries and include, but are not limited to, statements regarding expectations or predictions of future financial or business performance or conditions relating to the Corporation and its operations. These forward-looking statements may include statements with respect to the Corporation’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Corporation’s control). Forward-looking statements may also include, but are not limited to, discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, goals, expectations or consequences, and statements about future performance, expenses, operations, or products and services of the Corporation and its subsidiaries. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “believes,” “plans,” “expects,” “estimates,” “intends,” “anticipates,” “strives to,” “seeks,” ”intends,” “anticipates” or similar words or expressions.

Forward-looking statements are not historical facts, nor should they be relied upon as providing assurance of future performance. Forward-looking statements are based on current beliefs, expectations and assumptions regarding the future of the Corporation’s business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of the Corporation’s control. 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. Actual results could differ materially from those indicated in forward-looking statements due to, among others, the following factors:

changes in market interest rates and the persistence of the current inflationary environment in the U.S. and our market areas and the potential for an economic downturn or recession;

the effects of financial challenges at other banking institutions that could lead to depositor concerns that spread within the banking industry causing disruptive deposit outflows and other destabilizing results;

legislative and regulatory changes, and the uncertain impact of new laws and regulations;

monetary and fiscal policies of the federal government;

the effects of changes in accounting policies and practices;

ineffectiveness of the Corporation’s business strategy due to changes in current or future market conditions;

 changes in deposit flows, the cost of funds, demand for loan products and the demand for financial services;

the effects of the COVID-19 pandemic, including on the Corporation’s credit quality and operations as well as its impact on general economic conditions;

competition; market volatility, market downturns, changes in consumer behavior, business closures;

adverse changes in the quality or composition of the Corporation’s loan, investment and mortgage-backed securities portfolios, including from the effects of the current inflationary environment;

geographic concentration of the Corporation’s business;

deterioration of commercial real estate values;

the adequacy of loan loss reserves and the Corporation’s transition to the Current Expected Credit Loss (CECL) method of reserving for losses in its loan portfolio;

deterioration in the credit quality of borrowers;

the Company’s ability to attract and retain key personnel;

the impact of operational risks, including the risk of human error, failure or disruption of internal processes and systems, including of the Corporation’s information and other technology systems;

uncertainty surrounding the transition from LIBOR to an alternate reference rate;

failure or circumvention of our internal controls;

the Corporation’s ability to keep pace with technological changes;

breaches of security or failures of the Corporation to identify and adequately address cybersecurity and data breaches;

- 40 -

changes in government regulation and supervision and the potential for negative consequences resulting from regulatory examinations, investigations and violations;

the effects of adverse outcomes from claims and litigation;

occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, epidemics or pandemics, an outbreak or escalation of hostilities or other geopolitical instabilities, the effects of climate change or extraordinary events beyond the Corporation's control, and the Corporation’s ability to deal effectively with disruptions caused by the foregoing; and

economic, competitive, governmental and technological factors affecting the Corporation’s operations, markets, products, services and fees.

For a discussion of other risks and uncertainties that could affect the Corporation, please refer to the “Risk Factors” section of the Corporation’s Annual Report on Form 10-K for the year-ended December 31, 2022, and in its current and periodic reports that are, or will be, filed with the Securities and Exchange Commission (“SEC”) and available on the SEC’s website at www.sec.gov or in the Investor Relations section of the Corporation’s website at www.peoplesbanknet.com. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statement to reflect new information, events occurring after the date of this Form 10-Q or otherwise.

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 credit 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 material changes made to the Corporation’s critical accounting policies, which were described in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2022 below.

On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. The Corporation adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Corporation recorded a net decrease to retained earnings of $2,100,000 as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment included a $927,000 increase to the allowance for credit losses for loans, a $1,900,000 increase in the allowance for credit losses for unfunded commitments and a $667,000 increase in deferred tax assets.

Allowance for credit losses – loans

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Commercial loans

Commercial real estate – construction

Commercial real estate – owner occupied

Commercial real estate – non-owner occupied

Residential real estate – construction

Residential real estate – revolving

Residential real estate – multi family

Residential real estate – other

Consumer loans

The Corporation measures the allowance for credit losses using the following methods.

• Loans are aggregated into pools based on similar risk characteristics.

• The Probability of Default (PD) and Loss Given Default (LGD) CECL model components are determined based on loss estimates driven by historical experience at the input level.

• The PD model component uses "through the economic cycle transition" matrices based on the Corporation’s and peer group historical loan and transaction data across each pool of loans.

• The LGD model component calculates a lifetime estimate across each pool of loans utilizing a nonparametric loss curve modeling approach.

• Reasonable and supportable forecasts are incorporated into the PD model component that are based on different economic forecasts and scenarios sourced from an external party. A future loss forecast over the reasonable and supportable forecast period is based on the projected performance of specific economic variables that statistically correlate with the PD and LGD pools. After the reasonable and supportable forecast period, loss estimates naturally revert to input-level reversion.

• Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.

• A constant prepayment rate is calculated for each loan pool in the CECL model.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

The schedule below presents selected performance metrics for the third quarter of both 2023 and 2022.



