0000806279us-gaap:CommercialPortfolioSegmentMembercvly:WholesaleRetailMember2020-12-31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________

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

For the quarterly period ended ~~September~~June 30, ~~2020~~2021

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

For the transition period from____________to______________

Commission file number: 0-15536

CODORUS VALLEY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2428543

(State or other jurisdiction of incorporation or organization)

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

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

(Address of principal executive offices)(Zip code)

717-747-1519

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since the last report.)

_____________________________________________

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


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

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

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

Yes ☒ No ☐

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


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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On ~~October~~July 23, ~~2020, 9,795,362~~2021, 9,751,923 shares of common stock, par value $2.50, were outstanding.

‎

- 1 -

Codorus Valley Bancorp, Inc.

Form 10-Q Index


PART I – FINANCIAL INFORMATION		Page #

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

Item 2.	Management’s discussion and analysis of financial condition and results of operations	3439

Item 3.	Quantitative and qualitative disclosures about market risk	5356

Item 4.	Controls and procedures	5557

PART II – OTHER INFORMATION

Item 1.	Legal proceedings	5557

Item 1A.	Risk factors	5557

Item 2.	Unregistered sales of equity securities and use of proceeds	5657

Item 3.	Defaults upon senior securities	5658

Item 4.	Mine safety disclosures	5658

Item 5.	Other information	5658

Item 6.	Exhibits	5759

SIGNATURES		5860

‎

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)




	September 30,		December 31,		June 30,		December 31,
(dollars in thousands, except per share data)	2020		2019		2021		2020
Assets
Interest bearing deposits with banks	$	222,143	$	110,742	$	377,588	$	313,469
Cash and due from banks		19,366		20,849		19,444		22,324
Total cash and cash equivalents		241,509		131,591		397,032		335,793
Securities, available-for-sale		197,796		159,675		208,611		185,002
Restricted investment in bank stocks, at cost		2,593		4,551		1,311		2,593
Loans held for sale		13,817		11,803		4,795		15,981
Loans (net of deferred fees of $7,547 - 2020 and $3,463 - 2019)		1,575,011		1,505,135
Loans (net of deferred fees of $6,785- 2021 and $6,134 - 2020)						1,543,812		1,544,589
Less-allowance for loan losses		(20,909)		(21,066)		(22,011)		(21,264)
Net loans		1,554,102		1,484,069		1,521,801		1,523,325
Premises and equipment, net		25,785		25,967		22,316		25,206
Operating leases right-of-use assets		2,534		3,021		2,063		2,386
Goodwill		2,301		2,301		2,301		2,301
Other assets		68,534		63,567		75,923		69,612
Total assets	$	2,108,971	$	1,886,545	$	2,236,153	$	2,162,199

Liabilities
Deposits
Noninterest bearing	$	404,125	$	273,968	$	472,154	$	396,947
Interest bearing		1,441,748		1,316,596		1,483,176		1,466,592
Total deposits		1,845,873		1,590,564		1,955,330		1,863,539
Short-term borrowings		9,309		7,925		13,393		8,540
Long-term debt		46,613		81,632		21,592		46,606
Subordinated debentures - face amount $31,000 (less unamortized discount and debt
issuance cost of $358 at June 30, 2021 and $398 at December 31, 2020)						30,642		30,602
Operating leases liabilities		2,669		3,184		2,185		2,515
Other liabilities		10,246		12,072		13,738		12,437
Total liabilities		1,914,710		1,695,377		2,036,880		1,964,239

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at September 30, 2020 and 0 at December 31, 2019		0		0
0 at June 30, 2021 and 0 at December 31, 2020						0		0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
Shares issued: 9,795,542 at September 30, 2020 and 9,755,976 at December 31, 2019; and
shares outstanding: 9,795,362 at September 30, 2020 and 9,755,976 at December 31, 2019		24,489		24,390
shares issued: 9,883,187 at June 30, 2021 and 9,820,882 at December 31, 2020; and
shares outstanding: 9,750,555 at June 30, 2021 and 9,820,882 at December 31, 2020						24,708		24,552
Additional paid-in capital		141,184		140,450		141,940		141,461
Retained earnings		24,601		25,019		33,000		28,380
Accumulated other comprehensive income		3,989		1,309		2,114		3,567
Treasury stock, at cost; 180 shares at September 30, 2020		(2)		0
Treasury stock, at cost; 132,632 shares at June 30, 2021						(2,489)		0
Total shareholders' equity		194,261		191,168		199,273		197,960
Total liabilities and shareholders' equity	$	2,108,971	$	1,886,545	$	2,236,153	$	2,162,199

See accompanying notes.

‎

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

~~Unaudited~~(Unaudited)


	Three months ended				Nine months ended				Three months ended					Six months ended
	September 30,				September 30,				June 30,					June 30,
(dollars in thousands, except per share data)	2020		2019		2020		2019		2021		2020			2021			2020
Interest income
Loans, including fees	$	17,589	$	19,847	$	54,233	$	59,331	$	16,492		$	17,880		$	34,084		$	36,644
Investment securities:
Taxable		616		780		2,197		2,200		790			761			1,372			1,581
Tax-exempt		113		152		380		532		86			126			180			267
Dividends		36		85		131		292		23			23			49			95
Other		57		602		497		1,522		105			48			186			440
Total interest income		18,411		21,466		57,438		63,877		17,496			18,838			35,871			39,027

Interest expense
Deposits		3,111		4,815		10,888		14,051		1,949			3,501			4,169			7,777
Federal funds purchased and other short-term borrowings		9		11		29		31		10			11			18			20
Long-term debt		310		627		1,273		2,008		205			426			457			963
Subordinated debentures										418			0			836			0
Total interest expense		3,430		5,453		12,190		16,090		2,582			3,938			5,480			8,760
Net interest income		14,981		16,013		45,248		47,787		14,914			14,900			30,391			30,267
Provision for loan losses		1,930		0		13,915		2,250		352			2,550			1,583			11,985
Net interest income after provision for loan losses		13,051		16,013		31,333		45,537		14,562			12,350			28,808			18,282

Noninterest income
Trust and investment services fees		992		921		2,932		2,642		1,143			946			2,195			1,940
Income from mutual fund, annuity and insurance sales		287		255		797		786		344			249			644			510
Service charges on deposit accounts		1,182		1,239		3,287		3,605		1,319			975			2,540			2,105
Income from bank owned life insurance		286		301		851		960		427			279			697			565
Other income		215		443		1,136		1,497		359			482			922			921
Gain on sales of loans held for sale		1,282		312		2,134		849		933			554			1,983			852
Loss on write down of assets held for sale										(1,174)			0			(1,174)			0
Gain (loss) on sales of securities		0		2		65		(1)		0			50			(23)			65
Total noninterest income		4,244		3,473		11,202		10,338		3,351			3,535			7,784			6,958

Noninterest expense
Personnel		7,470		7,849		22,471		22,946		8,268			7,196			16,696			15,001
Occupancy of premises, net		805		865		2,596		2,728		856			865			1,829			1,791
Furniture and equipment		856		787		2,550		2,334		793			841			1,631			1,694
Postage, stationery and supplies		160		190		582		549
Professional and legal		298		272		748		603		253			245			604			450
Marketing		352		441		988		1,164		438			311			703			636
FDIC insurance		325		5		664		465		192			172			418			339
Debit card processing		344		263		1,017		903		397			284			677			673
Charitable donations		65		337		1,030		1,316		750			93			938			965
Telecommunications		122		124		387		380
External data processing		631		649		2,039		1,821		858			704			1,678			1,408
(Gain)/loss on foreclosed real estate, including provision for (recovery of) losses		3		10		(170)		144
Gain on foreclosed real estate, including recovery of losses										0			(193)			0			(173)
Impaired loan carrying costs		128		14		604		145		87			190			187			476
Other		1,070		1,045		2,572		2,418		888			1,422			2,125			2,189
Total noninterest expense		12,629		12,851		38,078		37,916		13,780			12,130			27,486			25,449
Income before income taxes		4,666		6,635		4,457		17,959
Provision for income taxes		1,042		1,432		772		3,806
Income (loss) before income taxes										4,133			3,755			9,106			(209)
Provision (benefit) for income taxes										851			705			1,924			(270)
Net income	$	3,624	$	5,203	$	3,685	$	14,153	$	3,282		$	3,050		$	7,182		$	61
Net income per share, basic	$	0.37	$	0.53	$	0.38	$	1.43	$	0.33		$	0.31		$	0.73		$	0.01
Net income per share, diluted	$	0.37	$	0.52	$	0.38	$	1.42	$	0.33		$	0.31		$	0.73		$	0.01

See accompanying notes.
‎

- 4 -

Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

~~Unaudited~~(Unaudited)



	Three months ended				Three months ended
	September 30,				June 30,
(dollars in thousands)	2020		2019		2021		2020
Net income	$	3,624	$	5,203	$	3,282	$	3,050
Other comprehensive income (loss):
Other comprehensive income:
Securities available for sale:
Net unrealized holding (losses) gains arising during the period
(net of tax (benefit) expense of ($120) and $164, respectively)		(452)		619
Net unrealized holding gains arising during the period
(net of tax expense of $170 and $99, respectively)						640		373
Reclassification adjustment for gains included in net income
(net of tax expense of $0 and $0, respectively) (a) (b)		0		(2)
Net unrealized (losses) gains		(452)		617
(net of tax expense of $0 and $11, respectively) (a) (b)						0		(39)
Net unrealized gains						640		334
Comprehensive income	$	3,172	$	5,820	$	3,922	$	3,384

	Nine months ended				Six months ended
	September 30,				June 30,
(dollars in thousands)	2020		2019		2021		2020
Net income	$	3,685	$	14,153	$	7,182	$	61
Other comprehensive income (loss):
Other comprehensive income:
Securities available for sale:
Net unrealized holding gains arising during the period
(net of tax expense of $726 and $992, respectively)		2,731		3,734
Reclassification adjustment for (gains) losses included in net income
(net of tax expense (benefit) of $14 and $0, respectively) (a) (b)		(51)		1
Net unrealized gains		2,680		3,735
Net unrealized holding (losses) gains arising during the period
(net of tax (benefit) expense of ($391) and $846, respectively)						(1,472)		3,183
Reclassification adjustment for losses (gains) included in net income
(net of tax (benefit) expense of ($5) and $14, respectively) (a) (b)						18		(51)
Net unrealized (losses) gains						(1,454)		3,132
Comprehensive income	$	6,365	$	17,888	$	5,728	$	3,193

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

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

See accompanying notes.

‎

- 5 -

Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

~~Unaudited~~

(Unaudited)



	Nine months ended				Six months ended
	September 30,				June 30,
(dollars in thousands)	2020		2019		2021		2020
Cash flows from operating activities
Net income	$	3,685	$	14,153	$	7,182	$	61
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/amortization		2,072		1,964		1,317		1,386
Net amortization of premiums on securities		686		232		524		390
Amortization of deferred loan origination fees and costs		(2,255)		(974)		(3,725)		(1,236)
Net amortization of operating lease right of use assets		484		446		299		336
Net amortization of finance lease right of use assets		36		40		24		24
Amortization of subordinated debentures issuance fees						41		0
Net change in operating lease liabilities		(500)		(456)		(307)		(345)
Provision for loan losses		13,915		2,250		1,583		11,985
Provision for losses on foreclosured real estate		18		26
Writedown of assets held for sale						1,174		0
Provision for losses on foreclosed real estate						0		18
Increase in bank owned life insurance		(851)		(960)		(697)		(565)
Originations of mortgage loans held for sale		(80,926)		(27,789)		(54,122)		(28,865)
Originations of SBA loans held for sale		(841)		(6,766)		(515)		(872)
Proceeds from sales of mortgage loans held for sale		81,649		26,289		60,170		24,663
Proceeds from sales of SBA loans held for sale		140		3,286		7,606		140
Gain on sales of mortgage loans held for sale		(2,125)		(596)		(1,769)		(843)
Gain on sales of SBA loans held for sale		(9)		(253)		(214)		(9)
Loss (gain) on disposal of premises and equipment		79		(15)
(Gain) loss on sales of securities, available-for-sale		(65)		1
Gain on disposal of premises and equipment						(25)		0
Loss (gain) on sales of securities, available-for-sale						23		(65)
Gain on sales of foreclosed real estate		(216)		0		0		(214)
Loss on lease write-off		8		0
Stock-based compensation		390		395		395		250
(Increase) decrease in interest receivable		(3,108)		577
(Increase) in other assets		(2,446)		(87)
(Decrease) increase in interest payable		(274)		28
(Decrease) increase in other liabilities		(1,554)		1,149
Decrease (increase) in interest receivable						3,058		(1,519)
Increase in other assets						(761)		(245)
Increase in interest payable						(203)		(225)
Decrease in other liabilities						1,503		98
Net cash provided by operating activities		7,992		12,940		22,561		4,348
Cash flows from investing activities
Purchases of securities, available-for-sale		(107,828)		(111,466)		(207,323)		(43,705)
Maturities, repayments and calls of securities, available-for-sale		50,801		90,859		177,523		21,679
Sales of securities, available-for-sale		21,679		11,776		3,803		26,288
Net decrease in restricted investment in bank stock		1,958		1,371		1,282		1,958
Net increase in loans made to customers		(81,802)		(4,222)
Net decrease (increase) in loans made to customers						3,667		(106,892)
Purchases of premises and equipment		(2,004)		(2,747)		(543)		(1,758)
Investment in bank owned life insurance		(7)		(6,836)		(7,000)		0
Proceeds from bank owned life insurance						450		0
Proceeds from sales of foreclosed real estate		1,116		111		0		1,011
Net cash used in investing activities		(116,087)		(21,154)		(28,141)		(101,419)
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits		248,060		(9,492)
Net increase in time deposits		7,249		74,236
Net increase in demand and savings deposits						114,372		211,867
Net (decrease) increase in time deposits						(22,581)		5,211
Net increase in short-term borrowings		1,384		1,808		4,853		1,551
Repayment of long-term debt		(35,000)		(20,000)		(25,000)		(35,000)
Net change in finance lease liabilities		(19)		(32)		(14)		(12)
Cash dividends paid to shareholders		(4,103)		(4,533)		(2,562)		(3,123)
Payment of taxes related to stock withheld		(4)		0		(5)		(2)
Treasury stock reissued		89		213		188		89
Treasury stock purchased		(87)		(3,530)
Issuance of stock		444		108
Treasury stock repurchased						(2,672)		(87)
Proceeds from issuance of stock						240		347
Net cash provided by financing activities		218,013		38,778		66,819		180,841
Net increase in cash and cash equivalents		109,918		30,564		61,239		83,770
Cash and cash equivalents at beginning of year		131,591		96,782		335,793		131,591
Cash and cash equivalents at end of period	$	241,509	$	127,346	$	397,032	$	215,361

See accompanying notes.

