Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2023

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

NOTE 1-Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”).PeoplesBank operates one wholly owned subsidiary as of December 31, 2023, Codorus Valley Financial Advisors, Inc. d/b/a Peoples Wealth Advisors, which sells non-deposit 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 reportable period of 2023.The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7 – Short-term Borrowings and Long-term Debt.All significant intercompany account balances and transactions have been eliminated in consolidation.The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, particularly as it relates to changing economic conditions.

Investment Securities

The classification of securities is determined at the time of acquisition and is reevaluated at each reporting date.Securities classified as available-for-sale are debt securities that the Corporation intends to hold for an indefinite period of time, but not necessarily to maturity.Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in maturity mix of assets and liabilities, income or liquidity needs, regulatory considerations and other factors.Debt securities available-for-sale are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive income in shareholders' equity.Premiums and discounts are recognized in interest income using the interest method over the estimated life of the security.Realized gains and losses from the sale of available-for-sale securities 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 statement of income.

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 December 31, 2023 and 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 and ACBI membership, PeoplesBank is required to maintain a minimum member stock investment, both as a condition of becoming and remaining a member and as a condition of obtaining borrowings from the FHLBP. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

The FHLBP paid dividends during the years ended December 31, 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 their cost.Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP.Management believes no impairment charge was necessary related to the restricted stock during the periods ended December 31, 2023 and 2022.

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 non-collectibility 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 $1,500,000 as of December 31, 2023, is excluded from the estimate of credit losses.

Loans Held for Sale

Loans held for sale are comprised of residential mortgage loans and the guaranteed portion of secondary-market qualified Small Business Administration loans. Loans held for sale are reported at the lower of cost or fair value, as determined by the aggregate commitments from investors or current investor yield requirements.The amount by which cost exceeds fair value, if any, is accounted for as a valuation allowance and is charged to expense in the period of the change.The Corporation generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio. Gains or losses recognized on the sale of mortgage loans and loans guaranteed by the Small Business Administration loans are recognized based on the difference between the selling price and the carrying value of the related loan and are recorded in noninterest income.

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 $6,500,000 at December 31, 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, 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 non-collectibility 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, lending management, delinquency trends, loan review system, value of underlying collateral, levels of concentrations, 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

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.

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 will revert over four quarters to the long term mean on a straight-line basis as permitted in ASC 326-20-30.

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 17 – Interest Rate Swaps.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation.Depreciation expense is calculated principally on the straight-line method over the assets’ estimated useful lives.Estimated useful lives are five years to forty years for buildings and improvements, five years to twenty years for furniture and equipment and two years to seven years for computer equipment and software.Maintenance and repairs are charged to expense as incurred.The cost of significant improvements to existing assets is capitalized and amortized over the shorter of the asset’s useful life or related lease term.When facilities are retired or otherwise disposed of, the depreciated cost is removed from the asset accounts, and any gain or loss is reflected in the statement of income.

Bank premises and equipment designated as held for sale are carried at the lower of cost or fair value. There was no balance at December 31, 2023, compared to $567,000 at December 31, 2022 which consisted of one retail banking property which closed in the second quarter 2022.Bank premises and equipment designated as held for sale is included in other assets on the Consolidated Balance Sheets.

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in substance foreclosure.Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses.Appraisals, obtained from an independent third party, are generally used to determine fair value.After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a charge-off.Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations.Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense.When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense.At December 31, 2023 there was $383,000 of foreclosed commercial real estate, compared to $479,000 at December 31, 2022.Included within loans receivable as of December 31, 2023, was a recorded investment of $133,000 of consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction compared to $124,000 as of December 31, 2022.

Bank Owned Life Insurance

PeoplesBank invests in bank owned life insurance (BOLI) as a source of funding for employee benefit expenses.BOLI involves the purchasing of life insurance by PeoplesBank on a select group of employees and members of the board of directors.PeoplesBank is the owner and beneficiary of the policies.This life insurance investment is carried at the cash surrender value of the underlying policies and is included in other assets in the amount of $61,998,000 at December 31, 2023, compared to $55,897,000 at December 31, 2022.

Mortgage Servicing Rights

PeoplesBank retained servicing of sold mortgage loans beginning in 2016. In 2020 PeoplesBank began selling mortgages with servicing released for the majority of the new portfolio. The mortgage servicing rights (MSRs) associated with previously 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 which was $132,000 and $153,000 in 2023 and 2022, respectively. Mortgage servicing income is included in other income in the statements of income.The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an expected life commensurate with the expected life 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 December 31, 2023, the balance of residential mortgage loans serviced for third parties was $51,069,000 compared to $55,708,000 at December 31, 2022.