	Three months ended
	September 30,
	2023			2022
Basic earnings per share	$	0.62		$	0.75
Diluted earnings per share	$	0.61		$	0.75
Cash dividend payout ratio		27.61	%		19.04	%
Return on average assets		1.08	%		1.25	%
Return on average equity		12.64	%		15.93	%
Net interest margin (tax equivalent basis)		3.64	%		3.66	%
Net overhead ratio		2.14	%		2.04	%
Efficiency ratio		66.95	%		63.51	%
Average equity to average assets		8.55	%		7.84	%

The Corporation’s net income (earnings) was $5,917,000 for the quarter ended September 30, 2023, as compared to $7,154,000 for the quarter ended September 30, 2022, a decrease of $1,237,000 or 17 percent.

- 42 -

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 September 30, 2023 was $19,372,000, a decrease of $979,000 or 5 percent compared to net interest income of $20,351,000 for the third quarter 2022.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 3.64 percent for the third quarter 2023 compared to 3.66 percent for the third quarter 2022. The net interest margin contraction was primarily the result of higher rates on interest bearing demand deposits and time deposits, offset by higher rates on commercial loans.

Total interest income for the third quarter 2023 totaled $29,073,000, an increase of $6,400,000 or 28 percent above the amount of total interest income for the third quarter 2022. The change was primarily a result of higher rates on commercial loans.

Interest and dividend income on investments increased $519,000 or 24 percent in the third quarter 2023 compared to the same period in 2022. The average balance of the investment securities portfolio increased $20,056,000 or 5 percent when comparing the third quarter 2023 to the same period in 2022. The tax-equivalent yield on investments for the third quarter 2023 was 2.75 percent or 39 basis points higher than the 2.36 percent realized in the third quarter 2022. The average balance of interest bearing deposits with banks decreased $233,530,000 or 90 percent in the third quarter 2023 compared to the third quarter 2022. The yield on the interest bearing deposits with banks increased 309 basis points when comparing the third quarter 2023 to the same period in 2022.

Interest income on loans increased $7,006,000 or 37 percent in the third quarter 2023 compared to the same period in 2022. The average balance of outstanding loans, primarily commercial loans, increased $119,721,000 or 8 percent comparing the third quarter 2023 to the same period in 2022. Higher rates on commercial loans was the primary driver of the increase in interest income on loans. The tax-equivalent yield on loans for the third quarter 2023 was 6.08 percent or 130 basis points higher than the 4.78 percent experienced in the third quarter 2022.

Total interest expense for the third quarter 2023 was $9,701,000, an increase of $7,379,000 or 318 percent as compared to total interest expense of $2,322,000 for the third quarter 2022. The change was primarily the result of the higher cost of interest bearing demand and time deposits.

Interest expense on deposits increased $6,933,000 or 384 percent in the third quarter 2023 compared to the same period in 2022. The average rate paid on interest bearing deposits was 2.31 percent in the third quarter 2023 or 185 basis points higher than the average rate paid of 0.46 percent in the third quarter 2022. The average balance of interest bearing deposits for the third quarter 2023 decreased by $51,565,000 or 3 percent compared to the third quarter 2022. Also, noninterest-bearing deposits decreased, with the average volume for the third quarter 2023 decreasing 18 percent to $401,734,000 as compared to $489,589,000 for the third quarter 2022.

For the third quarter 2023 interest expense on all borrowings increased $446,000 or 87 percent compared to the third quarter 2022. Short-term borrowings consisting of repurchase agreements and other short-term borrowings, which includes borrowings from the Federal Home Loan Bank of Pittsburgh (FHLBP) Open Repo Line of Credit averaged $38,726,000 for the third quarter 2023, compared to an average balance of $13,255,000 for the third quarter 2022. The rate on average short-term borrowings for the third quarter 2023 was 3.86 percent, an increase as compared to a rate of 0.39 percent for the third quarter 2022. Long-term debt, which includes junior subordinated trust preferred securities, finance leases and long-term FHLBP borrowings, averaged $14,356,000 for the third quarter 2023 and $15,047,000 for the third quarter 2022. For the third quarter 2023, the rate on average long-term debt was 5.94 percent, an increase of 243 basis points as compared to a rate of 3.51 percent for the third quarter 2022. Subordinated debentures, issued in December 2020 by the Corporation, averaged $30,818,000 for the third quarter 2023 and $30,737,000 for the third quarter 2022.

- 43 -



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

	Three months ended September 30,
	2023							2022
	Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	26,772	$	361		5.35	%	$	260,302	$	1,486		2.26	%
Investment securities:
Taxable		371,603		2,606		2.78			347,656		2,080		2.37
Tax-exempt		22,523		128		2.25			26,414		142		2.13
Total investment securities		394,126		2,734		2.75			374,070		2,222		2.36

Loans:
Taxable (1)		1,677,117		25,829		6.11			1,556,060		18,817		4.80
Tax-exempt		21,721		213		3.89			23,057		222		3.82
Total loans		1,698,838		26,042		6.08			1,579,117		19,039		4.78
Total earning assets		2,119,736		29,137		5.45			2,213,489		22,747		4.08
Other assets (2)		71,008							78,942
Total assets	$	2,190,744						$	2,292,431
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	917,983	$	5,542		2.40	%	$	982,174	$	1,238		0.50	%
Savings		146,038		11		0.03			166,275		13		0.03
Time		435,439		3,187		2.90			402,576		556		0.55
Total interest bearing deposits		1,499,460		8,740		2.31			1,551,025		1,807		0.46
Short-term borrowings		38,726		377		3.86			13,255		13		0.39
Long-term debt and junior subordinated debt		14,356		215		5.94			15,047		133		3.51
Subordinated notes		30,818		369		4.75			30,737		369		4.76
Total interest bearing liabilities		1,583,360		9,701		2.43			1,610,064		2,322		0.57


Noninterest bearing deposits		401,734							489,589
Other liabilities		18,439							12,992
Shareholders' equity		187,211							179,786

Total liabilities and
shareholders' equity	$	2,190,744						$	2,292,431
Net interest income (tax equivalent basis)			$	19,436						$	20,425
Net interest margin (3)						3.64	%						3.66	%
Tax equivalent adjustment				(64)							(74)
Net interest income			$	19,372						$	20,351

(1)Average balance includes average nonaccrual loans of $8,035,000 for 2023 and $15,775,000 for 2022.