- 6 -

Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

~~Unaudited~~(Unaudited)


							Accumulated												Accumulated
			Additional				Other								Additional				Other
	Common		Paid-in		Retained		Comprehensive		Treasury				Common		Paid-in		Retained		Comprehensive		Treasury
(dollars in thousands, except per share data)	Stock		Capital		Earnings		Income (Loss)		Stock		Total		Stock		Capital		Earnings		Income (Loss)		Stock		Total
Balance, January 1, 2021													$	24,552	$	141,461	$	28,380	$	3,567	$	0	$	197,960
Net income																		3,900						3,900
Other comprehensive loss, net of tax																				(2,093)				(2,093)
Cash dividends ($0.130 per share)																		(1,278)						(1,278)
Stock-based compensation																101								101
Withheld stock - 279 shares																						(5)		(5)
Issuance and reissuance of stock:
7,175 shares under the dividend reinvestment and stock purchase plan														18		98								116
5,702 shares under the employee stock option plan														14		31						5		50
43,212 shares of stock-based compensation awards														108		(108)								0
Balance, March 31, 2021													$	24,692	$	141,583	$	31,002	$	1,474	$	0	$	198,751
Balance, April 1, 2021													$	24,692	$	141,583	$	31,002	$	1,474	$	0	$	198,751
Net income																		3,282						3,282
Other comprehensive income, net of tax																				640				640
Cash dividends ($0.130 per share)																		(1,284)						(1,284)
Stock-based compensation																294								294
Repurchased stock - 142,541 shares																						(2,672)		(2,672)
Issuance and reissuance of stock:
6,495 shares under the dividend reinvestment and stock purchase plan														16		104								120
9,909 shares under employee stock purchase plan																(41)						183		142
Balance, June 30, 2021													$	24,708	$	141,940	$	33,000	$	2,114	$	(2,489)	$	199,273
Balance, January 1, 2020	$	24,390	$	140,450	$	25,019	$	1,309	$	0	$	191,168	$	24,390	$	140,450	$	25,019	$	1,309	$	0	$	191,168
Net loss						(2,989)						(2,989)						(2,989)						(2,989)
Other comprehensive income, net of tax								2,798				2,798								2,798				2,798
Cash dividends ($0.160 per share)						(1,561)						(1,561)						(1,561)						(1,561)
Stock-based compensation				120								120				120								120
Repurchased stock - 5,335 shares										(87)		(87)										(87)		(87)
Withheld stock - 102 shares										(2)		(2)										(2)		(2)
Issuance and reissuance of stock:
6,706 shares under the dividend reinvestment and stock purchase plan		17		132								149		17		132								149
6,468 shares of stock-based compensation awards		16		(16)								0		16		(16)								0
Balance, March 31, 2020	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596
Balance, April 1, 2020	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596
Net income						3,050						3,050						3,050						3,050
Other comprehensive income, net of tax								334				334								334				334
Cash dividends ($0.160 per share)						(1,562)						(1,562)						(1,562)						(1,562)
Stock-based compensation				130								130				130								130
Issuance and reissuance of stock:
12,536 shares under the dividend reinvestment and stock purchase plan		18		44						89		151		18		44						89		151
1,000 shares under the stock option plan		2		3								5		2		3								5
(767) shares of stock-based compensation awards		(2)		2								0		(2)		2								0
11,116 shares under employee stock purchase plan		28		103								131		28		103								131
Balance, June 30, 2020	$	24,469	$	140,968	$	21,957	$	4,441	$	0	$	191,835	$	24,469	$	140,968	$	21,957	$	4,441	$	0	$	191,835
Balance, July 1, 2020		24,469		140,968		21,957		4,441		0		191,835
Net income						3,624						3,624
Other comprehensive loss, net of tax								(452)				(452)
Cash dividends ($0.100 per share)						(980)						(980)
Stock-based compensation				139								139
Withheld stock - 180 shares										(2)		(2)
Issuance and reissuance of stock:
7,173 shares under the dividend reinvestment and stock purchase plan		18		79								97
771 shares of stock-based compensation awards		2		(2)								0
Balance, September 30, 2020	$	24,489	$	141,184	$	24,601	$	3,989	$	(2)	$	194,261
Balance, January 1, 2019	$	23,629	$	134,506	$	22,837	$	(2,226)	$	0	$	178,746
Adoption of ASC topic 842 (leases)						(199)						(199)
Net income						4,091						4,091
Other comprehensive income, net of tax								1,399				1,399
Cash dividends ($0.152 per share, adjusted)						(1,512)						(1,512)
Stock-based compensation				135								135
Forfeiture and withheld shares of restricted stock				2						(4)		(2)
Issuance and reissuance of stock:
6,646 shares under the dividend reinvestment and stock purchase plan		17		132								149
Balance, March 31, 2019	$	23,646	$	134,775	$	25,217	$	(827)	$	(4)	$	182,807
Balance, April 1, 2019	$	23,646	$	134,775	$	25,217	$	(827)	$	(4)	$	182,807
Net income						4,859						4,859
Other comprehensive income, net of tax								1,719				1,719
Cash dividends ($0.152 per share, adjusted)						(1,513)						(1,513)
Stock-based compensation				118								118
Forfeiture of restricted stock and withheld shares				5						(5)		0
Repurchased stock - 35,600 shares										(762)		(762)
Issuance and reissuance of stock:
6,605 shares under the dividend reinvestment and stock purchase plan		9		128						9		146
4,221 shares under the stock option plan				(69)						88		19
6,694 shares under employee stock purchase plan				(14)						141		127
Balance, June 30, 2019	$	23,655	$	134,943	$	28,563	$	892	$	(533)	$	187,520
Balance, July 1, 2019		23,655		134,943		28,563		892		(533)		187,520
Net income						5,203						5,203
Other comprehensive income, net of tax								617				617
Cash dividends ($0.152 per share, adjusted)						(1,508)						(1,508)
5% stock dividend, 465,473 shares at fair value		1,164		9,123		(10,287)						0
Stock-based compensation				142								142
Repurchased stock - 121,200 shares										(2,768)		(2,768)
Issuance and reissuance of stock:
6,421 shares under the dividend reinvestment and stock purchase plan				6						136		142
5,221 shares under the stock option plan				(86)						111		25
679 shares of stock-based compensation awards				(14)						14		0
Balance, September 30, 2019	$	24,819	$	144,114	$	21,971	$	1,509	$	(3,040)	$	189,373

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, ~~2019~~2020 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). As of ~~September~~June 30, ~~2020,~~2021, PeoplesBank operates 1 wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended ~~September~~June 30, ~~2020.~~2021. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

These consolidated statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 are not necessarily indicative of the results to be expected for the full year.

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of ~~September~~June 30, ~~2020~~2021 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

~~In December 2019, a coronavirus (COVID~~-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States. On March 13, 2020, President Trump declared the ongoing COVID–19 pandemic of sufficient severity and magnitude to warrant an emergency declaration for all states, territories, and the District of Columbia.

In response, many state and local governments, including the Commonwealth of Pennsylvania and the State of Maryland, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. It has been widely reported that these restrictions have resulted in significant adverse effects for many different types of businesses, particularly those in the travel, hospitality and food and beverage industries, among many others, and has resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which has negatively affected interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the coronavirus outbreak, and there is no guarantee that the Corporation’s efforts to address the adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.

~~The effect of COVID~~-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation's business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation's financial reporting and internal controls; declines in the demand for loans and other banking services and products;

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~~declines in demand resulting from adverse impacts of the disease on businesses deemed to be "non~~-~~essential" by governments; and branch or office closures and business interruptions.~~

In addition, the adverse economic effects of the coronavirus may lead to an increase in credit risk on the Corporation’s commercial and residential loan portfolios. Likewise, the Corporation is also monitoring the fluctuations in the markets as it pertains to interest rates and fair value of our investments for other than temporary impairment (OTTI). To curtail the spread of the virus, we are currently operating with modified branch access and taking other precautionary measures.

On March 27, 2020, ~~the President of the United States signed into law~~ the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in ~~response~~Section 4013 of the CARES Act to ~~the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.~~January 1, 2022.

~~The CARES~~On March 11, 2021, the American Rescue Plan Act ~~includes~~of 2021 (“ARP”) was signed into law. Chief among the $1.9 trillion stimulus act is additional support for individuals, including $1,400 checks to many Americans, extended unemployment benefits, and expanded tax credits. In addition, ARP provides funding for state and local governments and support for businesses continuing to struggle as a ~~provision~~result of the pandemic, including a modest increast to PPP, expanded eligibility to more non-profits, a grant program for restaurants that have suffered pandemic-related losses, and extended payroll support for the Corporation to opt out of applying the TDR accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 31, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019.airline industry.

While the Corporation continues to evaluate the disruption caused by the pandemic and impact of the CARES Act, these events may have a material adverse impact on the Corporation’s results of future operations, financial position, capital, and liquidity in fiscal year ~~2020.~~2021. Further, a decrease in results of future operations may place a strain on the Corporation’s capital reserve ratios.

Loans

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

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

Allowance for Loan Losses

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

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

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, generally nonaccrual loans and troubled debt restructurings. For loans that are classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans such as residential real estate, home equity and other consumer loans. These pools of loans are

- 9 -

evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative (environmental) risk factors. Historical loss rates are based on a two year rolling average of net charge-offs. Qualitative risk factors that supplement historical losses in the evaluation of loan pools are shown below. Each factor is assigned a value to reflect improving, stable or declining conditions based on the Corporation’s best judgment using relevant information available at the time of the evaluation.

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

Changes in the value of collateral for collateral dependent loans

Changes in the level of concentrations of credit

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

Changes in the nature and volume of the portfolio

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

Changes in underwriting standards and loan terms

Changes in the quality of the loan review system

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

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

Other pertinent environmental factors

~~Impact of COVID-19 pandemic~~

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

- 9 -

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

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

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

- 10 -

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

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

Loan-Level Interest Rate Swaps

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

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

- 10 -

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

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

Bank Premises and Equipment Held for Sale

Bank premises and equipment designated as held for sale are carried at the lower of cost or fair value, and, at June 30, 2021 consisted of a retail banking property scheduled to be closed in the fourth quarter 2021, totaling $945,000 and is included in other assets on the Consolidated Balance Sheets. An impairment charge of approximately $1,200,000 was recorded during the three months ended June 30, 2021. There were 0 bank premises and equipment designated as held for sale as of December 31, 2020.

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a write-down. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At ~~September~~June 30, ~~2020~~2021 there was 0 foreclosed real estate. Included within loans receivable as of ~~September~~June 30, ~~2020~~2021 was a recorded investment of ~~$209,000~~$105,000 of consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable ~~jurisdiction.~~jurisdiction, compared to $206,000 as of December 31, 2020.

Mortgage Servicing Rights

The mortgage servicing rights (MSRs) associated with the sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an estimate of future net servicing income of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At ~~September~~June 30, ~~2020,~~2021, the balance of residential mortgage loans serviced for third parties was ~~$96,268,000~~$73,927,000 compared to ~~$115,620,000~~$87,142,000 at December 31, ~~2019.~~2020.



		Three months ended				Nine months ended				Three months ended				Six months ended
		September 30,				September 30,				June 30,				June 30,
(dollars in thousands)		2020		2019		2020		2019		2021		2020		2021		2020
Amortized cost:
Balance at beginning of period	$	649	$	905	$	965	$	925	$	524	$	739	$	511	$	965
Originations of mortgage servicing rights		29		87		84		211		15		42		31		55
Amortization expense		(161)		(56)		(349)		(139)		(83)		(122)		(174)		(188)
Valuation allowance		(31)		(11)		(214)		(72)		2		(10)		90		(183)
Balance at end of period	$	486	$	925	$	486	$	925	$	458	$	649	$	458	$	649

Goodwill and Core Deposit Intangible Assets

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

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

- 11 -

Revenue from Contracts with Customers

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

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

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

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

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

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

- 12 -

Per Share Data

~~All per share computations include the effect of stock dividends distributed.~~ The computation of net income per share is provided in the table below.



	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
(in thousands, except per share data)	2020		2019		2020		2019		2021		2020		2021		2020
Net income	$	3,624	$	5,203	$	3,685	$	14,153	$	3,282	$	3,050	$	7,182	$	61

Weighted average shares outstanding (basic)		9,792		9,860		9,774		9,904		9,816		9,770		9,829		9,765
Effect of dilutive stock options		22		63		29		67		32		24		29		33
Weighted average shares outstanding (diluted)		9,814		9,923		9,803		9,971		9,848		9,794		9,858		9,798

Basic earnings per share	$	0.37	$	0.53	$	0.38	$	1.43	$	0.33	$	0.31	$	0.73	$	0.01
Diluted earnings per share	$	0.37	$	0.52	$	0.38	$	1.42	$	0.33	$	0.31	$	0.73	$	0.01

- 12 -

Comprehensive Income

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

Cash Flow Information

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

Supplemental cash flow information is provided in the table below.



