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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 March 31, 2024

☐ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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 April 30, 2024 there were 9,662,378 shares of common stock, par value $2.50, outstanding.

‎

- 1 -

Codorus Valley Bancorp, Inc.

Form 10-Q Index


PART I – FINANCIAL INFORMATION		Page #

Item 1.	Financial statements (unaudited):
	Consolidated balance sheets	3
	Consolidated statements of income	4
	Consolidated statements of comprehensive 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	37

Item 3.	Quantitative and qualitative disclosures about market risk	48

Item 4.	Controls and procedures	49

PART II – OTHER INFORMATION

Item 1.	Legal proceedings	49

Item 1A.	Risk factors	50

Item 2.	Unregistered sales of equity securities and use of proceeds	50

Item 3.	Defaults upon senior securities	50

Item 4.	Mine safety disclosures	50

Item 5.	Other information	50

Item 6.	Exhibits	51

SIGNATURES		52

‎

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)




	March 31,		December 31,
(dollars in thousands, except per share data)	2024		2023
Assets
Interest bearing deposits with banks	$	11,128		$	10,882
Cash and due from banks		15,534			22,809
Total cash and cash equivalents		26,662			33,691
Securities, available-for-sale, at fair value (amortized cost $382,516 at March 31, 2024
and $390,397 at December 31, 2023, respectively)		339,495			349,767
Restricted investment in bank stocks, at cost		3,186			3,146
Loans held for sale		958			822
Loans (net of deferred fees of $3,636 - 2024 and $3,752 - 2023)		1,739,269			1,705,608
Less-allowance for credit losses		(21,645)			(20,506)
Net loans		1,717,624			1,685,102
Premises and equipment, net		19,090			19,563
Operating leases right-of-use assets		2,591			2,746
Goodwill		2,301			2,301
Other assets		96,686			97,660
Total assets	$	2,208,593		$	2,194,798

Liabilities
Deposits
Noninterest bearing	$	365,358		$	379,288
Interest bearing		1,549,705			1,494,054
Total deposits		1,915,063			1,873,342
Short-term borrowings		30,314			56,541
Long-term debt and junior subordinated debt		11,513			11,520
Subordinated notes - face amount $31,000 (less discount and debt
issuance cost of $135 at March 31, 2024 and $155 at December 31, 2023)		30,865			30,845
Operating leases liabilities		2,687			2,848
Allowance for credit losses on off-balance sheet credit exposures		1,503			2,278
Other liabilities		15,654			17,819
Total liabilities		2,007,599			1,995,193

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at March 31, 2024 and 0 at December 31, 2023		0			0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
shares issued: 9,883,660 at March 31, 2024 and December 31, 2023;
and shares outstanding: 9,662,378 at March 31, 2024 and 9,642,851 at December 31, 2023		24,709			24,709
Additional paid-in capital		142,816			142,633
Retained earnings		71,249			68,633
Accumulated other comprehensive loss		(32,911)			(31,082)
Treasury stock shares outstanding, at cost: 221,282 shares at March 31, 2024
and 240,809 at December 31, 2023		(4,869)			(5,288)
Total shareholders' equity		200,994			199,605
Total liabilities and shareholders' equity	$	2,208,593		$	2,194,798

See accompanying notes.
‎

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	Three months ended
	March 31,
(dollars in thousands, except per share data)	2024		2023
Interest income
Loans, including fees	$	26,855	$	23,034
Investment securities:
Taxable		2,651		2,457
Tax-exempt		109		101
Dividends		74		17
Other		155		684
Total interest income		29,844		26,293
Interest expense
Deposits		10,738		5,137
Federal funds purchased and other short-term borrowings		878		38
Long-term debt and junior subordinated debt		217		194
Subordinated notes		369		369
Total interest expense		12,202		5,738
Net interest income		17,642		20,555
Provision for credit losses - loans		891		492
(Recovery of) provision for credit losses - unfunded commitments		(775)		246
Net interest income after provision for credit losses		17,526		19,817