Interest includes net loan fees of $798,000 for 2023 and $1,006,000 for 2022.

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

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

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

	Three months ended
	September 30,
	2023 vs. 2022
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate			Net

Interest Income
Interest bearing deposits with banks	$	(1,333)	$	208	$	(1,125)
Investment securities:
Taxable		139		387		526
Tax-exempt		(21)		7		(14)
Loans:
Taxable		1,017		5,995		7,012
Tax-exempt		(13)		4		(9)
Total interest income		(211)		6,601		6,390
Interest Expense
Deposits:
Interest bearing demand		(35)		4,339		4,304
Savings		(2)		0		(2)
Time		48		2,583		2,631
Short-term borrowings		0		364		364
Long-term debt and junior subordinated debt		(4)		86		82
Subordinated notes		1		(1)		0
Total interest expense		8		7,371		7,379
Net interest income (tax equivalent basis)	$	(219)	$	(770)	$	(989)

*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 Credit Losses

The provision for credit 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 credit losses. Total provision for credit losses, including off-balance sheet exposures, for the third quarter 2023 was a provision of $251,000. Recoveries on previously charged-off loans attributed $833,000 and other impacts, primarily increases in qualitative reserves, attributed $1,254,000 to the change in provision for the quarter. These were offset by attributions related to charge-offs of $192,000 and attributions associated with changes in quantitative reserves related to economic conditions of $1,127,000, resulting in a net change in provision in the third quarter 2023 of $768,000. The allowance as a percentage of total loans was 1.26 percent at September 30, 2023, as compared to 1.27 percent at December 31, 2022 and 1.39 percent at September 30, 2022.

More information about the allowance for credit losses can be found in this report under the caption Allowance for Credit Losses on page 56.

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Noninterest Income

The following table presents the components of total noninterest income for the third quarter 2023, compared to the third quarter 2022.



Table 3 - Noninterest income

		Three months ended				Change
		September 30,				Increase (Decrease)
(dollars in thousands)	2023		2022		$		%

Trust and investment services fees	$	1,293	$	1,141	$	152	13	%
Income from mutual fund, annuity and insurance sales		315		283		32	11
Service charges on deposit accounts		1,598		1,395		203	15
Income from bank owned life insurance		396		322		74	23
Other income		549		528		21	4
Gain on sales of loans held for sale		42		42		0	0
Loss on sales of assets held for sale		0		(100)		100	100
Total noninterest income	$	4,193	$	3,611	$	582	16	%

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

Service charges on deposit accounts—The $203,000 or 15 percent increase in service charges on deposit accounts is primarily due to higher volume of overdraft fees.

Income from bank owned life insurance—The $74,000 or 23 percent increase in income from bank owned life insurance is primarily due to death benefits paid during the third quarter 2023.

Loss on sales of assets held for sale—The $100,000 or 100 percent change in loss on sales of assets held for sale was due to the loss recognized in the third quarter 2022 related to the disposition of a closed retail branch.

Noninterest Expense

The following table presents the components of total noninterest expense for the third quarter 2023, compared to the third quarter 2022.



Table 4 - Noninterest expense

		Three months ended				Change
		September 30,				Increase (Decrease)
(dollars in thousands)	2023		2022		$		%

Personnel	$	9,412	$	9,243	$	169	2	%
Occupancy of premises, net		853		943		(90)	(10)
Furniture and equipment		798		852		(54)	(6)
Professional and legal		549		367		182	50
Marketing		347		507		(160)	(32)
FDIC insurance		245		190		55	29
Debit card processing		546		455		91	20
Charitable donations		62		56		6	11
External data processing		974		981		(7)	(1)
Impaired loan carrying costs		107		217		(110)	(51)
Other		2,003		1,511		492	33
Total noninterest expense	$	15,896	$	15,322	$	574	4	%

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

Personnel—The $169,000 or 2 percent increase in personnel expense is attributed to higher variable compensation accruals in the third quarter 2023.

- 46 -

Professional and legal—The $182,000 or 50 percent increase in professional and legal expense is attributed to higher legal fees associated with corporate matters and higher consulting fees related to partial outsourcing of loan reviews and internal audits in the third quarter 2023.

Marketing—The $160,000 or 32 percent decrease in marketing expense is related to the marketing campaigns related to the new Hunt Valley Connections Center in the third quarter 2022.

FDIC insurance—The $55,000 or 29 percent increase in FDIC insurance expense is attributed to higher assessment rates during the current period.

Debit card processing—The $91,000 or 20 percent increase in debit card processing expense is attributed to incentive credits received in the third quarter 2022.

Impaired loan carrying costs—The $110,000 or 51 percent decrease in impaired loan carrying costs is attributed to the recovery of costs of prior periods during the current quarter.