		Nine months ended				Six months ended
		September 30,				June 30,
(dollars in thousands)		2020		2019		2021		2020
Cash paid during the period for:
Income taxes	$	3,557	$	3,610	$	2,385	$	0
Interest	$	12,464	$	16,062	$	5,682	$	8,985

Noncash investing and financing activities:
Transfer of loans to foreclosed real estate	$	121	$	0	$	0	$	121
Initial recognition of financing lease right-of-use assets	$	0	$	1,358
Initial recognition of financing lease liabilities	$	0	$	1,480
Transfer of premises and equipment to assets held for sale					$	2,119	$	0
Initial recognition of operating lease right-of-use assets	$	186	$	2,958	$	18	$	186
Initial recognition of operating lease liabilities	$	186	$	3,035	$	18	$	186
Increase in other liabilities for purchase of securities settling after quarter end					$	0	$	663

Recent Accounting Pronouncements

Pronouncements Adopted in ~~2020~~

In January 2017, the FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard simplifies the test for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill, which currently is Step 2 of the goodwill impairment test. Instead, the goodwill impairment test will consist of a single quantitative step comparing the fair value of the reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and any interim goodwill impairment tests in reporting periods beginning after December 15, 2019. The Corporation adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on its consolidated financial statements.2021

In August 2018, the FASB issued ASU ~~2018-13, Fair Value Measurement.~~2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update ~~modify~~remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed: the amount of and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The following disclosure requirements were modified: for investments in certain entities that calculate net asset value, and entity is required to disclose the timing of liquidation of investee’s assets and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurementidentified as of the reporting date. The following disclosure requirements were added: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.relevant. The update is effective for fiscal years ~~beginning~~ending after December 15, ~~2019.~~2020. The adoption of this ~~update did not have a material impact on the Corporation’s consolidated financial statements.~~

~~In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. This~~ standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. This standard requires application of Subtopic 350-40 to determine which costs to implement the service contract would be capitalized as an asset and which costs would be expensed. The amendments in the update are effective for the years beginning after December 15, 2019. The adoption of this update did not have a material impact on its consolidated financial statements.

Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This standard adds a new Topic 326 which requires companies to measure and record impairment on financial instruments at the time of origination using the expected

- 13 -

credit loss (CECL) model. The CECL model calculates impairment based on historical experience, current conditions, and reasonable and supportable forecasts, and reflects the organization’s current estimate of all expected credit losses over the contractual term of its financial assets. The new standard was delayed and is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation expects the provisions of ASU No. 2016-13 to impact its consolidated

- 13 -

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

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The update is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Corporation is currently evaluating the impact of the adoption of this update on its disclosures.

Note 2 – Securities

A summary of securities available-for-sale at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At ~~September~~June 30, ~~2020, 85~~2021, 80.5 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania and 1211.4 percent was concentrated in the state of Texas. The portfolio was intentionally distributed to limit exposure with the largest issuer at ~~$2.0~~$2.6 million. At June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the US Government and its agencies, in an amount greater than 10% of shareholders’ equity.



	Amortized		Gross Unrealized				Fair		Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
September 30, 2020
June 30, 2021
Debt securities:
U.S. Treasury notes	$	4,999	$	22	$	0	$	5,021
U.S. agency		49,997		0		(1)		49,996	$	2,000	$	0	$	(38)	$	1,962
U.S. agency mortgage-backed, residential		112,311		4,645		(20)		116,936		152,302		3,242		(632)		154,912
State and municipal		20,948		301		(25)		21,224		32,314		288		(367)		32,235
Corporate debt		4,491		128		0		4,619
Corporates										19,320		217		(35)		19,502
Total debt securities	$	192,746	$	5,096	$	(46)	$	197,796	$	205,936	$	3,747	$	(1,072)	$	208,611
December 31, 2019
December 31, 2020
Debt securities:
U.S. Treasury notes	$	9,834	$	119	$	0	$	9,953
U.S. agency		15,000		0		(77)		14,923	$	40,000	$	0	$	0	$	40,000
U.S. agency mortgage-backed, residential		106,799		1,443		(87)		108,155		106,792		4,133		(29)		110,896
State and municipal		26,385		260		(1)		26,644		24,014		311		(25)		24,300
Corporates										9,681		139		(14)		9,806
Total debt securities	$	158,018	$	1,822	$	(165)	$	159,675	$	180,487	$	4,583	$	(68)	$	185,002

‎

- 14 -

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



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

The amortized cost and estimated fair value of debt securities at ~~September~~June 30, ~~2020~~2021 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.



	Available-for-sale				Available-for-sale
	Amortized		Fair		Amortized		Fair
(dollars in thousands)	Cost		Value		Cost		Value
Due in one year or less	$	63,773	$	63,803	$	3,398	$	3,423
Due after one year through five years		99,452		102,937		97,040		99,389
Due after five years through ten years		16,574		17,241		65,165		65,331
Due after ten years		12,947		13,815		40,333		40,468
Total debt securities	$	192,746	$	197,796	$	205,936	$	208,611

- 14 -

Gross realized gains and losses on sales of securities available-for-sale are shown 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. There were 0 proceeds from the sale of securities for the three months ended September 30, 2020. Proceeds from the sale of securities were $2,000,000, with 0 related tax benefit for the three months ended September 30, 2019. Proceeds from the sale of securities were $21,679,000, with a related tax expense of $14,000 for the nine months ended September 30, 2020. Proceeds from the sale of securities were $11,776,000, with no related tax benefit or expense for the nine months ended September 30, 2019.

Three months ended
Nine months ended
September 30,
September 30,
(dollars in thousands)
2020
2019
2020
2019
Realized gains
$
0
$
2
$
124
$
16
Realized losses
0
0
(59)
(17)
Net gains (losses)
$
0
$
2
$
65
$
(1)

Investment securities having a carrying value of ~~$188,300,000~~$161,642,000 and ~~$128,427,000~~$170,313,000 on ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized
(dollars in thousands)	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
September 30, 2020
June 30, 2021
Debt securities:
U.S. agency	7		44,996		(1)	0		0		0	7		44,996		(1)	1	$	1,962	$	(38)	0	$	0	$	0	1	$	1,962	$	(38)
U.S. agency mortgage-backed, residential	5		4,407		(20)	0		0		0	5		4,407		(20)	30		56,130		(632)	0		0		0	30		56,130		(632)
State and municipal	5		2,808		(25)	0		0		0	5		2,808		(25)	23		21,890		(367)	0		0		0	23		21,890		(367)
Corporates																7		7,515		(35)	0		0		0	7		7,515		(35)
Total temporarily impaired debt
securities, available-for-sale	17	$	52,211	$	(46)	0	$	0	$	0	17	$	52,211	$	(46)	61	$	87,497	$	(1,072)	0	$	0	$	0	61	$	87,497	$	(1,072)
December 31, 2019
December 31, 2020
Debt securities:
U.S. agency	1		4,983		(17)	2		9,940		(60)	3		14,923		(77)	2	$	40,000	$	0	0	$	0	$	0	2	$	40,000	$	0
U.S. agency mortgage-backed, residential	12		21,821		(82)	2		1,163		(5)	14		22,984		(87)	8		8,706		(29)	0		0		0	8		8,706		(29)
State and municipal	1		466		(1)	0		0		0	1		466		(1)	4		3,808		(25)	0		0		0	4		3,808		(25)
Corporates																3		4,075		(14)	0		0		0	3		4,075		(14)
Total temporarily impaired debt
securities, available-for-sale	14	$	27,270	$	(100)	4	$	11,103	$	(65)	18	$	38,373	$	(165)	17	$	56,589	$	(68)	0	$	0	$	0	17	$	56,589	$	(68)

- 15 -

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

The Corporation believes that unrealized losses at ~~September~~June 30, ~~2020~~2021 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through ~~September~~June 30, ~~2020~~2021 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

- 15 -

Note 3—Restricted Investment in Bank Stocks

Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLBP”) and, to a lesser degree, Atlantic Community Bancshares, Inc. (“ACBI”), the parent company of Atlantic Community Bankers Bank (“ACBB”). Under the FHLBP’s Capital Plan member banks, including PeoplesBank, are required to maintain a minimum stock investment. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

The FHLBP paid dividends during the periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. The FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of 5 percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes 0 impairment charge was necessary related to the restricted stock during the periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Note 4—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The portfolio is comprised of 2 segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance.

‎

- 16 -

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



	September 30,		% Total		December 31,		% Total		June 30,		% Total		December 31,		% Total
(dollars in thousands)	2020		Loans		2019		Loans		2021		Loans		2020		Loans
Builder & developer	$	163,722		10.4	$	159,312		10.6	$	147,377		9.5	$	147,609		9.6
Commercial real estate investor		200,666		12.7		207,227		13.8		278,269		18.0		236,924		15.3
Residential real estate investor		242,602		15.4		247,969		16.5		232,352		15.1		238,458		15.4
Hotel/Motel		78,991		5.0		80,260		5.3		81,822		5.3		79,421		5.2
Wholesale & retail		113,805		7.2		109,238		7.3		86,405		5.6		108,425		7.0
Manufacturing		95,906		6.1		86,511		5.7		74,987		4.9		79,142		5.1
Agriculture		78,321		5.0		80,719		5.4		93,272		6.0		80,450		5.2
Service										78,597		5.1		76,838		5.0
Other		381,267		24.2		313,371		20.7		258,573		16.8		280,616		18.2
Total commercial related loans		1,355,280		86.0		1,284,607		85.3		1,331,654		86.3		1,327,883		86.0
Residential mortgages		97,012		6.2		94,868		6.3		99,558		6.4		95,751		6.2
Home equity		98,724		6.3		100,827		6.7		91,617		5.9		96,711		6.3
Other		23,995		1.5		24,833		1.7		20,983		1.4		24,244		1.5
Total consumer related loans		219,731		14.0		220,528		14.7		212,158		13.7		216,706		14.0
Total loans	$	1,575,011		100.0	$	1,505,135		100.0	$	1,543,812		100.0	$	1,544,589		100.0

Loan Risk Ratings

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans ~~and residential mortgages held for investment~~ are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, ~~and commercial~~the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $500,000 ~~the Corporation uses~~may be scored using a third-party credit scoring software ~~models~~model for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Special Asset Committee, ~~(the ‘Committee’),~~ which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value. In addition to review by the Committee, existing loans are monitored by the primary loan officer and loan review officer to

- 16 -

determine if any changes, upward or downward, in risk ratings are appropriate. ~~An external consultant is also used to review a portion of the existing portfolio and recommend rating changes as appropriate.~~ Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing loans, except to ~~nonaccrual~~non-accrual status. Only the Committee, Executive Chairman or President/CEO may downgrade a loan to ~~nonaccrual~~non-accrual status or upgrade a loan that is criticized or classified.

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

‎

- 17 -

The table below presents a summary of loan risk ratings by loan class at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.



			Special										Special
(dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total		Pass		Mention		Substandard		Nonaccrual		Total
September 30, 2020
June 30, 2021
Builder & developer	$	150,570	$	10,843	$	1,930	$	379	$	163,722	$	136,225	$	7,177	$	3,152	$	823	$	147,377
Commercial real estate investor		194,020		6,439		0		207		200,666		271,441		5,592		1,050		186		278,269
Residential real estate investor		238,059		1,300		136		3,107		242,602		225,356		3,321		688		2,987		232,352
Hotel/Motel		53,308		12,509		13,174		0		78,991		50,126		531		18,377		12,788		81,822
Wholesale & retail		103,926		8,796		1,083		0		113,805		83,136		2,050		1,219		0		86,405
Manufacturing		84,502		0		11,404		0		95,906		67,173		0		55		7,759		74,987
Agriculture		70,297		755		3,778		3,491		78,321		85,554		2,276		394		5,048		93,272
Service												72,099		658		4,869		971		78,597
Other		355,831		2,297		12,740		10,399		381,267		235,133		1,458		13,274		8,708		258,573
Total commercial related loans		1,250,513		42,939		44,245		17,583		1,355,280		1,226,243		23,063		43,078		39,270		1,331,654
Residential mortgage		96,725		124		11		152		97,012		99,547		0		11		0		99,558
Home equity		98,093		56		0		575		98,724		91,023		48		0		546		91,617
Other		23,798		0		0		197		23,995		20,809		0		0		174		20,983
Total consumer related loans		218,616		180		11		924		219,731		211,379		48		11		720		212,158
Total loans	$	1,469,129	$	43,119	$	44,256	$	18,507	$	1,575,011	$	1,437,622	$	23,111	$	43,089	$	39,990	$	1,543,812

December 31, 2019
December 31, 2020
Builder & developer	$	151,672	$	6,503	$	252	$	885	$	159,312	$	133,804	$	11,305	$	2,121	$	379	$	147,609
Commercial real estate investor		201,967		3,890		1,145		225		207,227		230,113		6,379		231		201		236,924
Residential real estate investor		238,216		3,780		202		5,771		247,969		234,316		1,215		130		2,797		238,458
Hotel/Motel		67,732		12,528		0		0		80,260		48,264		542		18,143		12,472		79,421
Wholesale & retail		89,556		10,513		1,954		7,215		109,238		99,821		8,591		13		0		108,425
Manufacturing		76,721		1,058		7,597		1,135		86,511		67,968		0		3,610		7,564		79,142
Agriculture		76,350		1,123		404		2,842		80,719		72,829		416		3,776		3,429		80,450
Service												75,618		249		0		971		76,838
Other		277,634		16,490		13,748		5,499		313,371		256,040		1,481		13,804		9,291		280,616
Total commercial related loans		1,179,848		55,885		25,302		23,572		1,284,607		1,218,773		30,178		41,828		37,104		1,327,883
Residential mortgage		94,388		131		74		275		94,868		95,466		123		11		151		95,751
Home equity		100,089		61		0		677		100,827		96,026		55		0		630		96,711
Other		24,600		0		7		226		24,833		23,954		0		0		290		24,244
Total consumer related loans		219,077		192		81		1,178		220,528		215,446		178		11		1,071		216,706
Total loans	$	1,398,925	$	56,077	$	25,383	$	24,750	$	1,505,135	$	1,434,219	$	30,356	$	41,839	$	38,175	$	1,544,589

‎

- 1718 -

Impaired Loans

The table below presents a summary of impaired loans at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for those individual loans that are commercial related where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs.