Noninterest income
Trust and investment services fees		1,421		1,202
Income from mutual fund, annuity and insurance sales		314		369
Service charges on deposit accounts		1,455		1,485
Income from bank owned life insurance		414		322
Other income		467		862
Gain on sales of loans held for sale		105		10
Gain on sales of assets held for sale		0		118
Loss on sales of securities		0		(388)
Total noninterest income		4,176		3,980

Noninterest expense
Personnel		9,879		9,042
Occupancy of premises, net		894		978
Furniture and equipment		828		838
Professional and legal		283		467
Marketing		312		276
FDIC insurance		246		250
Debit card processing		470		478
External data processing		1,111		1,010
Merger related expenses		118		0
Committee & director fees		320		358
PA shares tax		363		343
Impaired (recovery of) loan carrying costs		74		(98)
Other		1,363		869
Total noninterest expense		16,261		14,811
Income before income taxes		5,441		8,986
Provision for income taxes		1,186		1,994
Net income	$	4,255	$	6,992
Net income per share, basic	$	0.44	$	0.73
Net income per share, diluted	$	0.44	$	0.73

See accompanying notes.
‎

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Net income	$	4,255	$	6,992
Other comprehensive income (loss):
Securities available for sale:
Net unrealized holding (losses) gains arising during the period
(net of tax (benefit) expense of ($562) and $1,083, respectively)		(1,829)		3,526
Reclassification adjustment for losses included in net income
(net of tax benefit of $0 and $91, respectively) (a) (b)		0		297
Net unrealized (loss) gain		(1,829)		3,823
Comprehensive income	$	2,426	$	10,815

(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)



	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Cash flows from operating activities
Net income	$	4,255	$	6,992
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/software amortization		588		585
Net accretion income		(137)		(66)
Net change in operating lease liabilities		(161)		(145)
(Recovery of) provision for credit losses on off-balance sheet credit exposures		(775)		246
Provision for credit losses on loans		891		492
Deferred income tax expense		0		(667)
Increase in bank owned life insurance		(414)		(322)
Originations of loans held for sale		(3,996)		(277)
Proceeds from sales of loans held for sale		4,108		442
Gain on sales of loans held for sale		(105)		(10)
Gain on disposal of premises and equipment		0		(118)
Loss on sales of securities, available-for-sale		0		388
Stock-based compensation		655		454
(Increase) decrease in interest receivable		(380)		316
Decrease (increase) in other assets		2,363		(1,455)
Increase in interest payable		634		609
Decrease in other liabilities		(2,022)		(2,762)
Net cash provided by operating activities		5,504		4,702
Cash flows from investing activities
Purchases of securities, available-for-sale		(744)		(12,247)
Maturities, repayments and calls of securities, available-for-sale		8,581		8,113
Sales of securities, available-for-sale		0		4,253
Purchase of restricted investment in bank stock		(2,080)		(2,000)
Redemption of restricted investment in bank stock		2,040		0
Net increase in loans made to customers		(34,637)		(15,710)
Proceeds from sale of commercial loans held for sale		640		1,336
Purchases of premises and equipment		(127)		(757)
Proceeds from sale of fixed assets		0		685
Net cash used in investing activities		(26,327)		(16,327)
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits		2,017		(73,823)
Net increase in time deposits		39,704		19,989
Net (decrease) increase in short-term borrowings		(26,227)		49,766
Net change in finance lease liabilities		(8)		(7)
Cash dividends paid to shareholders		(1,639)		(1,533)
Payment of taxes related to stock withheld		(197)		(139)
Treasury stock reissued		620		475
Proceeds from issuance of stock, net		(476)		(277)
Net cash provided by (used in) financing activities		13,794		(5,549)
Net decrease in cash and cash equivalents		(7,029)		(17,174)
Cash and cash equivalents at beginning of year		33,691		120,439
Cash and cash equivalents at end of period	$	26,662	$	103,265

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) Income		Stock		Total
Balance, January 1, 2024	$	24,709	$	142,633	$	68,633	$	(31,082)	$	(5,288)	$	199,605
Net income						4,255						4,255
Other comprehensive loss, net of tax								(1,829)				(1,829)
Cash dividends ($0.17 per share)						(1,639)						(1,639)
Stock-based compensation				655								655
Forfeiture of restricted stock and withheld shares - 8,734 shares										(197)		(197)
Issuance and reissuance of stock:
6,472 shares under the dividend reinvestment and stock purchase plan				11						136		147
(182) shares under employee stock purchase plan				1						(4)		(3)
21,971 shares of stock-based compensation awards				(484)						484		0
Balance, March 31, 2024	$	24,709	$	142,816	$	71,249	$	(32,911)	$	(4,869)	$	200,994
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

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, 2023 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 March 31, 2024, 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 March 31, 2024. 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, 2023.