Other—The $492,000 or 33 percent increase in other expense is associated with debit card dispute charge offs, higher appraisal expenses and new checking account rewards in the third quarter 2023 compared to the prior period. Several other categories increased slightly as attendance at seminars, business meetings and business development activities normalize following COVID.

Provision for Income Taxes

The provision for income taxes for the third quarter 2023 was $1,501,000 a decrease of $552,000 or 27 percent as compared to the third quarter 2022. The decrease was attributed to lower pre-tax net income for the third quarter 2023 compared to the third quarter 2022. The effective tax rate for the three months ended September 30, 2023 and September 30, 2022 was 20.2 percent and 22.3 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.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

The Corporation’s net income (earnings) was $19,520,000 for the first nine months of 2023 compared to $12,160,000 for the first nine months of 2022, an increase of $7,360,000 or 61 percent.

The schedule below presents selected performance metrics for the first nine months of both 2023 and 2022.



	Nine months ended
	September 30,
	2023			2022
Basic earnings per share	$	2.03		$	1.28
Diluted earnings per share	$	2.03		$	1.27
Cash dividend payout ratio		24.09	%		35.21	%
Return on average assets		1.20	%		0.69	%
Return on average equity		14.07	%		8.78	%
Net interest margin (tax equivalent basis)		3.81	%		3.21	%
Net overhead ratio		2.06	%		1.99	%
Efficiency ratio		63.32	%		70.44	%
Average equity to average assets		8.50	%		7.90	%

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 nine months ended September 30, 2023 was $59,826,000, an increase of $6,035,000 or 11 percent compared to net interest income of $53,791,000 for the first nine months of 2022. The primary contributor to the increase was higher rates on commercial loans, partially offset by higher cost of interest bearing demand deposits and time deposits.

- 47 -

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 3.81 percent for the first nine months of 2023, representing an increase compared to the 3.21 percent net interest margin for the first nine months of 2022. The net interest margin expansion was predominantly the result of higher rates on commercial loans, partially offset by higher rates on interest bearing demand deposits and time deposits.

Total interest income for the first nine months of 2023 totaled $83,356,000, an increase of $24,103,000 or 41 percent above the amount of total interest income for the first nine months of 2022. The change was primarily a result of higher rates on commercial loans.

Interest income on loans increased $22,374,000 or 43 percent in the first nine months of 2023 compared to the same period in 2022. The average balance of outstanding loans increased $107,301,000 or 7 percent in the first nine months of 2023 compared to the first nine months of 2022.

Investment income for the first nine months of 2023 increased $2,501,000 or 46 percent compared to the first nine months of 2022. The average balance of investment securities increased $59,513,000 or 18 percent in the first nine months of 2023 compared to the first nine months of 2022, 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 nine months of 2023 was 2.72 percent or 51 basis points higher than the 2.21 percent experienced during the first nine months of 2022. The average balance of interest bearing deposits with banks decreased $314,356,000 or 88 percent in the first nine months of 2023 compared to the first nine months of 2022. The yield on interest bearing deposits with banks was 4.92 percent for the first nine months of 2023, an increase of 404 basis points from 0.88 percent in the first nine months of 2022.

Total interest expense for the first nine months of 2023 was $23,530,000, an increase of $18,068,000 or 331 percent as compared to total interest expense of $5,462,000 for the first nine months of 2022. The change in interest expense was primarily a result of an increase in the cost of interest bearing demand deposits and time deposits.

Interest expense on deposits increased $17,075,000 or 440 percent in the first nine months of 2023 compared to the same period in 2022. The change was due primarily to an increase in the cost of interest bearing demand deposits and time deposits. The average balance of interest-bearing deposits for the first nine months of 2023 decreased $101,977,000 or 6 percent compared to the average for the first nine months of 2022. The average rate paid on interest-bearing deposits in the first nine months of 2023 was 1.90 percent, an increase of 157 basis points from the average rate of 0.33 percent paid on interest-bearing deposits during the first nine months of 2022. Also, noninterest-bearing deposits decreased, with the average volume for the first nine months of 2023 decreasing 16 percent to $421,397,000 as compared to $501,243,000 for the first nine months of 2022.

Interest expense on total borrowings for the first nine months of 2023 increased 63 percent compared to the first nine months of 2022, primarily due to higher rates on borrowings, except subordinated notes, which are currently at a fixed rate. Short-term borrowings consisting of repurchase agreements and other short-term borrowings, which includes borrowings from the Federal Home Loan Bank of Pittsburgh (FHLBP) Open Repo Line of Credit averaged $32,014,000 for the first nine months of 2023, compared to an average balance of $11,780,000 for the first nine months of 2022. The rate on average short-term borrowings for the first nine months of 2023 was 3.56 percent, an increase as compared to a rate of 0.40 percent for the same period in 2022. Long-term debt, which includes junior subordinated trust preferred securities, finance leases and long-term FHLBP borrowings, averaged $14,521,000 for the first nine months of 2023 and $20,049,000 for the first nine months of 2022. The decrease was attributable to FHLBP advances totaling $10,000,000 which matured and were repaid in the second quarter of 2022. For the first nine months of 2023, the rate on average long-term debt was 5.68 percent, an increase of 274 basis points as compared to a rate of 2.94 percent for the first nine months of 2022. Subordinated debentures, issued in December 2020 by the Corporation, averaged $30,798,000 for the first nine months of 2023 and $30,717,000 for the first nine months of 2022.