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




	With No Allowance				With A Related Allowance						Total
	Recorded		Unpaid		Recorded		Unpaid		Related		Recorded		Unpaid
(dollars in thousands)	Investment		Principal		Investment		Principal		Allowance		Investment		Principal
September 30, 2020
December 31, 2020
Builder & developer	$	579	$	631	$	0	$	0	$	0	$	579	$	631	$	575	$	790	$	0	$	0	$	0	$	575	$	790
Commercial real estate investor		1,216		1,221		0		0		0		1,216		1,221		1,163		1,170		0		0		0		1,163		1,170
Residential real estate investor		2,653		2,681		454		468		242		3,107		3,149		581		862		2,216		2,216		216		2,797		3,078
Hotel/Motel		0		0		0		0		0		0		0		12,472		12,472		0		0		0		12,472		12,472
Wholesale & retail		238		238		0		0		0		238		238		237		237		0		0		0		237		237
Manufacturing		0		0		0		0		0		0		0		7,564		7,564		0		0		0		7,564		7,564
Agriculture		2,313		2,390		1,178		1,218		534		3,491		3,608		2,270		2,382		1,159		1,217		615		3,429		3,599
Service																971		1,061		0		0		0		971		1,061
Other commercial		6,412		6,655		3,987		4,309		2,513		10,399		10,964		5,739		5,954		3,552		3,888		2,481		9,291		9,842
Total impaired commercial related loans		13,411		13,816		5,619		5,995		3,289		19,030		19,811		31,572		32,492		6,927		7,321		3,312		38,499		39,813
Residential mortgage		152		152		0		0		0		152		152		151		151		0		0		0		151		151
Home equity		575		592		0		0		0		575		592		630		653		0		0		0		630		653
Other consumer		197		206		0		0		0		197		206		290		301		0		0		0		290		301
Total impaired consumer related loans		924		950		0		0		0		924		950		1,071		1,105		0		0		0		1,071		1,105
Total impaired loans	$	14,335	$	14,766	$	5,619	$	5,995	$	3,289	$	19,954	$	20,761	$	32,643	$	33,597	$	6,927	$	7,321	$	3,312	$	39,570	$	40,918

‎

December 31, 2019
Builder & developer
$
621
$
651
$
473
$
474
$
238
$
1,094
$
1,125
Commercial real estate investor
1,370
1,371
0
0
0
1,370
1,371
Residential real estate investor
734
753
5,037
5,137
1,873
5,771
5,890
Hotel/Motel
0
0
0
0
0
0
0
Wholesale & retail
273
273
7,184
7,811
2,537
7,457
8,084
Manufacturing
13
13
1,122
1,220
463
1,135
1,233
Agriculture
1,784
1,791
1,058
1,058
701
2,842
2,849
Other commercial
1,864
1,974
3,635
3,888
1,608
5,499
5,862
Total impaired commercial related loans
6,659
6,826
18,509
19,588
7,420
25,168
26,414
Residential mortgage
275
277
0
0
0
275
277
Home equity
677
677
0
0
0
677
677
Other consumer
226
231
0
0
0
226
231
Total impaired consumer related loans
1,178
1,185
0
0
0
1,178
1,185
Total impaired loans
$
7,837
$
8,011
$
18,509
$
19,588
$
7,420
$
26,346
$
27,599

- 1819 -

The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. Interest income on loans with no related allowance is the result of interest collected on a cash basis, except accruing TDRs.



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

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

‎

With No Related Allowance
With A Related Allowance
Total
Average
Total
Average
Total
Average
Total
Recorded
Interest
Recorded
Interest
Recorded
Interest
(dollars in thousands)
Investment
Income
Investment
Income
Investment
Income
Three months ended September 30, 2020
Builder & developer
$
585
9
70
0
$
655
$
9
Commercial real estate investor
1,244
16
0
0
1,244
16
Residential real estate investor
1,779
3
2,710
0
4,489
3
Hotel/Motel
0
0
0
0
0
0
Wholesale & retail
239
2
0
0
239
2
Manufacturing
0
0
0
0
0
0
Agriculture
2,337
37
1,200
0
3,537
37
Other commercial
5,696
33
3,805
0
9,501
33
Total impaired commercial related loans
11,880
100
7,785
0
19,665
100
Residential mortgage
152
2
0
0
152
2
Home equity
614
5
0
0
614
5
Other consumer
206
2
0
0
206
2
Total impaired consumer related loans
972
9
0
0
972
9
Total impaired loans
$
12,852
$
109
$
7,785
$
0
$
20,637
$
109
Three months ended September 30, 2019
Builder & developer
$
1,281
$
4
$
243
$
0
$
1,524
$
4
Commercial real estate investor
2,594
35
0
0
2,594
35
Residential real estate investor
588
4
5,113
0
5,701
4
Hotel/Motel
0
0
0
0
0
0
Wholesale & retail
244
2
7,317
0
7,561
2
Manufacturing
15
4
1,281
0
1,296
4
Agriculture
1,221
6
529
0
1,750
6
Other commercial
2,096
0
5,788
0
7,884
0
Total impaired commercial related loans
8,039
55
20,271
0
28,310
55
Residential mortgage
121
0
0
0
121
0
Home equity
575
5
0
0
575
5
Other consumer
278
4
0
0
278
4
Total impaired consumer related loans
974
9
0
0
974
9
Total impaired loans
$
9,013
$
64
$
20,271
$
0
$
29,284
$
64

- 1920 -



	With No Related Allowance				With A Related Allowance				Total				With No Related Allowance				With A Related Allowance				Total
	Average		Total		Average		Total		Average		Total		Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest		Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income		Investment		Income		Investment		Income		Investment		Income
Nine months ended September 30, 2020
Six months ended June 30, 2021
Builder & developer	$	771		31		189		0	$	960	$	31	$	868	$	0		0	$	0	$	868	$	0
Commercial real estate investor		1,296		56		0		0		1,296		56		1,108		23		0		0		1,108		23
Residential real estate investor		1,311		22		3,865		0		5,176		22		1,275		58		1,610		0		2,885		58
Hotel/Motel		0		0		0		0		0		0		12,570		0		0		0		12,570		0
Wholesale & retail		255		5		3,564		0		3,819		5		158		14		0		0		158		14
Manufacturing		6		3		537		0		543		3		7,687		0		0		0		7,687		0
Agriculture		2,217		95		1,106		0		3,323		95		2,739		37		1,120		0		3,859		37
Service														971		0		0		0		971		0
Other commercial		4,257		71		3,719		0		7,976		71		5,513		26		4,045		0		9,558		26
Total impaired commercial related loans		10,113		283		12,980		0		23,093		283		32,889		158		6,775		0		39,664		158
Residential mortgage		183		5		0		0		183		5		51		0		0		0		51		0
Home equity		643		42		0		0		643		42		610		0		0		0		610		0
Other consumer		215		9		0		0		215		9		240		7		0		0		240		7
Total impaired consumer related loans		1,041		56		0		0		1,041		56		901		7		0		0		901		7
Total impaired loans	$	11,154	$	339	$	12,980	$	0	$	24,134	$	339	$	33,790	$	165		6,775	$	0	$	40,565	$	165

Nine months ended September 30, 2019
Six months ended June 30, 2020
Builder & developer	$	1,202	$	32	$	156	$	0	$	1,358	$	32	$	835	$	22	$	252	$	0	$	1,087	$	22
Commercial real estate investor		3,102		103		0		0		3,102		103		1,322		40		0		0		1,322		40
Residential real estate investor		601		15		4,729		0		5,330		15		864		22		5,002		0		5,866		22
Hotel/Motel		0		0		0		0		0		0		0		0		0		0		0		0
Wholesale & retail		1,483		8		7,359		0		8,842		8		261		3		4,751		0		5,012		3
Manufacturing		342		13		1,462		0		1,804		13		8		3		716		0		724		3
Agriculture		939		17		265		0		1,204		17		2,185		59		1,082		0		3,267		59
Service														900		3		0		0		900		3
Other commercial		4,849		0		5,329		0		10,178		0		2,639		49		3,631		0		6,270		49
Total impaired commercial related loans		12,518		188		19,300		0		31,818		188		9,014		201		15,434		0		24,448		201
Residential mortgage		335		9		0		0		335		9		194		3		0		0		194		3
Home equity		590		15		0		0		590		15		666		37		0		0		666		37
Other consumer		278		13		0		0		278		13		220		7		0		0		220		7
Total impaired consumer related loans		1,203		37		0		0		1,203		37		1,080		47		0		0		1,080		47
Total impaired loans	$	13,721	$	225	$	19,300	$	0	$	33,021	$	225	$	10,094	$	248	$	15,434	$	0	$	25,528	$	248

‎

- 21 -

Past Due and Nonaccrual

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

- 20 -



					≥ 90 Days														≥ 90 Days
	30-59		60-89		Past Due				Total Past						30-59		60-89		Past Due				Total Past
	Days		Days		and				Due and				Total		Days		Days		and				Due and				Total
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Loans		Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Loans
September 30, 2020
June 30, 2021
Builder & developer	$	849	$	78	$	721	$	379	$	2,027	$	161,695	$	163,722	$	0	$	0	$	0	$	823	$	823	$	146,554	$	147,377
Commercial real estate investor		0		0		0		207		207		200,459		200,666		82		0		0		186		268		278,001		278,269
Residential real estate investor		0		0		0		3,107		3,107		239,495		242,602		0		0		0		2,987		2,987		229,365		232,352
Hotel/Motel		0		12,509		0		0		12,509		66,482		78,991		0		0		0		12,788		12,788		69,034		81,822
Wholesale & retail		30		0		0		0		30		113,775		113,805		139		0		0		0		139		86,266		86,405
Manufacturing		368		0		654		0		1,022		94,884		95,906		0		0		0		7,759		7,759		67,228		74,987
Agriculture		0		0		0		3,491		3,491		74,830		78,321		0		0		0		5,048		5,048		88,224		93,272
Service																0		0		0		971		971		77,626		78,597
Other		0		25		0		10,399		10,424		370,843		381,267		0		0		0		8,708		8,708		249,865		258,573
Total commercial related loans		1,247		12,612		1,375		17,583		32,817		1,322,463		1,355,280		221		0		0		39,270		39,491		1,292,163		1,331,654
Residential mortgage		0		336		407		152		895		96,117		97,012		0		67		0		0		67		99,491		99,558
Home equity		143		131		0		575		849		97,875		98,724		0		130		0		546		676		90,941		91,617
Other		28		363		0		197		588		23,407		23,995		498		580		0		174		1,252		19,731		20,983
Total consumer related loans		171		830		407		924		2,332		217,399		219,731		498		777		0		720		1,995		210,163		212,158
Total loans	$	1,418	$	13,442	$	1,782	$	18,507	$	35,149	$	1,539,862	$	1,575,011	$	719	$	777	$	0	$	39,990	$	41,486	$	1,502,326	$	1,543,812

December 31, 2019
December 31, 2020
Builder & developer	$	0	$	0	$	43	$	885	$	928	$	158,384	$	159,312	$	427	$	489	$	322	$	379	$	1,617	$	145,992	$	147,609
Commercial real estate investor		0		0		0		225		225		207,002		207,227		0		0		0		201		201		236,723		236,924
Residential real estate investor		295		0		0		5,771		6,066		241,903		247,969		136		0		0		2,797		2,933		235,525		238,458
Hotel/Motel		0		0		0		0		0		80,260		80,260		0		0		0		12,472		12,472		66,949		79,421
Wholesale & retail		0		0		0		7,215		7,215		102,023		109,238		29		0		0		0		29		108,396		108,425
Manufacturing		409		0		0		1,135		1,544		84,967		86,511		0		0		0		7,564		7,564		71,578		79,142
Agriculture		14		0		0		2,842		2,856		77,863		80,719		0		0		0		3,429		3,429		77,021		80,450
Service																0		709		0		971		1,680		75,158		76,838
Other		463		1,865		120		5,499		7,947		305,424		313,371		679		887		0		9,291		10,857		269,759		280,616
Total commercial related loans		1,181		1,865		163		23,572		26,781		1,257,826		1,284,607		1,271		2,085		322		37,104		40,782		1,287,101		1,327,883
Residential mortgage		0		70		104		275		449		94,419		94,868		0		0		937		151		1,088		94,663		95,751
Home equity		249		276		0		677		1,202		99,625		100,827		206		177		36		630		1,049		95,662		96,711
Other		750		68		13		226		1,057		23,776		24,833		717		321		0		290		1,328		22,916		24,244
Total consumer related loans		999		414		117		1,178		2,708		217,820		220,528		923		498		973		1,071		3,465		213,241		216,706
Total loans	$	2,180	$	2,279	$	280	$	24,750	$	29,489	$	1,475,646	$	1,505,135	$	2,194	$	2,583	$	1,295	$	38,175	$	44,247	$	1,500,342	$	1,544,589

Troubled Debt Restructurings

Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans ~~generally~~ involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. The principal balance of outstanding TDRs was $1,058,000 at June 30, 2021 and $1,395,000 at December 31, 2020. There were 0 allowances allocated to any TDRs at June 30, 2021 or December 31, 2020. There are no commitments to lend to existing TDRs. A TDR is considered to be in payment default once it is contractually past due pursuant to the terms of the loan documents. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if

- 22 -

principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and with respect to which management believes that future loan payments are reasonably assured under the modified terms. TDRs included as impaired loan totaled $1,447,000 and $3,824,000 as of September 30, 2020 and September 30, 2019, respectively. There are 0 commitments to lend additional amounts to these TDRs as of September 30, 2020 and September 30, 2019.

As of ~~September~~June 30, ~~2020,~~2021, there are 30 modifications ~~remaining~~ for consumer loans, ~~totaling approximately $20,000, 12~~4 mortgage loans totaling approximately ~~$4,200,000~~$1,422,000 and 8816 commercial loans totaling approximately ~~$93,100,000~~$67,734,000 under the CARES Act, which are not considered TDRs.

- 21 -

~~The table below shows~~There were 0 loans whose terms have been modified under TDRs during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019. The loan modified during 2019, detailed in the table below, was charged off in the third quarter of~~ 2020. There were 0 defaults ~~during~~for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~September~~June 30, ~~2019~~2020 for TDRs entered into during the previous 12 month period.

Modifications
Pre-Modification
Post-Modification
Number
Outstanding
Outstanding
Recorded
of
Recorded
Recorded
Investment
(dollars in thousands)
Contracts
Investments
Investments
at Period End
Three months ended:
September 30, 2020
None
September 30, 2019
None
Nine months ended:
September 30, 2020
None
September 30, 2019
Commercial related loans accruing
1
$
63
$
63
$
56

NOTE 5 – Allowance for Loan Losses

The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.