The results of operations for the three months ended March 31, 2024 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 March 31, 2024 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Agreement and Plan of Merger with Orrstown Financial Services, Inc.

On December 12, 2023, Codorus Valley Bancorp, Inc. and Orrstown Financial Services, Inc., a Pennsylvania corporation (“Orrstown”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Codorus Valley Bancorp, Inc. will be merged with and into Orrstown, with Orrstown as the surviving corporation (the “Merger”). Promptly following the Merger, PeoplesBank will be merged with and into Orrstown Bank, a Pennsylvania chartered bank,, which is the wholly-owned subsidiary of Orrstown, with Orrstown Bank as the surviving bank (the “Bank Merger”). The Merger and the Bank Merger are collectively referred to as the “pending Merger.”

The pending Merger has been approved by the board of directors of Codorus Valley Bancorp, Inc. and Orrstown and is expected to close in the third quarter of 2024, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approvals from Orrstown and Codorus Valley shareholders. Upon completion of the pending Merger, Orrstown shareholders are expected to own approximately 56% of the outstanding shares of the combined company and Codorus Valley shareholders are expected to own approximately 44% of the outstanding shares of the combined company. A copy of the Merger Agreement is included as Exhibit 2.1 to the Current Report on Form 8-K filed by Codorus Valley Bancorp, Inc. with the Securities and Exchange Commission on December 12, 2023.

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

- 8 -

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 $1,600,000 as of March 31, 2024, 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 $6,800,000 at March 31, 2024 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, 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.

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

- 9 -

Residential real estate – multi family

Residential real estate – other

Consumer loans

The Corporation groups its loan portfolio into segments which are further broken down into classes to allow management to monitor the performance of the portfolio. The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may impact both the borrower’s ability to repay its loans and the value of the associated collateral.

Commercial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, most of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a considerable number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Corporation, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Corporation’s underwriting standards are developed to mitigate this risk. The underwriting process includes evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers is typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.

Commercial Real Estate includes commercial construction loans along with owner and non-owner occupied commercial real estate loans. Commercial construction loans include multi-family construction loans commercial and land development loans. The risk of loss on these loans is dependent on the Corporation’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Corporation must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan. Non-owner occupied commercial real estate present a different credit risk to the Corporation than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements and may result in lower collateral values. The Corporation recognizes that greater risk is inherent in these credit relationships compared to owner occupied loans that are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be negatively impacted.

Residential Real Estate includes construction loans for single family housing units, revolving lines secured by 1-4 housing units, loans for multi-family units and fixed-rate and adjustable-rate loans with 1-4 owner occupied family residential housing securing the loans. The risk of loss on construction loans is largely dependent on the Corporation’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs, construction management, including timely completion of the unit. Revolving residential home equity loans, including term loans and lines of credit, present a slightly higher risk to the Corporation than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios. Multi-family residential contain multiple separate housing units for residential inhabitants in several buildings or within one complex. High interest rates, fluctuations in rental demand, lacking property management and maintenance can impact the borrower’s ability to repay the loan. Fixed-rate and adjustable-rate loans with 1-4 owner occupied family residential housing risk exposure is minimized through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Consumer installment and other consumer loans credit risk is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured, or the collateral value may depreciate quickly or may fluctuate, and may present a greater risk to the Corporation than 1-4 family residential loans.

- 10 -

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 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. There were no bank premises and equipment designated as held for sale as of March 31, 2024 or December 31, 2023.

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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 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 March 31, 2024 there was $408,000 of foreclosed real estate compared to $383,000 at December 31, 2023. As of March 31, 2024, there was $39,000 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 $133,000 as of December 31, 2023.