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

	Nine months ended September 30,
	2023							2022
	Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	43,232	$	1,590		4.92	%	$	357,588	$	2,362		0.88	%
Investment securities:
Taxable		370,376		7,623		2.75			308,214		5,111		2.22
Tax-exempt		22,877		374		2.19			25,526		398		2.08
Total investment securities		393,253		7,997		2.72			333,740		5,509		2.21

Loans:
Taxable (1)		1,645,243		73,319		5.96			1,543,502		51,059		4.42
Tax-exempt		22,200		644		3.88			16,640		509		4.09
Total loans		1,667,443		73,963		5.93			1,560,142		51,568		4.42
Total earning assets		2,103,928		83,550		5.31			2,251,470		59,439		3.53
Other assets (2)		71,693							84,516
Total assets	$	2,175,621						$	2,335,986
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	906,847	$	13,615		2.01	%	$	986,805	$	1,999		0.27	%
Savings		152,363		35		0.03			162,538		37		0.03
Time		413,646		7,304		2.36			425,490		1,843		0.58
Total interest bearing deposits		1,472,856		20,954		1.90			1,574,833		3,879		0.33
Short-term borrowings		32,014		852		3.56			11,780		35		0.40
Long-term debt and junior subordinated debt		14,521		617		5.68			20,049		441		2.94
Subordinated notes		30,798		1,107		4.81			30,717		1,107		4.82
Total interest bearing liabilities		1,550,189		23,530		2.03			1,637,379		5,462		0.45

Noninterest bearing deposits		421,397							501,243
Other liabilities		19,064							12,766
Shareholders' equity		184,971							184,598

Total liabilities and
shareholders' equity	$	2,175,621						$	2,335,986
Net interest income (tax equivalent basis)			$	60,020						$	53,977
Net interest margin (3)						3.81	%						3.21	%
Tax equivalent adjustment				(194)							(186)
Net interest income			$	59,826						$	53,791

(1)Average balance includes average nonaccrual loans of $8,327,000 for 2023 and $26,206,000 for 2022.

Interest includes net loan fees of $2,308,000 for 2023 and $3,653,000 for 2022.

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

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

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

	Nine months ended
	September 30,
	2023 vs. 2022
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate		Net

Interest Income
Interest bearing deposits with banks	$	(2,076)	$	1,304	$	(772)
Investment securities:
Taxable		1,015		1,497		2,512
Tax-exempt		(41)		17		(24)
Loans:
Taxable		2,432		19,828		22,260
Tax-exempt		170		(35)		135
Total interest income		1,500		22,611		24,111
Interest Expense
Deposits:
Interest bearing demand		(139)		11,755		11,616
Savings		(2)		0		(2)
Time		(51)		5,512		5,461
Short-term borrowings		2		815		817
Long-term debt and junior subordinated debt		(123)		299		176
Subordinated notes		3		(3)		0
Total interest expense		(310)		18,378		18,068
Net interest income (tax equivalent basis)	$	1,810	$	4,233	$	6,043

*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 Credit Losses

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 56.

Noninterest Income

The following table presents the components of total noninterest income for the first nine months of 2023, compared to the first nine months of 2022.



Table 7 - Noninterest income

	Nine months ended				Change
	September 30,				Increase (Decrease)
(dollars in thousands)	2023		2022		$		%

Trust and investment services fees	$	3,770	$	3,440	$	330		10	%
Income from mutual fund, annuity and insurance sales		1,007		958		49		5
Service charges on deposit accounts		4,624		4,045		579		14
Income from bank owned life insurance		1,047		941		106		11
Other income		1,998		1,479		519		35
Gain on sales of loans held for sale		48		621		(573)		(92)
Gain (loss) on sales of assets held for sale		118		(100)		218		218
Loss on sales of securities		(388)		0		(388)		(100)
Total noninterest income	$	12,224	$	11,384	$	840		7	%

- 50 -

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

Service charges on deposit accounts—The $579,000 or 14 percent increase in service charges on deposit accounts is attributable to an increase in overdraft fees in the current period.

Other income—The $519,000 or 35 percent increase in other income is attributable to fees associated with interest rate swaps recognized in the current period.

Gain on sales of loans held for sale—The $573,000 or 92 percent decrease in gain on sales of loans is due to the sale of a smaller volume of mortgage loans to the secondary market during the current period.

Gain on sales of assets held for sale—The $218,000 or 218 percent increase in gain on sales of assets is due to the sale of the Gardenville branch real estate during the current period.

Loss on sales of securities—There was a $388,000 loss on sales of securities in the current period compared to no sales of securities in the prior period.

Noninterest Expense

The following table presents the components of total noninterest expense for the first nine months of 2023, compared to the first nine months of 2022.



Table 8 - Noninterest expense

	Nine months ended				Change
	September 30,				Increase (Decrease)
(dollars in thousands)	2023			2022		$	%

Personnel	$	27,943	$	26,124	$	1,819		7	%
Occupancy of premises, net		2,711		2,844		(133)		(5)
Furniture and equipment		2,514		2,551		(37)		(1)
Professional and legal		1,395		2,281		(886)		(39)
Marketing		1,010		1,340		(330)		(25)
FDIC insurance		739		617		122		20
Debit card processing		1,456		1,222		234		19
Charitable donations		993		971		22		2
External data processing		3,027		2,820		207		7
(Recovery of) impaired loan carrying costs		(229)		512		(741)		(145)
Other		4,624		4,939		(315)		(6)
Total noninterest expense	$	46,183	$	46,221	$	(38)		(0)	%

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

Personnel—The $1,819,000 or 7 percent increase in personnel expense is attributed to higher variable compensation accruals in the current period.