	Allowance for Loan Losses										Allowance for Loan Losses
	July 1, 2020								September 30, 2020		April 1, 2021								June 30, 2021
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance		Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,376	$	0	$	0	$	(254)	$	2,122	$	2,066	$	0	$	0	$	152	$	2,218
Commercial real estate investor		2,732		0		0		(56)		2,676		3,410		0		0		82		3,492
Residential real estate investor		4,767		(1,641)		3		807		3,936		4,009		(166)		43		(58)		3,828
Hotel/Motel		1,530		0		0		6		1,536		1,648		0		0		(339)		1,309
Wholesale & retail		2,398		0		0		21		2,419		2,111		0		0		(96)		2,015
Manufacturing		901		0		0		29		930		775		0		0		15		790
Agriculture		1,112		0		0		38		1,150		1,451		0		0		(11)		1,440
Service												738		0		0		12		750
Other commercial		4,610		(367)		0		1,293		5,536		5,564		(648)		22		606		5,544
Total commercial related loans		20,426		(2,008)		3		1,884		20,305		21,772		(814)		65		363		21,386
Residential mortgage		229		0		0		19		248		256		0		0		9		265
Home equity		297		(59)		0		56		294		282		0		0		(9)		273
Other consumer		94		(2)		7		(3)		96		98		(7)		4		(8)		87
Total consumer related loans		620		(61)		7		72		638		636		(7)		4		(8)		625
Unallocated		(8)		0		0		(26)		(34)		3		0		0		(3)		0
Total	$	21,038	$	(2,069)	$	10	$	1,930	$	20,909	$	22,411	$	(821)	$	69	$	352	$	22,011

- 22 -

Allowance for Loan Losses
July 1, 2019
September 30, 2019
(dollars in thousands)
Balance
Charge-offs
Recoveries
Provision
Balance
Builder & developer
$
2,708
$
(8)
$
0
$
(495)
$
2,205
Commercial real estate investor
2,568
0
0
60
2,628
Residential real estate investor
3,888
0
3
33
3,924
Hotel/Motel
746
0
0
2
748
Wholesale & retail
3,482
(24)
0
144
3,602
Manufacturing
1,355
0
0
(74)
1,281
Agriculture
556
0
0
819
1,375
Other commercial
5,145
0
0
(380)
4,765
Total commercial related loans
20,448
(32)
3
109
20,528
Residential mortgage
137
0
0
13
150
Home equity
272
(30)
69
(97)
214
Other consumer
160
(35)
15
20
160
Total consumer related loans
569
(65)
84
(64)
524
Unallocated
157
0
0
(45)
112
Total
$
21,174
$
(97)
$
87
$
0
$
21,164

Allowance for Loan Losses
January 1, 2020
September 30, 2020
(dollars in thousands)
Balance
Charge-offs
Recoveries
Provision
Balance
Builder & developer
$
2,263
$
(844)
$
0
$
703
$
2,122
Commercial real estate investor
2,565
0
0
111
2,676
Residential real estate investor
4,632
(1,641)
9
936
3,936
Hotel/Motel
742
0
0
794
1,536
Wholesale & retail
3,575
(3,116)
7
1,953
2,419
Manufacturing
1,252
(392)
0
70
930
Agriculture
1,304
0
0
(154)
1,150
Other commercial
4,204
(8,057)
0
9,389
5,536
Total commercial related loans
20,537
(14,050)
16
13,802
20,305
Residential mortgage
158
0
0
90
248
Home equity
203
(59)
0
150
294
Other consumer
167
(13)
34
(92)
96
Total consumer related loans
528
(72)
34
148
638
Unallocated
1
0
0
(35)
(34)
Total
$
21,066
$
(14,122)
$
50
$
13,915
$
20,909

Allowance for Loan Losses
January 1, 2019
September 30, 2019
(dollars in thousands)
Balance
Charge-offs
Recoveries
Provision
Balance
Builder & developer
$
2,835
$
(8)
$
0
$
(622)
$
2,205
Commercial real estate investor
2,636
0
0
(8)
2,628
Residential real estate investor
3,945
0
9
(30)
3,924
Hotel/Motel
732
0
0
16
748
Wholesale & retail
1,813
(24)
0
1,813
3,602
Manufacturing
1,287
0
0
(6)
1,281
Agriculture
579
0
0
796
1,375
Other commercial
4,063
(46)
0
748
4,765
Total commercial related loans
17,890
(78)
9
2,707
20,528
Residential mortgage
126
0
0
24
150
Home equity
265
(147)
71
25
214
Other consumer
144
(125)
40
101
160
Total consumer related loans
535
(272)
111
150
524
Unallocated
719
0
0
(607)
112
Total
$
19,144
$
(350)
$
120
$
2,250
$
21,164

- 23 -



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



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

‎

- 24 -



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

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.



	Allowance for Loan Losses						Loans						Allowance for Loan Losses						Loans
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated For		Evaluated For				Evaluated For		Evaluated For				Evaluated For		Evaluated For				Evaluated For		Evaluated For
(dollars in thousands)	Impairment		Impairment		Balance		Impairment		Impairment		Balance		Impairment		Impairment		Balance		Impairment		Impairment		Balance
September 30, 2020
June 30, 2021
Builder & developer	$	0	$	2,122	$	2,122	$	579	$	163,143	$	163,722	$	0	$	2,218	$	2,218	$	1,013	$	146,364	$	147,377
Commercial real estate investor		0		2,676		2,676		1,216		199,450		200,666		0		3,492		3,492		1,053		277,216		278,269
Residential real estate investor		242		3,694		3,936		3,107		239,495		242,602		210		3,618		3,828		2,987		229,365		232,352
Hotel/Motel		0		1,536		1,536		0		78,991		78,991		0		1,309		1,309		12,788		69,034		81,822
Wholesale & retail		0		2,419		2,419		238		113,567		113,805		0		2,015		2,015		0		86,405		86,405
Manufacturing		0		930		930		0		95,906		95,906		0		790		790		7,759		67,228		74,987
Agriculture		534		616		1,150		3,491		74,830		78,321		544		896		1,440		5,048		88,224		93,272
Service														0		750		750		971		77,626		78,597
Other commercial		2,513		3,023		5,536		10,399		370,868		381,267		3,090		2,454		5,544		8,709		249,864		258,573
Total commercial related		3,289		17,016		20,305		19,030		1,336,250		1,355,280		3,844		17,542		21,386		40,328		1,291,326		1,331,654
Residential mortgage		0		248		248		152		96,860		97,012		0		265		265		0		99,558		99,558
Home equity		0		294		294		575		98,149		98,724		0		273		273		546		91,071		91,617
Other consumer		0		96		96		197		23,798		23,995		0		87		87		174		20,809		20,983
Total consumer related		0		638		638		924		218,807		219,731		0		625		625		720		211,438		212,158
Unallocated		0		(34)		(34)		0		0		0		0		0		0		0		0		0
Total	$	3,289	$	17,620	$	20,909	$	19,954	$	1,555,057	$	1,575,011	$	3,844	$	18,167	$	22,011	$	41,048	$	1,502,764	$	1,543,812

December 31, 2019
Builder & developer
$
238
$
2,025
$
2,263
$
1,094
$
158,218
$
159,312
Commercial real estate investor
0
2,565
2,565
1,370
205,857
207,227
Residential real estate investor
1,873
2,759
4,632
5,771
242,198
247,969
Hotel/Motel
0
742
742
0
80,260
80,260
Wholesale & retail
2,537
1,038
3,575
7,457
101,781
109,238
Manufacturing
463
789
1,252
1,135
85,376
86,511
Agriculture
701
603
1,304
2,842
77,877
80,719
Other commercial
1,608
2,596
4,204
5,499
307,872
313,371
Total commercial related
7,420
13,117
20,537
25,168
1,259,439
1,284,607
Residential mortgage
0
158
158
275
94,593
94,868
Home equity
0
203
203
677
100,150
100,827
Other consumer
0
167
167
226
24,607
24,833
Total consumer related
0
528
528
1,178
219,350
220,528
Unallocated
0
1
1
0
0
0
Total
$
7,420
$
13,646
$
21,066
$
26,346
$
1,478,789
$
1,505,135

- 25 -



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

Note 6—Deposits

The composition of deposits as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is ~~$15,000~~$46,000 at ~~September~~June 30, ~~2020,~~2021, compared to ~~$86,000~~$55,000 at December 31, ~~2019.~~2020.



	September 30,		December 31,		June 30,		December 31,
(dollars in thousands)	2020		2019		2021		2020
Noninterest bearing demand	$	404,125	$	273,968	$	472,154	$	396,947
Interest bearing demand		208,288		174,248		247,301		224,764
Money market		578,255		513,948		591,794		598,398
Savings		105,045		85,489		134,374		111,143
Time deposits less than $100		295,424		303,527		272,613		283,910
Time deposits $100 to $250		186,976		175,477		168,693		180,674
Time deposits $250 or more		67,760		63,907		68,401		67,703
Total deposits	$	1,845,873	$	1,590,564	$	1,955,330	$	1,863,539

- 2426 -

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

Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At ~~September~~June 30, ~~2020,~~2021, the balance of securities sold under agreements to repurchase was ~~$9,309,000~~$13,393,000 compared to ~~$7,925,000~~$8,540,000 at December 31, ~~2019.~~2020. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were 0 other short-term borrowings.

The following table presents a summary of long-term debt as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. PeoplesBank’s long-term debt obligations to the FHLBP are fixed rate instruments. Under terms of a blanket collateral agreement with the FHLBP, the obligations are secured by FHLBP stock and PeoplesBank qualifying loan receivables, principally real estate secured loans.



	September 30,		December 31,		June 30,		December 31,
(dollars in thousands)	2020		2019		2021		2020
PeoplesBank’s obligations:
Federal Home Loan Bank of Pittsburgh (FHLBP)
Due March 2020, 1.86%	$	0	$	10,000
Due June 2020, 1.87%		0		15,000
Due June 2020, 2.70%		0		10,000
Due June 2021, 2.81%		10,000		10,000	$	0	$	10,000
Due June 2021, 2.14%		15,000		15,000		0		15,000
Due May 2022, 2.93%		10,000		10,000		10,000		10,000
Total FHLBP	$	35,000	$	70,000	$	10,000	$	35,000
Codorus Valley Bancorp, Inc. obligations:
Junior subordinated debt
Due 2034, 2.27%, floating rate based on 3 month
Due 2034, 2.14%, floating rate based on 3 month
LIBOR plus 2.02%, callable quarterly		3,093		3,093		3,093		3,093
Due 2036, 1.82% floating rate based on 3 month
Due 2036, 1.72% floating rate based on 3 month
LIBOR plus 1.54%, callable quarterly		7,217		7,217		7,217		7,217
Due 2030, 4.50% fixed rate, callable on or after December 2025						30,642		30,602
Total junior subordinated debt	$	10,310	$	10,310	$	40,952	$	40,912
Lease obligations included in long-term debt:
Finance lease liabilities		1,303		1,322		1,282		1,296
Total long-term debt	$	46,613	$	81,632	$	52,234	$	77,208

At ~~September~~June 30, ~~2020 and December 31, 2019,~~2021 there were 0 municipal deposit letters of credit compared to $42,000,000 at December 31, 2020. These letters of credit are issued by the FHLBP on behalf of PeoplesBank naming applicable municipalities as ~~beneficiaries were $42,000,000.~~beneficiaries. The letters of credit took the place of securities pledged to the municipalities for their deposits maintained at PeoplesBank.

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

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

Note 8—Leases

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

- 27 -

Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property, ATM locations, and office space. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Corporation has 1 finance lease for 1 financial center.

Leases with an initial term of 12 months or less are not recorded on the consolidated statement of condition. All other leases have remaining lease terms of 1 year to 25 years, some of which include options to extend. Upon opening a new financial center, we typically install brand-specific leasehold improvements which are depreciated over the shorter of the useful life or length of the lease. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and, taking into

- 25 -

consideration the dollar amount of the improvements, we conclude that it is reasonably certain that a renewal option will be exercised, the renewal period is included in the lease term, and the related payments are reflected in the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on an amortizing and collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Corporation’s financing lease, the Corporation utilized its incremental borrowing rate at lease inception.

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

The components of lease expense were as follows:



	Three months ended				Three months ended
	September 30,				June 30,
(dollars in thousands)	2020		2019		2021		2020
Operating lease cost	$	169	$	189	$	169	$	192

Finance lease cost:
Amortization of right-of-use assets	$	12	$	17	$	12	$	12
Interest on lease liability		12		13		12		12
Total finance lease cost	$	24	$	30	$	24	$	24

Total lease cost	$	193	$	219	$	193	$	216



	Nine months ended				Six months ended
	September 30,				June 30,
(dollars in thousands)	2020		2019		2021		2020
Operating lease cost	$	564	$	565	$	338	$	395

Finance lease cost:
Amortization of right-of-use assets	$	36	$	51	$	24	$	24
Interest on lease liability		36		39		24		24
Total finance lease cost	$	72	$	90	$	48	$	48

Total lease cost	$	636	$	655	$	386	$	443

- 28 -

Supplemental cash flow information related to leases was as follows:



	Nine months ended				Six months ended
	September 30,				June 30,
	2020		2019		2021		2020
Operating cash flows from operating leases	$	578	$	583	$	347	$	404
Operating cash flows from financing leases		36		39		24		24
Financing cash flows from financing leases		19		31		14		13

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		186		13		18		186
Finance leases		0		0		0		0

- 26 -

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



	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Assets:
Operating leases right-of-use assets	$	2,534	$	3,021	$	2,063	$	2,386
Finance leases assets		1,099		1,134		1,064		1,087
Total lease assets	$	3,633	$	4,155	$	3,127	$	3,473

Liabilities:
Operating	$	2,669	$	3,184	$	2,185	$	2,515
Financing		1,303		1,322		1,282		1,296
Total lease liabilities	$	3,972	$	4,506	$	3,467	$	3,811

Weighted Average Remaining Lease Term (years)
Operating leases		5.4		5.6		4.4		5.2
Finance leases		23.4		24.2		22.7		23.2

Weighted Average Discount Rate
Operating leases		2.69%		2.72%		2.61%		2.68%
Finance leases		3.69%		3.69%		3.69%		3.69%

Future minimum payments for financing leases and operating leases as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:



(dollars in thousands:)	September 30, 2020				June 30, 2021
Year Ending December 31,	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2020	$	171	$	19
2021		667		75	$	330	$	38
2022		604		75		615		75
2023		489		75		487		75
2024		413		75		400		75
2025						179		79
Thereafter		508		1,666		307		1,588
Total lease payments		2,852		1,985		2,318		1,930
Less imputed interest		(183)		(682)		(133)		(648)
Total	$	2,669	$	1,303	$	2,185	$	1,282

(dollars in thousands:)
December 31, 2019
Year Ending December 31,
Operating Leases
Finance Leases
2020
$
767
$
74
2021
706
75
2022
545
75
2023
491
75
2024
413
75
Thereafter
507
1,668
Total lease payments
3,429
2,042
Less imputed interest
(245)
(720)
Total
$
3,184
$
1,322

- 29 -



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

Note 9—Regulatory Matters

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

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain ~~off-balance-sheet~~off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory ~~action that, if imposed, could have a material adverse effect on the Corporation’s financial statements.~~action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of ~~September~~June 30, ~~2020,~~2021, the Corporation and ~~PeoplesBank~~Bank meet all capital adequacy requirements to which they are subject.