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 March 31, 2024, the balance of residential mortgage loans serviced for third parties was $50,246,000 compared to $51,069,000 at December 31, 2023.



		Three months ended
		March 31,
(dollars in thousands)		2024		2023
Amortized cost:
Balance at beginning of period	$	227	$	279
Amortization expense		(9)		(21)
Balance at end of period	$	218	$	258

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

- 12 -

mortgage servicing activities, as these activities are subject to other U.S. Generally Accepted Accounting Principles (GAAP) discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of income as components of non-interest income are as follows:

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

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

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

Other noninterest income: The Corporation evaluated individual components of other noninterest income, such as credit card merchant fees, credit and gift card fees and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through payment networks, such as Visa. Credit and gift card income is realized through a third party provider who issues cards as private label in the Corporation’s name. ATM fees are primarily generated when a non-Corporation cardholder uses a Corporation ATM. The income is primarily comprised as a percentage of interchange fees earned whenever the issuer’s card is processed through card payment networks, such as Visa or Pulse. Merchant services income is realized through a 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
	March 31,
(in thousands, except per share data)	2024		2023
Net income	$	4,255	$	6,992

Weighted average shares outstanding (basic)		9,649		9,585
Effect of dilutive stock options		21		27
Weighted average shares outstanding (diluted)		9,670		9,612

Basic earnings per share	$	0.44	$	0.73
Diluted earnings per share	$	0.44	$	0.73

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.



		Three months ended
		March 31,
(dollars in thousands)		2024		2023
Cash paid during the period for:
Income taxes	$	250	$	3,930
Interest	$	11,568	$	5,129

Noncash investing and financing activities:
Transfer of loans to foreclosed real estate	$	25	$	0
Transfer of loans to held for sale	$	783	$	2,018

Recent Accounting Pronouncements

Pronouncements Not Yet Effective

In November 2023, the FASB issued ASU 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures (Topic 280).This standard issues the requirement for a public entity to disclose its significant segment expense categories and amounts for each reportable segment. This standard is not expected to have a material impact on the Corporation’s consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). This standard sets forth additional disclosures associated with the rate reconciliation, with different categories having varying degrees of qualitative and/or quantitative disclosures. This standard is being evaluated and is not expected to have material impact on the Corporation’s consolidated financial statements.

Note 2 – Securities

A summary of securities available-for-sale at March 31, 2024 and December 31, 2023 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 March 31, 2024 and December 31, 2023, 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
March 31, 2024
Debt securities:
U.S. Treasury notes	$	19,883	$	0	$	0	$	(337)	$	19,546
U.S. agency		13,875		0		0		(1,196)		12,679
U.S. agency mortgage-backed, residential		276,260		0		155		(31,620)		244,795
State and municipal		35,302		0		27		(4,961)		30,368
Corporates		37,196		0		33		(5,122)		32,107
Total debt securities	$	382,516	$	0	$	215	$	(43,236)	$	339,495

December 31, 2023
Debt securities:
U.S. Treasury notes	$	19,843	$	0	$	0	$	(369)	$	19,474
U.S. agency		13,953		0		0		(1,116)		12,837
U.S. agency mortgage-backed, residential		283,058		0		342		(29,121)		254,279
State and municipal		35,351		0		53		(4,732)		30,672
Corporates		38,192		0		1		(5,688)		32,505
Total debt securities	$	390,397	$	0	$	396	$	(41,026)	$	349,767

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



	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Proceeds	$	0	$	4,253
Gross gains		0		0
Gross losses		0		(388)
Tax benefit		0		81

The amortized cost and estimated fair value of debt securities at March 31, 2024 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	$	18,549	$	18,258
Due after one year through five years		105,899		99,048
Due after five years through ten years		215,655		186,226
Due after ten years		42,413		35,963
Total debt securities	$	382,516	$	339,495

Investment securities having a carrying value of $204,019,000 and $214,547,000 on March 31, 2024 and December 31, 2023, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, for which an allowance for credit losses has not been recorded, at March 31, 2024 and December 31, 2023.

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

March 31, 2024

Debt securities:

CODORUS VALLEY BANCORP INC 10-Q