Professional and legal—The $886,000 or 39 percent decrease in professional and legal expense is primarily due to corporate matters in the prior period.

Marketing—The $330,000 or 25 percent decrease in marketing expense is due to activity with branding and marketing campaigns in the prior period.

FDIC insurance—The $122,000 or 20 percent increase in FDIC insurance expense is attributed to higher assessment rates in the current period.

Debit card processing—The $234,000 or 19 percent increase in debit card processing expense is attributed to higher reliance by our clients on electronic access to their accounts in the current period.

- 51 -

(Recovery of) impaired loan carrying costs—The $741,000 or 145 percent decrease in impaired loan carrying costs is attributed to the recovery of costs associated with impaired loans during the current period.

Provision for Income Taxes

The provision for income taxes for the nine months ended September 30, 2023 was $5,435,000 an increase of $2,075,000 or 62 percent as compared to the nine months ended September 30, 2022. The increase was attributed to higher pre-tax net income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 and September 30, 2022 was 21.8 percent and 21.7 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 September 30, 2023, interest bearing deposits with banks totaled $28,858,000, a decrease of $70,919,000 or 71 percent, compared to the level at year-end 2022. The decrease is primarily due to an increase in commercial loans, resulting in a use of cash.

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 September 30, 2023, the fair value of investment securities available-for-sale totaled $335,656,000, which represented a decrease of $9,801,000 as compared to the fair value of investment securities at year-end 2022. Purchases of securities did not exceed the cash flows from principal reductions and maturities during the first nine months of 2023.

Restricted Investments in Bank Stock, at Cost

On September 30, 2023, restricted investments in bank stock, at cost, was $2,152,000, which was $1,197,000 or 125 percent higher than the level at year-end 2022. This was attributable to short-term borrowings of $25,875,000 with FHLBP, which requires a corresponding membership stock purchase.

Loans Held For Sale

On September 30, 2023, loans held for sale totaled $1,103,000, which was $949,000 or 616 percent higher than the level at year-end 2022. This was primarily attributable to SBA loans held for sale at the end of the period.

Loans Held For Investment

On September 30, 2023, total loans, net of deferred fees, were $1.70 billion, which was $71,523,000 or 4 percent higher than the level at year-end 2022. The composition of the Corporation’s loan portfolio is provided in Note 4—Loans and Allowance for Credit Losses.

Deposits

Deposits are the Corporation’s principal source of funding for earning assets. On September 30, 2023, deposits totaled $1.91 billion, which reflected a $36,841,000 or 2 percent decrease compared to the level at year-end 2022. Of the decrease in total deposits, $65,367,000 is attributable to noninterest bearing deposits, offset by a $28,526,000 increase in interest bearing deposits, primarily money market accounts and time deposits. The Corporation maintains a well-diversified deposit base and has a comparatively low level of uninsured deposits. At September 30, 2023, 83% of the Bank’s deposits were estimated to be FDIC-insured, and an additional 7% of deposits were fully collateralized. The composition of the Corporation’s total deposit portfolio is provided in Note 5—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 $39,099,000 at September 30, 2023, which reflected a $27,494,000 or 237 percent increase compared to the level at year-end 2022. At September 30, 2023, the balance of other short-term borrowings was $25,875,000 compared to $0 at December 31, 2022, which consisted of FHLBP Open Repo line of credit advances.

- 52 -

Long-term Debt and Subordinated Debentures

The Corporation uses long-term borrowings as a secondary funding source for asset growth and to manage interest rate risk. On September 30, 2023, long-term debt, including subordinated debentures totaled $42,353,000 compared to $42,314,000 at year-end 2022. A listing of outstanding long-term debt obligations is provided in Note 6—Short-Term Borrowings and Long-Term Debt.

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 $183,363,000 on September 30, 2023, an increase of $6,063,000 or 3 percent compared to the level at year-end 2022. The increase was primarily attributable to net income of $19,520,000, partially offset by dividends paid of $4,701,000 for the nine months ended September 30, 2023 and the adoption of ASC Topic 326 (CECL) of $2,100,000.

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 $0.17 per share on October 10, 2023, payable on November 14, 2023, to shareholders of record at the close of business on October 24, 2023. The cash dividend follows a quarterly cash dividend of $0.16 per share distributed in February 2023 and May 2023 and a quarterly cash dividend of $0.17 per share distributed in August 2023.

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 September 30, 2023 and the minimum capital ratios established by regulators are set forth in Note 8—Regulatory Matters to the financial statements. We believe that PeoplesBank is well capitalized on September 30, 2023 and had no regulatory dividend restrictions (see Note 8—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, 2022, provides a more detailed overview of the Corporation’s credit risk management process.

Management regularly analyzes the commercial real estate portfolio, which includes the review of occupancy, cash flows, expenses and expiring leases, as well as the location of the real estate. At September 30, 2023, the Corporation has $133,600,000 outstanding loan balances related to office space. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metro markets.

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 September 30, 2023 was $7,988,000, which decreased by $3,461,000 or 30 percent when compared to year-end 2022, of which $1,213,000 relates to troubled debt restructured loans reported under previously applicable GAAP. The decrease was primarily attributed to the repayment of nonaccrual loans during the year.