- 27 -

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. ~~As of September~~At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the most recent regulatory notifications categorized PeoplesBank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

~~The table below provides a comparison of the Corporation’s~~

- 30 -

Actual and ~~PeoplesBank’s risk-based~~required capital ~~ratios and leverage ratios to the minimum regulatory requirement for the periods indicated. Minimum~~ amounts (in thousands) and ratios ~~include the full phase in of the capital conservation buffer of 2.5 percent required by the Basel III framework.~~are presented below.



					Minimum for Basel III				Well Capitalized								Minimum for Basel III				Well Capitalized
	Actual				Capital Adequacy				Minimum (1)				Actual (1)				Capital Adequacy				Minimum (2)
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Codorus Valley Bancorp, Inc. (consolidated)
at September 30, 2020
at June 30, 2021
Capital ratios:
Common equity Tier 1	$	187,741	13.20	%	$	99,597	7.00	%		n/a	n/a		$	194,630	12.87	%	$	105,896	7.00	%		n/a	n/a
Tier 1 risk based		197,741	13.90			120,939	8.50			n/a	n/a			204,630	13.53			128,587	8.50			n/a	n/a
Total risk based		215,565	15.15			149,396	10.50			n/a	n/a			254,220	16.80			158,843	10.50			n/a	n/a
Leverage		197,741	9.51			83,130	4.00			n/a	n/a			204,630	9.11			89,893	4.00			n/a	n/a

at December 31, 2019
at December 31, 2020
Capital ratios:
Common equity Tier 1	$	187,312	12.45	%	$	105,359	7.00	%		n/a	n/a		$	191,863	13.10	%	$	102,504	7.00	%		n/a	n/a
Tier 1 risk based		197,312	13.11			127,936	8.50			n/a	n/a			201,863	13.79			124,469	8.50			n/a	n/a
Total risk based		216,154	14.36			158,039	10.50			n/a	n/a			250,806	17.13			153,756	10.50			n/a	n/a
Leverage		197,312	10.55			74,820	4.00			n/a	n/a			201,863	9.58			84,250	4.00			n/a	n/a

PeoplesBank, A Codorus Valley Company
at September 30, 2020
at June 30, 2021
Capital ratios:
Common equity Tier 1	$	194,064	13.67	%	$	99,349	7.00	%	$	92,253	6.50	%	$	223,871	14.83	%	$	105,656	7.00	%	$	98,109	6.50	%
Tier 1 risk based		194,064	13.67			120,638	8.50			113,542	8.00			223,871	14.83			128,296	8.50			120,749	8.00
Total risk based		211,844	14.93			149,024	10.50			141,928	10.00			242,777	16.08			158,483	10.50			150,937	10.00
Leverage		194,064	9.35			82,990	4.00			103,737	5.00			223,871	9.98			89,756	4.00			112,195	5.00

at December 31, 2019
at December 31, 2020
Capital ratios:
Common equity Tier 1	$	193,421	12.88	%	$	105,118	7.00	%	$	97,610	6.50	%	$	198,184	13.56	%	$	102,274	7.00	%	$	94,968	6.50	%
Tier 1 risk based		193,421	12.88			127,643	8.50			120,135	8.00			198,184	13.56			124,190	8.50			116,884	8.00
Total risk based		212,220	14.13			157,677	10.50			150,169	10.00			216,484	14.82			153,411	10.50			146,105	10.00
Leverage		193,421	10.36			74,673	4.00			93,341	5.00			198,184	9.43			84,109	4.00			105,137	5.00

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

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

Note 10—Shareholders’ Equity

~~Stock Dividend~~

Periodically, the Corporation distributes stock dividends on its common stock. The Corporation distributed a 5 percent stock dividend on December 10, 2019, which resulted in the issuance of 463,193 additional shares.

- 28 -

Share Repurchase

The Corporation’s Board of Directors approved a ~~new~~ Share Repurchase Program (“Program”) in March 2020. Under the ~~newly approved~~ Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. During the first quarter of 2020 the Corporation repurchased 5,335 shares at an average price of $16.37. Shortly after the Program began, and in response to COVID-19, the Corporation suspended the Program. ~~There was 0 activity under~~That program expired by its own terms in October, 2020.

The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in January 2021. Under the ~~program~~newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the ~~quarter~~Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation progam. During the three and six months ended ~~September~~June 30, ~~2020.~~2021, the Corporation purchased 142,541 shares at an average price of $18.75 for a total of $2,700,000.

- 31 -

Note 11—Contingent Liabilities

There are 0 legal proceedings pending against Codorus Valley Bancorp, Inc. or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation, other than routine litigation incidental to the business. Management is not aware of any proceedings known or contemplated by government authorities.

Note 12—Guarantees

Codorus Valley does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by PeoplesBank to guarantee the performance of a client to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to clients. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had ~~$15,570,000~~$14,919,000 of standby letters of credit outstanding on ~~September~~June 30, ~~2020,~~2021, compared to ~~$17,253,000~~$15,206,000 on December 31, ~~2019.~~2020. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The amount of the liability as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

Note 13—Fair Value of Assets and Liabilities

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

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

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

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

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

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

- 29 -

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

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

Fair Value Measurements
(dollars in thousands)
Total
(Level 1)
‎Quoted Prices in
‎Active Markets for
‎Identical Assets
(Level 2)
‎Significant Other
‎Observable Inputs
(Level 3)
‎Significant Other
‎Unobservable Inputs
September 30, 2020
Securities available-for-sale:
U.S. Treasury notes
$
5,021
$
5,021
$
0
$
0
U.S. agency
49,996
0
49,996
0
U.S. agency mortgage-backed, residential
116,936
0
116,936
0
State and municipal
21,224
0
21,224
0
Corporate debt
4,619
0
4,619
0
December 31, 2019
Securities available-for-sale:
U.S. Treasury notes
$
9,953
$
9,953
$
0
$
0
U.S. agency
14,923
0
14,923
0
U.S. agency mortgage-backed, residential
108,155
0
108,155
0
State and municipal
26,644
0
26,644
0

- 32 -

Interest rate swap agreements

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



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

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

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

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

3 fair values, based on the lowest level of input that is significant to the fair value measurements. At ~~September~~June 30, ~~2020,~~2021, the fair value of impaired loans with a valuation allowance or partial charge-off was ~~$2,553,000,~~$2,421,000, net of valuation allowances of ~~$3,289,000~~$3,844,000 and partial

charge-offs of ~~$134,000.~~$266,000. At December 31, ~~2019~~2020 the fair value of impaired loans with a valuation allowance or charge-off was ~~$11,297,000,~~$4,009,000, net of valuation allowances of ~~$7,420,000~~$3,312,000 and charge-offs of ~~$134,000.~~$373,000.

Foreclosed Real Estate

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

sales offer. At ~~September~~June 30, 2021 and December 31, 2020, there were 0 foreclosed real estate assets with a valuation allowance or ~~write-down, and at December 31, 2019, the fair value of foreclosed real estate with a valuation allowance or write-down was $797,000 which is net of write-downs of $617,000.~~write-down.

- 3033 -

Mortgage Servicing Rights

Mortgage servicing rights are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and original time to maturity. Mortgage servicing rights are subsequently evaluated for impairment on a quarterly basis. Significant inputs to the valuation include expected cash flow, expected net servicing income, a cash flow discount rate and the expected life of the underlying loans. At ~~September~~June 30, 2021, the fair value of the mortgage servicing rights asset was $498,000. At December 31, 2020, the fair value of the mortgage servicing rights asset was ~~$548,000. At December 31, 2019, the fair value of the mortgage servicing rights asset was $1,047,000.~~$511,000.

Fair Value Measurements
(dollars in thousands)
Total
(Level 1)
‎Quoted Prices in
‎Active Markets for
‎Identical Assets
(Level 2)
‎Significant Other
‎Observable Inputs
(Level 3)
‎Significant Other
‎Unobservable Inputs
September 30, 2020
Impaired loans
$
2,553
$
0
$
0
$
2,553
Mortgage servicing rights
548
0
0
548
December 31, 2019
Impaired loans
$
11,297
$
0
$
0
$
11,297
Foreclosed real estate
797
0
0
797
Mortgage servicing rights
1,047
0
0
1,047



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

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

‎

- 34 -

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

Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Valuation
Unobservable
Weighted
(dollars in thousands)
Estimate
Techniques
Input
Range
Average
September 30, 2020
Impaired loans
$
2,553
Appraisal ⁽¹⁾
Appraisal adjustments ⁽²⁾
15% -50%
42%
Mortgage Servicing Rights
548
Multiple of annual service fee
Estimated prepayment speed based on rate and term
17.0% - 20.2%
19.4%
December 31, 2019
Impaired loans
$
5,991
Appraisal ⁽¹⁾
Appraisal adjustments ⁽²⁾
15% - 55%
44%
Impaired loans
5,306
Business asset valuation ⁽³⁾
Business asset valuation adjustments ⁽⁴⁾
10% - 73%
70%
Foreclosed real estate
797
Appraisal ⁽¹⁾
Appraisal adjustments ⁽²⁾
22% - 22%
22%
Mortgage Servicing Rights
1,047
Multiple of annual service fee
Estimated prepayment speed based on rate and term
7.9% - 8.9%
8.7%



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

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

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

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

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

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

- 3135 -

The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.



						Fair Value Estimates										Fair Value Estimates
					(Level 1)		(Level 2)		(Level 3)						(Level 1)		(Level 2)		(Level 3)
					Quoted Prices		Significant		Significant						Quoted Prices		Significant		Significant
					in Active		Other		Other						in Active		Other		Other
	Carrying		Estimated		Markets for		Observable		Unobservable		Carrying		Estimated		Markets for		Observable		Unobservable
(dollars in thousands)	Amount		Fair Value		Identical Assets		Inputs		Inputs		Amount		Fair Value		Identical Assets		Inputs		Inputs
September 30, 2020
Financial assets
Cash and cash equivalents	$	241,509	$	241,509	$	241,509	$	0	$	0
Securities available-for-sale		197,796		197,796		5,021		192,775		0
Loans held for sale		13,817		14,854		0		14,854		0
Loans, net		1,554,102		1,559,318		0		0		1,559,318
Interest receivable		8,123		8,123		0		8,123		0

Financial liabilities
Deposits	$	1,845,873	$	1,851,955	$	0	$	1,851,955	$	0
Short-term borrowings		9,309		9,309		0		9,309		0
Long-term debt (1)		45,310		42,702		0		35,754		6,948
Interest payable		568		568		0		568		0

Off-balance sheet instruments		0		0		0		0		0

December 31, 2019
June 30, 2021
Financial assets
Cash and cash equivalents	$	131,591	$	131,591	$	131,591	$	0	$	0	$	397,032	$	397,032	$	397,032	$	0	$	0
Securities available-for-sale		159,675		159,675		9,953		149,722		0		208,611		208,611		0		208,611		0
Restricted investment in bank stocks		4,551		4,551		0		4,551		0		1,311		N/A		N/A		N/A		N/A
Loans held for sale		11,803		12,460		0		12,460		0		4,795		5,143		0		5,143		0
Loans, net		1,484,069		1,472,772		0		0		1,472,772		1,521,801		1,517,262		0		0		1,517,262
Interest receivable		5,016		5,016		0		5,016		0		5,293		5,293		0		5,293		0

Financial liabilities
Deposits	$	1,590,564	$	1,582,179	$	0	$	1,582,179	$	0	$	1,955,330	$	1,957,587	$	0	$	1,957,587	$	0
Short-term borrowings		7,925		7,925		0		7,925		0		13,393		13,393		0		13,393		0
Long-term debt (1)		80,310		79,579		0		70,486		9,093		20,310		18,762		0		10,242		8,520
Subordinated debentures												30,642		32,515		0		32,515		0
Interest payable		842		842		0		842		0		329		329		0		329		0
Off-balance sheet instruments												0		0		0		0		0

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

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

(1) Exclude leases included in Long-term debt	(1) Exclude leases included in Long-term debt										(1) Exclude leases included in Long-term debt

- 3236 -

Note 14—Assets and Liabilities Subject to Offsetting

Securities Sold Under Agreements to Repurchase

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



							Gross amounts Not Offset in														Gross amounts Not Offset in
							the Statements of Condition														the Statements of Condition
							Financial Instruments														Financial Instruments
(dollars in thousands)	Gross ‎Amounts of ‎Recognized ‎Liabilities		Gross ‎Amounts ‎Offset in the ‎Statements ‎of Condition		Net Amounts ‎of Liabilities ‎Presented in ‎the Statements ‎of Condition		U.S. agency ‎mortgage-backed, ‎residential		U.S. agency		Cash ‎Collateral ‎Pledged		Net ‎Amount		Gross ‎Amounts of ‎Recognized ‎Liabilities		Gross ‎Amounts ‎Offset in the ‎Statements ‎of Condition		Net Amounts ‎of Liabilities ‎Presented in ‎the Statements ‎of Condition		U.S. agency ‎mortgage-backed, ‎residential		U.S. agency		Cash ‎Collateral ‎Pledged		Net ‎Amount
September 30, 2020
June 30, 2021
Repurchase Agreements	$	9,309	$	0	$	9,309	$	(9,505)	$	0	$	0	$	(196)	$	13,393	$	0	$	13,393	$	(13,197)	$	0	$	0	$	196

December 31, 2019
December 31, 2020
Repurchase Agreements	$	7,925	$	0	$	7,925	$	(9,601)	$	0	$	0	$	(1,676)	$	8,540	$	0	$	8,540	$	(10,255)	$	0	$	0	$	(1,715)

Note 15 – Interest Rate Swaps

Loan Level Interest Rate Swaps

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

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





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

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

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

- 37 -

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





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

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

‎

- 3338 -

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

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

Forward-looking Statements

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

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

Operating, legal and regulatory risks;

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

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

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

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

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

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

A prolonged economic downturn or excessive inflation;

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

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

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

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

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

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

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

Impact of COVID-19 pandemic.