The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets.



	Years ended December 31,
(dollars in thousands)	2023		2022
Amortized cost:
Balance at beginning of year	$	279	$	380
Originations of mortgage servicing rights		0		6
Amortization expense		(52)		(107)
Balance at end of year	$	227	$	279

Trust and Investment Services Assets

Assets held by PeoplesBank in a fiduciary or agency capacity for its clients are not included in the consolidated balance sheets since these items are not assets of PeoplesBank. At December 31, 2023, the market value of assets was $981,570,000 compared to$820,283,000 at December 31, 2022.

Advertising

Advertising costs are charged to expense when incurred.

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences.Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized.Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the effective date.

The Corporation accounts for uncertain tax positions as required by FASB ASC Topic 740.FASB ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.Specifically, the accounting standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as well as guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.No significant income tax uncertainties have been identified by the Corporation; therefore, the Corporation recognized no adjustment for unrecognized income tax benefits for the years ended December 31, 2023 and 2022.The Corporation’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statement of Income.The tax years subject to examination by the taxing authorities are the years ended December 31, 2022, 2021, and 2020.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15 – Fair Value Measurements and Fair Values of Financial Instruments.Fair value estimates involve uncertainties and matters of significant judgment.Changes in assumptions or in market conditions could significantly affect the estimates.

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 1^st 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.

At December 31, 2023, the Corporation does not have any indicators of potential impairment of either goodwill or core deposit intangibles.

Revenue from Contracts with Customers

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

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

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

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

Other noninterest income – The Corporation evaluated individual components of other noninterest income, such as credit card merchant fees, credit and gift card fees and ATM fees.Debit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through payment networks, such as Visa.Credit and gift card income is realized through a third party provider who issues credits as private label in the Corporation’s name.ATM fees are primarily generated when a non-Corporation cardholder uses a Corporation ATM.The income is primarily comprised as a percentage of interchange fees earned whenever the issuer’s card is processed through card payment networks, such as Visa or Pulse.Merchant services income is realized through a third party service provider who is contracted by the Corporation under a referral arrangement.Such fees represent fees charged to merchants to process their debit card transactions. The Corporation’s performance obligation for these fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.Payment is typically received within a 1 to 3 day lag or in the following month.

Per Share Data

Basic net income per share is calculated as net income available to shareholders divided by the weighted average number of shares outstanding.Diluted net income per share is calculated as net income available to shareholders divided by the weighted average number of shares outstanding plus shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance.Potential shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method.

The computation of net income per share for the years ended December 31, 2023 and 2022 is provided in the table below.



(in thousands, except per share data)	2023		2022
Net income available to shareholders	$	24,973	$	20,092

Weighted average shares outstanding (basic)		9,608		9,532
Effect of dilutive stock options		17		28
Weighted average shares outstanding (diluted)		9,625		9,560

Basic earnings per share	$	2.60	$	2.11
Diluted earnings per share	$	2.59	$	2.10

Anti-dilutive stock options excluded from the computation of earnings per share		26		30

Stock-Based Compensation

The Corporation accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, which requires public companies to recognize compensation expense, related to stock-based compensation awards in their statements of

operations.Compensation expense is equal to the fair value of the stock-based compensation awards on the grant date and is recognized over the vesting period of such awards.More information is provided in Note 11 – Stock-Based Compensation.

Cash Flow Information

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

Supplemental cash flow information is provided in the table below.



	Years ended December 31,
(dollars in thousands)	2023		2022
Cash paid during the period for:
Income taxes	$	9,395	$	410
Interest	$	33,497	$	9,124

Noncash investing 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	$	282	$	2,061
Initial recognition of operating lease liabilities	$	282	$	2,061

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Corporation enters into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit.These financial instruments are recorded on the balance sheet when they become a receivable to the Corporation.

Comprehensive Income and Accumulated Other Comprehensive Income

Accounting principles generally accepted in the United States of America 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.

Segment Reporting

Management has determined that it operates in only one segment, community banking.The Corporation’s non-banking activities are insignificant to the consolidated financial statements.

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 $2,100,000 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 $1,900,000 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.

The following table illustrates the impact of ASC 326.


			January 1, 2023
			Pre-CECL		Reclassification to CECL		Post-CECL Adoption
(dollars in thousands)			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.

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.

CODORUS VALLEY BANCORP INC 10-K