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 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

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the net carrying amount for individually evaluated commercial related loans, a specific loss allowance is established for the difference. Further provisions for credit 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 September 30, 2023 compared to December 31, 2022.

Table 9 – Nonperforming assets



(dollars in thousands)	September 30, 2023
Nonaccrual loans:
Commercial loans	$	3,984
Commercial real estate:
Construction		40
Owner occupied		2,043
Non-owner occupied		204
Residential real estate:
Revolving		506
Other		828
Total nonaccrual loans	$	7,605



Other Real Estate Owned	$	383
Total Nonperforming assets	$	7,988

Individually evaluated loans without a valuation allowance	$	5,617
Individually evaluated loans with a valuation allowance		1,988
Total individually evaluated loans	$	7,605
Valuation allowance related to individually evaluated loans	$	1,092

Nonperforming loans as a % of total loans		0.45	%
Nonperforming assets to total loans and foreclosed real estate		0.47	%
Nonperforming assets as a % of total period-end assets		0.36	%
ACL as a % of nonperforming loans		282.03	%
ACL as a % of nonperforming assets		268.50	%
ACL as a % of total loans		1.26	%

Nonaccrual loans as a % of applicable portfolio:
Commercial loans		2.32	%
Commercial real estate:
Construction		0.02	%
Owner occupied		0.59	%
Non-owner occupied		0.04	%
Residential real estate:
Revolving		0.48	%
Other		0.30	%

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(dollars in thousands)		December 31, 2022
Nonaccrual loans:
Builder & developer	$	1,773
Commercial real estate investor		222
Residential real estate investor		856
Manufacturing		2,965
Agriculture		912
Commercial other		3,436
Residential mortgages		349
Home equity		457
Total nonaccrual loans	$	10,970
Troubled debt restructurings (TDRs):
Performing	$	1,213
Total TDR loans	$	1,213
Other Real Estate Owned:	$	479
Total Nonperforming assets	$	11,449

Impaired loans without a valuation allowance	$	9,400
Impaired loans with a valuation allowance		2,783
Total impaired loans	$	12,183
Valuation allowance related to impaired loans	$	2,484

Nonaccrual loans as a % of total loans		0.67	%
Nonperforming loans as a % of total loans		0.67	%
Nonperforming assets as a % of total period-end assets		0.52	%
ALL as a % of nonaccrual loans		189.02	%
ALL as a % of nonperforming assets		181.12	%
ALL as a % of total loans		1.27	%

Nonaccrual loans as a % of applicable portfolio:
Builder & developer		1.38	%
Commercial real estate investor		0.06	%
Residential real estate investor		0.33	%
Manufacturing		3.42	%
Agriculture		1.00	%
Commercial other		1.64	%
Residential mortgages		0.26	%
Home equity		0.47	%

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 September 30, 2023, the nonperforming loan portfolio balance totaled $7,605,000, compared to $10,970,000 at year-end 2022. 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 was $383,000 as of September 30, 2023 and $479,000 as of December 31, 2022. A write-down of $96,000 was recorded during the nine months ended September 30, 2023.

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Allowance for Credit Losses (ACL)

The ACL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision for credit losses. The Corporation records a provision for credit losses in the Consolidated Statements of Income to maintain the ACL at a level considered sufficient to absorb expected credit losses.

The ACL on loans was $21,449,000 as of September 30, 2023 and $20,736,000 as of December 31, 2022. As a percentage of period-end loans, the ACL was 1.26 percent as of September 30, 2023 and 1.27 percent as of December 31, 2022. As detailed in Note 1–Summary of Significant Accounting Policies, the ACL increased $927,000 at the adoption of CECL.

The ACL as a percentage of nonperforming loans was 282.03 percent as of September 30, 2023 and 189.02 percent as of December 31, 2022. The ACL as a percentage of nonperforming assets was 268.50 percent as of September 30, 2023 and 181.12 percent as of December 31, 2022.

The ACL on unfunded commitments was $2,212,000 as of September 30, 2023 and $0 as of December 31, 2022. The Corporation recorded $323,000 of provision for credit losses on unfunded commitments for the nine months ended September 30, 2023, compared to none in the prior year. Similar to the increase in ACL on loans, the increase in ACL and provision expense on unfunded commitments was related to the adoption of CECL.

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 September 30, 2023, we believe that liquidity was adequate based upon the availability of unpledged available-for-sale securities with a fair value totaling approximately $108,054,000. With an unrealized loss of $42,869,000, liquidation options would need to be considered, however there would be options for pledging of these securities to other borrowing sources. Although the Corporation has not utilized the Federal Reserve’s Bank Term Funding Facility as of September 30, 2023, the program has attractive features, such as being able to borrow based on the par values (rather than market values) of a bank’s investment securities that are pledged as collateral. For this reason, the program would be considered among the Corporation’s other wholesale borrowing options if additional liquidity was needed. Available credit from the Federal Home Loan Bank of Pittsburgh totals approximately $723,088,000. The Corporation’s loan-to-deposit ratio was 89.4 percent as of September 30, 2023, 84.0 percent as of December 31, 2022 and 89.3 percent as of June 30, 2022.

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 at September 30, 2023, totaled $733,233,000 and consisted of $640,385,000 in unfunded commitments under existing loan facilities, $76,139,000 to grant new loans and $16,699,000 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.