~~COVID – 19 Pandemic~~COVID-19

~~During the third quarter, many businesses~~Higher vaccination rates and ~~schools found paths to re-open and operate under~~ a ~~“new normal” while following state and national guidelines to mitigate the spread of the virus.~~continued decline in COVID-19 cases in ~~the Company’s~~ Pennsylvania and Maryland ~~markets were relatively steady throughout~~have resulted in lifting many state restrictions related to mask requirements, limited occupancy levels and social distancing. This has resulted in an increase in branch transactions and in-person deposit account openings compared to the ~~third~~first quarter.

~~The PeoplesBank Crisis Management Team continues to monitor the situation and is meeting bi-weekly to manage the changing dynamics of COVID-19.~~

- 3439 -

In addition to the virus, social unrest has had an occasional impact in some of the Company’s local urban markets. This has precipitated the need to reinforce security protocols and asset management practices.

Associates

~~Approximately 40 percent~~The first group of ~~the Company’s associates continue to work off-premise. A phased approach and a comprehensive plan to safely return~~ associates working remotely ~~has been developed, and will be implemented as~~returned to the number of COVID-19 cases decline. At the time of this release, two client-facing associates have tested positive for COVID-19 since the start of the pandemic. A detailed protocol for safeguarding the safetyoffice on a full or part-time basis in June 2021. The process of associates returning to the office will continue in a phased approach through August. A long-term remote work policy was recently adopted allowing a portion of positions to work remotely on an ad hoc, part-time or full-time basis. This new employment strategy provides more work flexibility, broadens the employment geographic market, allows for the redeployment of office space, and ~~clients has been followed, including notifying clients who may have come into contact with an associate who has tested positive.~~ensures that PeoplesBank remains competitive in a tightening labor market.

Re-Opening

~~By late September, the final five Financial Center lobbies re-opened.~~ At the time of this ~~release,~~filing, all Financial Centers are operating with ~~normal drive-thru hours~~regular lobby and ~~modified lobby~~drive thru hours. ~~Additional lobby protocols including the use of a lobby manager to screen and limit the number~~ of ~~clients within the lobby continue.~~

All Retirement Community Office lobbies ~~also remain open by appointment only with several modifications to ensure the safety of clients and associates.~~are open. Three Loan Production Offices ~~(Hanover,~~ (Hanover, Centerville, and Bel Air) remain closed.

‎

Client Hardship

PeoplesBank continues to responsibly and prudently extend credit to qualified borrowers. ~~As of September 30th,~~ PeoplesBank has processed approximately ~~1,329 SBA~~822 second round Paycheck Protection Program (PPP) loans totaling ~~$181.9~~$77 million. These PPP loans support 9,800 jobs. The majority of these loans ~~(83~~(87 percent) ~~were supporting~~support small businesses with loan amounts below $150,000. ~~PeoplesBank offered several free PPP forgiveness webinars in the third quarter tailored specifically for PPP borrowers to provide an overview of the PPP forgiveness process.~~

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

Critical Accounting Policies

The Corporation’s critical accounting policies, as summarized in Note 1—Summary of Significant Accounting Policies, include those related to the allowance for loan losses ~~valuation of foreclosed real estate, evaluation of other-than-temporary impairment of securities,~~ and ~~determination of acquisition-related goodwill and~~the fair value ~~adjustments,~~of its available-for-sale securities portfolio, which require management to make significant judgments, estimates and assumptions that have a material impact on the carrying value of the respective assets and liabilities. For this Form 10-Q, there were no material changes made to the Corporation’s critical accounting policies, which are more fully disclosed in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

‎

- 3540 -

Three Months Ended ~~September~~June 30, ~~2020~~2021 vs. Three Months Ended ~~September~~June 30, ~~2019~~2020

~~FINANCIAL HIGHLIGHTS~~

The Corporation’s net income (earnings) was $3,624,000 for the quarter ended September 30, 2020, as compared to $5,203,000 for the quarter ended September 30, 2019, a decrease of $1,579,000 or 30 percent.

Net interest income for the third quarter of 2020 decreased $1,032,000 or 6 percent below the same period in 2019, primarily due to lower rates of interest on loans and interest bearing deposits with banks, partially offset by lower rates on interest bearing demand deposits in the third quarter 2020 as compared to the third quarter 2019.

The Corporation’s net interest margin (tax-equivalent basis) for the third quarter 2020 was 3.01 percent, compared to 3.60 percent for the third quarter 2019. The net interest margin contraction was a result of lower rates on interest bearing deposits with banks and lower rates on loans, partially offset by lower rates on interest bearing demand deposits.

The provision for loan losses for the third quarter 2020 was $1,930,000, as compared to no provision for the third quarter 2019. The increased provision expense in the third quarter 2020 was attributed primarily to partial charge offs arising from two commercial lending relationships. The partial charge offs did not exceed the specific reserve allocation for the relationships, however, it did increase the historical loss factor in the allowance for loan loss analysis. The reduction in specific reserve allocation was offset by an increase to the specific reserve allocation for one commercial lending relationship. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in additional provision for loan losses in the quarter. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.33 percent at September 30, 2020 as compared to 1.40 percent at December 31, 2019 and 1.42 percent at September 30, 2019.

Noninterest income for the third quarter 2020 increased $771,000 or 22 percent compared to the third quarter 2019. Trust and investment service fees and mutual fund, annuity and insurance sales and gain on sales from loans held for sale increased in 2020, offset by a decrease in other income.

Noninterest expense in the third quarter 2020 was $222,000 or 2 percent lower than the third quarter 2019. Lower personnel costs, marketing and charitable donations accounted for a majority of the decrease. The decrease was partially offset by an increase in FDIC insurance and debit card processing.

The provision for income taxes for the third quarter 2020 decreased by $390,000 or 27 percent as compared to the third quarter 2019 as a result of the lower income before taxes in the third quarter 2020 as compared to the third quarter 2019.

‎

- 36 -

The schedule below presents selected performance metrics for the ~~third~~second quarter of both ~~2020~~2021 and ~~2019. Per share computations include the effect of stock dividends, including the most recent, a 5 percent stock dividend distributed in the fourth quarter of 2019.~~2020.



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

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

Three months ended
September 30,
2020
2019
Basic earnings per share
$
0.37
$
0.53
Diluted earnings per share
$
0.37
$
0.52
Cash dividend payout ratio
27.01
%
28.99
%
Return on average assets
0.70
%
1.12
%
Return on average equity
7.47
%
10.98
%
Net interest margin (tax equivalent basis)
3.01
%
3.60
%
Net overhead ratio
1.61
%
2.01
%
Efficiency ratio
65.27
%
65.48
%
Average equity to average assets
9.31
%
10.16
%

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

INCOME STATEMENT ANALYSIS

Net Interest Income

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

Net interest income for the quarter ended ~~September~~June 30, ~~2020~~2021 was ~~$14,981,000, a decrease~~$14,914,000, an increase of ~~$1,032,000~~$14,000 or 6less than 1 percent compared to net interest income of ~~$16,013,000~~$14,900,000 for the ~~third~~second quarter 2019. The decrease was primarily attributable to lower rates of interest on loans and interest bearing deposits with banks, partially offset by lower rates on interest bearing demand deposits in the third quarter 2020 as compared to the third quarter 2019.2020.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was ~~3.01~~2.80 percent for the ~~third~~second quarter ~~2020~~2021 compared to the ~~3.60~~3.07 percent for the ~~third~~second quarter ~~2019.~~2020. The net interest margin contraction was a result of lower ~~rates on interest bearing deposits with banks and lower~~ interest rates on loans and higher volume and rate on long-term debt, partially offset by lower rates on interest bearing demand and time deposits.

Total interest income for the ~~third~~second quarter ~~2020~~2021 totaled ~~$18,411,000,~~$17,496,000, a decrease of ~~$3,055,000~~$1,342,000 or 147 percent below the amount of total interest income for the ~~third~~second quarter ~~2019.~~2020. The change was primarily a result of lower rates on ~~interest bearing deposits with banks and lower rates on commercial loans, partially offset by a higher volume of~~ commercial loans.

Interest and dividend income on investments decreased ~~$252,000~~$11,000 or 251 percent in the ~~third~~second quarter ~~2020~~2021 compared to the same period in ~~2019.~~2020. The average balance of the investment securities portfolio ~~decreased $1,646,000~~increased $23,940,000 or 114 percent when comparing the ~~third~~second quarter ~~2020~~2021 to the same period in ~~2019.~~2020. The tax-equivalent yield on investments for the ~~third~~second quarter ~~2020~~2021 was ~~1.93~~1.95 percent or 6134 basis points lower than the ~~2.54~~2.29 percent experienced in the ~~third~~second quarter ~~2019.~~2020.

Interest income on loans decreased ~~$2,258,000~~$1,388,000 or 118 percent in the ~~third~~second quarter ~~2020~~2021 compared to the same period in ~~2019.~~2020. The average balance of outstanding loans, primarily commercial loans, ~~increased~~decreased approximately ~~$103,492,000~~$26,597,000 or 72 percent comparing the ~~third~~second quarter ~~2020~~2021 to the same period in ~~2019.~~2020. Lower rates on the loan portfolio were the primary driver of the decrease in interest income on ~~loans, which was partially offset by a higher volume of commercial~~ loans. The tax-equivalent yield on loans for the ~~third~~second quarter ~~2020~~2021 was ~~4.38~~4.21 percent or 8929 basis points less than the ~~5.27~~4.50 percent experienced in the ~~third~~second quarter ~~2019.~~2020.

Total interest expense for the ~~third~~second quarter ~~2020~~2021 was ~~$3,430,000,~~$2,582,000, a decrease of ~~$2,023,000~~$1,356,000 or 3734 percent as compared to total interest expense of ~~$5,453,000~~$3,938,000 for the ~~third~~second quarter ~~2019.~~2020. The change was primarily the result of a decrease in the cost of interest bearing demand and time deposits.

Interest expense on deposits decreased ~~$1,704,000~~$1,552,000 or 3544 percent in the ~~third~~second quarter ~~2020~~2021 compared to the same period in ~~2019.~~2020. The average rate paid on interest bearing deposits was ~~0.87~~0.53 percent in the ~~third~~second quarter ~~2020~~2021 or 6148 basis points lower than the average rate paid of ~~1.48~~1.01 percent in the ~~third~~second quarter ~~2019.~~2020. The average balance of interest bearing deposits for the ~~third~~second quarter ~~2020~~2021 increased by ~~$129,626,000~~$85,125,000 or 106 percent compared to the ~~third~~second quarter ~~2019.~~2020. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the ~~third~~second quarter ~~2020~~2021 increasing 5224 percent to ~~$402,648,000~~$470,530,000 as compared to ~~$264,550,000~~$378,549,000 for the ~~third~~second quarter ~~2019.~~2020. The increase was primarily related to deposits associated with the origination of Paycheck Protection Program (PPP) ~~loans.~~

loans and consumer stimulus payments.

- 3741 -

For the ~~third~~second quarter ~~2020~~2021 interest expense on borrowings ~~decreased $319,000~~(long-term debt and subordinated debentures) increased $197,000 or 5046 percent compared to the ~~third~~second quarter ~~2019.~~2020. Short-term borrowings consisting of repurchase agreements and other short-term borrowings averaged ~~$9,276,000~~$10,617,000 for the ~~third~~second quarter ~~2020,~~2021, compared to an average balance of ~~$8,571,000~~$8,234,000 for the ~~third~~second quarter ~~2019.~~2020. The rate on average short-term borrowings for the ~~third~~second quarter ~~2020~~2021 was ~~0.39~~0.38 percent, a decrease as compared to a rate of ~~0.51~~0.54 percent for the ~~third~~second quarter ~~2019.~~2020. Long-term debt, ~~primarily~~which includes borrowings from the Federal Home Loan Bank of Pittsburgh (FHLBP), and subordinated debentures issued in December 2020 by the Corporation, averaged ~~$49,379,000~~$71,249,000 for the ~~third~~second quarter ~~2020~~2021 and ~~$99,448,000~~$66,406,000 for the ~~third~~second quarter ~~2019.~~2020. For the ~~third~~second quarter ~~2020,~~2021, the rate on average long-term borrowings was ~~2.50~~3.51 percent, ~~the same~~an increase of 93 basis points as compared to a rate of ~~2.50~~2.58 percent for the ~~third~~second quarter ~~2019.~~2020.



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

	Three months ended September 30,														Three months ended June 30,
	2020							2019							2021							2020
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	221,701	$	57		0.10	%	$	109,636	$	602		2.18	%	$	383,440	$	105		0.11	%	$	194,820	$	48		0.10	%
Investment securities:
Taxable		143,448		652		1.81			138,390		865		2.48			170,961		813		1.91			143,861		784		2.19
Tax-exempt		19,635		141		2.86			26,339		188		2.83			20,600		108		2.10			21,304		157		2.96
Total investment securities		163,083		793		1.93			164,729		1,053		2.54			191,561		921		1.93			165,165		941		2.29

Loans:
Taxable (1)		1,591,152		17,528		4.38			1,484,676		19,764		5.28			1,564,672		16,419		4.21			1,590,244		17,800		4.50
Tax-exempt		7,358		77		4.16			10,342		104		3.99			9,078		91		4.02			10,103		100		3.98
Total loans		1,598,510		17,605		4.38			1,495,018		19,868		5.27			1,573,750		16,510		4.21			1,600,347		17,900		4.50
Total earning assets		1,983,294		18,455		3.70			1,769,383		21,523		4.83			2,148,751		17,536		3.27			1,960,332		18,889		3.88
Other assets (2)		101,859							95,081							103,034							97,777
Total assets	$	2,085,153						$	1,864,464						$	2,251,785						$	2,058,109
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	767,579	$	525		0.27	%	$	678,156	$	1,955		1.14	%	$	836,011	$	426		0.20	%	$	747,550	$	654		0.35	%
Savings		104,015		15		0.06			85,015		21		0.10			131,528		17		0.05			97,506		15		0.06
Time		548,865		2,571		1.86			527,662		2,839		2.13			518,325		1,506		1.17			555,683		2,832		2.05
Total interest bearing deposits		1,420,459		3,111		0.87			1,290,833		4,815		1.48			1,485,864		1,949		0.53			1,400,739		3,501		1.01
Short-term borrowings		9,276		9		0.39			8,571		11		0.51			10,617		10		0.38			8,234		11		0.54
Long-term debt		49,379		310		2.50			99,448		627		2.50			71,249		623		3.51			66,406		426		2.58
Total interest bearing liabilities		1,479,114		3,430		0.92			1,398,852		5,453		1.55			1,567,730		2,582		0.66			1,475,379		3,938		1.07


Noninterest bearing deposits		402,648							264,550							470,530							378,549
Other liabilities		9,311							11,592							13,529							12,684
Shareholders' equity		194,080							189,470							199,996							191,497

Total liabilities and
shareholders' equity	$	2,085,153						$	1,864,464						$	2,251,785						$	2,058,109
Net interest income (tax equivalent basis)			$	15,025						$	16,070						$	14,954						$	14,951
Net interest margin (3)						3.01	%						3.60	%						2.80	%						3.07	%
Tax equivalent adjustment				(44)							(57)							(40)							(51)
Net interest income			$	14,981						$	16,013						$	14,914						$	14,900

(1)Average balance includes average nonaccrual loans of ~~$18,939,000~~$38,801,000 for ~~2020~~2021 and ~~$24,392,000~~$25,749,000 for ~~2019.~~2020.