Critical Accounting Estimates

Disclosure of the Corporation’s significant accounting policies is included in Note 1 in the notes to the consolidated financial statements its December 31, 2022 Form 10-K. Some of these policies require management to make significant judgments, estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities. Management makes significant estimates in determining the allowance for credit loans. Subsequent to the adoption of ASC 326 in the first quarter of 2023, the Corporation’s accounting policy for ACL – loans is now as follows:

Allowance for credit losses – loans

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Commercial loans

Commercial real estate – construction

Commercial real estate – owner occupied

Commercial real estate – non-owner occupied

Residential real estate – construction

Residential real estate – revolving

Residential real estate – multi family

Residential real estate – other

Consumer loans

The Corporation measures the allowance for credit losses using the following methods.

• Loans are aggregated into pools based on similar risk characteristics.

• The Probability of Default (PD) and Loss Given Default (LGD) CECL model components are determined based on loss estimates driven by historical experience at the input level.

• The PD model component uses "through the economic cycle transition" matrices based on the Corporation’s and peer group historical loan and transaction data across each pool of loans.

• The LGD model component calculates a lifetime estimate across each pool of loans utilizing a nonparametric loss curve modeling approach.

• Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.

• A constant prepayment rate is calculated for each loan pool in the CECL model.

Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments when appropriate.

To the extent actual outcomes differ from management’s estimates, additional provision for credit losses may be required that would impact the Corporation’s operating results.

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

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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 400 basis point decrease in interest rates is not simulated at this time.

The following table summarizes the expected impact of interest rate shocks on net interest income as well as the Corporation’s policy limits at each level. All scenarios were within policy limits at September 30, 2023.



Change in Interest Rates	Annual Change in Net		% Change in Net		% Change
(basis points)	Interest Income (in thousands)		Interest Income		Policy Limit
+100	$	654	0.82	%	(7.50)	%
(100)	$	642	0.81	%	(7.50)	%

+200	$	1,310	1.65	%	(15.00)	%
(200)	$	589	0.74	%	(15.00)	%

+300	$	1,978	2.49	%	(25.00)	%
(300)	$	(5)	(0.01)	%	(25.00)	%

+400	$	2,662	3.36	%	(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 September 30, 2023, 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.

Effective January 1, 2023, the Corporation adopted ASC 326. The Corporation designed new controls and modified existing controls in conjunction with its adoption. These additional controls over financial reporting included controls over model creation and design, model governance and model assumptions, among others. There were no changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

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matter may be more or less than the amount estimated. For any matter for which a loss is not probable, or the amount of the loss cannot reasonably be estimated, no loss reserve is established.

In addition, the Corporation may be involved in legal proceedings in the form of investigations of regulatory or governmental inquiries covering a range of possible issues. These could be specific to the Corporation, or part of more wide-spread inquires by regulatory authorities. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation and could result in fines, penalties, restitution, or other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices.

Item 1A. Risk Factors

Other than the risk factors set for below, there have been no material changes to the risk factors as previously disclosed in Item 1A – Risk Factors – in the Corporation’s 2022 10-K.

Risks Related to Recent Banking Industry Turmoil

The Corporation is exposed to the risk that when a bank or other financial institution experiences financial difficulties, there could be an adverse “contagion” impact on other banking institutions. The failures of Silicon Valley Bank in California, Signature Bank in New York and First Republic Bank in California during the first and second quarters of 2023 caused an element of panic and uncertainty in the investor community and among bank customers generally, including, specifically, deposit customers. While the Corporation does not believe that the circumstances of these three failures are necessarily indicators of broader issues for concern with all other banks or with the banking system itself, the failures are likely to reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have negative reputational ramifications for institutions in the banking industry, including, possibly, the Corporation and its PeoplesBank subsidiary. The Corporation will continue to closely monitor the ongoing events and volatility in the financial services industry, together with any responsive measures taken by the banking regulators to mitigate or manage the concerns of bank customers regarding FDIC deposit insurance coverage and the safety and soundness of community banks.

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, 2022.

The Corporation’s Board of Directors approved a new Share Repurchase Program in January 2023. 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 are required to 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 nine months ended September 30, 2023.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

This Item 4 is not applicable to the Corporation.

Item 5. Other Information

None

‎

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Item 6. Exhibits


Exhibit Number		Description of Exhibit
3.1		Amended Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for June 30, 2018, filed with the Commission on August 6, 2018)
3.2		Amended 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 September 30, 2023, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Shareholder’s Equity, and (vi) the Notes to Consolidated Financial Statements – filed herewith.
104		Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101)

‎

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Signatures

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



		Codorus Valley Bancorp, Inc. (Registrant)


November 6, 2023		/s/ Craig L. Kauffman
Date		Craig L. Kauffman,
		President
		and Chief Executive Officer (Principal Executive Officer)


November 6, 2023		/s/ Larry D. Pickett
Date		Larry D. Pickett
		Treasurer
		(Principal Financial and Accounting Officer)

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CODORUS VALLEY BANCORP INC - Quarter Report: 2023 September (Form 10-Q)

Form 10-Q Index

Loans

Note 3—Restricted Investment in Bank Stocks

Note 5—Deposits

Note 6—Short-Term Borrowings and Long-Term Debt

Note 8—Regulatory Matters

Note 9—Shareholders’ Equity

Note 10—Contingent Liabilities