Interest includes net loan fees of ~~$1,462,000~~$1,956,000 for ~~2020~~2021 and ~~$739,000~~$1,190,000 for ~~2019.~~2020.

(2)Average balance includes average bank owned life insurance and foreclosed real ~~estate and unrealized holding gains (losses) on investment securities.~~estate.

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

- 3842 -



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

	Three months ended						Three months ended
	September 30,						June 30,
	2020 vs. 2019						2021 vs. 2020
	Increase (decrease) due to change in*						Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate			Net	Volume		Rate			Net

Interest Income
Interest bearing deposits with banks	$	615	$	(1,160)	$	(545)	$	47	$	10	$	57
Investment securities:
Taxable		28		(241)		(213)		247		(218)		29
Tax-exempt		(48)		1		(47)		(4)		(45)		(49)
Loans:
Taxable		2,131		(4,367)		(2,236)		345		(1,726)		(1,381)
Tax-exempt		(30)		3		(27)		(10)		1		(9)
Total interest income		2,696		(5,764)		(3,068)		625		(1,978)		(1,353)
Interest Expense
Deposits:
Interest bearing demand		224		(1,654)		(1,430)		79		(307)		(228)
Savings		5		(11)		(6)		5		(3)		2
Time		114		(382)		(268)		(190)		(1,136)		(1,326)
Short-term borrowings		1		(3)		(2)		3		(4)		(1)
Long-term debt		(293)		(24)		(317)		52		145		197
Total interest expense		51		(2,074)		(2,023)		(51)		(1,305)		(1,356)
Net interest income (tax equivalent basis)	$	2,645	$	(3,690)	$	(1,045)	$	676	$	(673)	$	3

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

Provision for Loan Losses

The provision for loan losses is an expense charged to earnings to cover the estimated losses attributable to uncollected loans. The provision reflects management’s judgment of an appropriate level for the allowance for loan losses. Provision for loan losses for the ~~third~~second quarter ~~2020~~2021 was ~~$1,930,000,~~$352,000, a ~~$1,930,000 increase~~$2,198,000 decrease as compared to no$2,550,000 provision for the ~~third~~second quarter ~~2019.~~2020. The ~~increased~~decreased provision expense in the ~~third~~second quarter ~~2020~~2021 was attributed primarily to a partial charge ~~offs~~off arising from ~~two~~a single commercial lending ~~relationships. The partial charge offs did not exceed~~relationship and the ~~specific reserve allocation for the relationships, however, it did increase the historical loss factor~~impacts of COVID-19 in the allowance for loan loss analysis. The reduction in specific reserve allocation was offset by an increase to the specific reserve allocation for one commercial lending relationship. In addition, changesprior period. Changes in the external environment created by COVID-19 ~~caused management~~continue to ~~increase~~impact the qualitative factors for certain loan segments in the allowance for loan loss ~~analysis, which resulted in additional provision for loan losses in the quarter.~~analysis. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was ~~1.33~~1.43 percent at ~~September~~June 30, ~~2020,~~2021, as compared to ~~1.40~~1.38 percent at December 31, ~~2019~~2020 and ~~1.42~~1.31 percent at ~~September~~June 30, ~~2019.~~2020.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page ~~51.~~54.

- 3943 -

Noninterest Income

The following table presents the components of total noninterest income for the ~~third~~second quarter ~~2020,~~2021, compared to the ~~third~~second quarter ~~2019.~~2020.



Table 3 - Noninterest income

		Three months ended				Change				Three months ended				Change
		September 30,				Increase (Decrease)				June 30,				Increase (Decrease)
(dollars in thousands)	2020		2019		$		%		2021		2020		$		%

Trust and investment services fees	$	992	$	921	$	71	8	%	$	1,143	$	946	$	197	21	%
Income from mutual fund, annuity and insurance sales		287		255		32	13			344		249		95	38
Service charges on deposit accounts		1,182		1,239		(57)	(5)			1,319		975		344	35
Income from bank owned life insurance		286		301		(15)	(5)			427		279		148	53
Other income		215		443		(228)	(51)			359		482		(123)	(26)
Gain on sales of loans held for sale		1,282		312		970	311			933		554		379	68
Loss on write down of assets held for sale										(1,174)		0		(1,174)	*nm
Gain on sales of securities		0		2		(2)	*nm			0		50		(50)	(100)
Total noninterest income	$	4,244	$	3,473	$	771	22	%	$	3,351	$	3,535	$	(184)	(5)	%

*nm – not meaningful

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

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

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

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

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

Other income—The ~~$228,000~~$123,000 or 5126 percent decrease in other income is due to lower swap ~~fee referrals~~referral fees during the ~~third~~second quarter ~~2020~~2021 compared to the ~~third~~second quarter ~~2019.~~2020.

Gain on sales of loans held for sale—The ~~$970,000~~$379,000 or ~~311~~68 percent increase in gain on sales of loans was due to the sale of a larger volume of the mortgage loans to the secondary market during the ~~third~~second quarter ~~2020~~2021 compared to the second quarter 2020.

Loss on write down of assets held for sale—The $1,174,000 increase in loss on write down of assets held for sale was due to the recognition of impairment expected on the sale of the Dover Financial Center during the second quarter 2021. The financial center is expected to close in the third quarter ~~2019.~~2021 and the actual sale is expected to occur in the fourth quarter 2021.

- 44 -

Noninterest Expense

The following table presents the components of total noninterest expense for the ~~third~~second quarter ~~2020,~~2021, compared to the ~~third~~second quarter ~~2019.~~2020.



Table 4 - Noninterest expense

		Three months ended				Change				Three months ended						Change
		September 30,				Increase (Decrease)				June 30,						Increase (Decrease)
(dollars in thousands)	2020		2019		$		%		2021		2020			$			%

Personnel	$	7,470	$	7,849	$	(379)	(5)	%	$	8,268		$	7,196		$	1,072		15	%
Occupancy of premises, net		805		865		(60)	(7)			856			865			(9)		(1)
Furniture and equipment		856		787		69	9			793			841			(48)		(6)
Postage, stationery and supplies		160		190		(30)	(16)
Professional and legal		298		272		26	10			253			245			8		3
Marketing		352		441		(89)	(20)			438			311			127		41
FDIC insurance		325		5		320	*nm			192			172			20		12
Debit card processing		344		263		81	31			397			284			113		40
Charitable donations		65		337		(272)	(81)			750			93			657		706
Telecommunications		122		124		(2)
External data processing		631		649		(18)	(3)			858			704			154		22
Gain on foreclosed real estate, including provision for losses		3		10		(7)	(70)
Gain on foreclosed real estate, including recovery of losses										0			(193)			193		100
Impaired loan carrying costs		128		14		114	*nm			87			190			(103)		(54)
Other		1,070		1,045		25	2			888			1,422			(534)		(38)
Total noninterest expense	$	12,629	$	12,851	$	(222)	(2)	%	$	13,780		$	12,130		$	1,650		14	%

*nm – not meaningful

- 40 -

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

Personnel—The ~~$379,000~~$1,072,000 or 515 percent ~~decrease~~increase in personnel expense is primarily the result of ~~a lower~~higher variable compensation accruals and actual medical claims expense in ~~2020~~2021 compared to the prior period.

~~Postage, stationery and supplies~~—~~The $30,000 or 16 percent decrease in postage, stationery and supplies expense is attributed to additional postage expense during the third quarter 2019.~~

Marketing—The ~~$89,000~~$127,000 or 2041 percent ~~decrease~~increase in marketing expense is attributed to marketing campaigns previously delayed ~~in 2020~~ due to the COVID-19 pandemic resuming in the second quarter 2021..

~~FDIC insurance~~Debit card processing—The ~~$320,000~~$113,000 or 40 percent increase in ~~FDIC insurance~~debit card processing expense is attributed to the ~~recognition~~growth of ~~small bank assessment credits in the third quarter 2019.~~retail clients and increased usage of electronic methods to access deposits.

Charitable donations—The ~~$272,000~~$657,000 or 81706 percent ~~decrease~~increase in charitable donations expense is attributed to ~~a delay in~~timing of charitable donations ~~due~~in 2021 compared to the ~~COVID-19 pandemic~~prior period.

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

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

Impaired loan carrying costs—The ~~$114,000 increase~~$103,000 or 54 percent decrease in impaired loan carrying costs expense is primarily attributed to a decrease in expenses associated with impaired loans ~~such as real estate taxes.~~compared to the prior period.

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

Provision for Income Taxes

The provision for income taxes for the ~~third~~second quarter ~~2020~~2021 was ~~$1,042,000, a decrease~~$851,000, an increase of ~~$390,000~~$146,000 or 2721 percent as compared to the ~~third~~second quarter ~~2019.~~2020. The ~~decrease~~increase was attributed to ~~lower~~higher pre-tax net income for the ~~third~~second quarter ~~2020~~2021 compared to the ~~third~~second quarter ~~2019.~~2020. The effective tax rate for the three months ended ~~September~~June 30, ~~2020~~2021 was ~~22.3 percent and the effective tax rate for the three months ended September 30, 2019 was 21.6~~20.6 percent. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.

- 4145 -

~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~

~~financial highlights~~2020

The Corporation’s net income (earnings) was ~~$3,685,000~~$7,182,000 for the first ~~nine~~six months of 2021 compared to $61,000 for the first six months of 2020, ~~compared to $14,153,000 for the first nine months of 2019, a decrease of $10,468,000 or 74 percent.~~

Net interest income for the first nine months of 2020 decreased $2,539,000 or 5 percent below the first nine months of 2019, primarily due to lower rates on interest bearing deposits with banks and lower rates on loans, partially offset by lower rates on interest bearing demand deposits over the previous period.

The Corporation’s net interest margin (tax-equivalent basis) for the nine months ended September 30, 2020 was 3.17 percent, compared to 3.68 percent for the first nine months of 2019. The net interest margin contraction was a result of lower rates on interest bearing deposits with banks, lower rates on loans, partially offset by lower rates on interest bearing demand deposits.

The provision for loan losses for the first nine months of 2020 was $13,915,000 an $11,665,000 increase as compared to a provision of $2,250,000 for the first nine months of 2019. The increased provision expense in 2020 was primarily due to partial charge offs on commercial lending relationships. Although some of the lending relationships did have specific reserve allocations to adequately cover the partial charge off, historical loss factors were negatively impacted which increased the provision expense. One partial charge off in the first quarter 2020 did not have a specific reserve allocation, which also increased provision expense. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in additional provision for loan losses during the year. The provision for both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.33 percent at September 30, 2020, as compared to 1.40 percent at December 31, 2019, and 1.42 percent at September 30, 2019.

Noninterest income for the first nine months of 2020 increased $864,000 or 8 percent compared to the first nine months of 2019. Contributing to the rise in noninterest income were gain on sales of loans held for sale. A decline in other income partially offset the increase.

Noninterest expense for the first nine months of 2020 was $38,078,000 compared to $37,916,000 for the first nine months of 2019. The increase was primarily attributable to higher professional and legal, FDIC insurance and impaired loans carrying costs. Offsetting some of the increase were declines in marketing, charitable donations and gains on foreclosed real estate.

The provision for income taxes for the first nine months of 2020 decreased $3,034,000 or 80 percent as compared to the first nine months of 2019 as a result of lower income before taxes in the first nine months of 2020 compared to the first nine months of 2019.

~~On September 30, 2020, the Corporation’s total assets were $2.11 billion,~~ an increase of ~~12 percent since December 31, 2019. The increase was primarily attributed to loan growth, specifically loans associated with the Paycheck Protection Program (PPP).~~

The Corporation’s capital level remained sound as evidenced by regulatory capital ratios that exceed current regulatory requirements for well capitalized institutions. As of September 30, 2020, the Corporation’s capital calculations and ratios reflect full compliance with the Basel III regulatory capital framework, which became effective on January 1, 2015.$7,121,000.

The schedule below presents selected performance metrics for the first ~~nine~~six months of both ~~2020~~2021 and ~~2019. Per share computations include the effect of stock dividends, including the most recent, 5 percent stock dividend distributed in the fourth quarter of 2019.~~2020.



	Nine months ended						Six months ended
	September 30,						June 30,
	2020			2019			2021			2020
Basic earnings per share	$	0.38		$	1.43		$	0.73		$	0.01
Diluted earnings per share	$	0.38		$	1.42		$	0.73		$	0.01
Cash dividend payout ratio		111.32	%		32.03	%		35.67	%		5,119.67	%
Return on average assets		0.24	%		1.03	%		0.65	%		0.01	%
Return on average equity		2.54	%		10.17	%		7.25	%		0.06	%
Net interest margin (tax equivalent basis)		3.17	%		3.68	%		2.91	%		3.25	%
Net overhead ratio		1.78	%		2.00	%		1.77	%		1.88	%
Efficiency ratio		67.07	%		64.72	%		71.45	%		68.00	%
Average equity to average assets		9.59	%		10.11	%		8.93	%		9.75	%

- 42 -

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

INCOME STATEMENT ANALYSIS

Net Interest Income

Net interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$45,248,000, a decrease~~$30,391,000, an increase of ~~$2,539,000~~$124,000 or 5less than 1 percent compared to net interest income of ~~$47,787,000~~$30,267,000 for the first ~~nine~~six months of ~~2019. The decrease was~~2020. Although the total volume of loans originated positively impacted net interest income primarily ~~attributable~~due to ~~lower~~PPP loans and related fees that were recognized, PPP loans were originated at a rate of 1.00 percent and therefore had a larger negative net interest margin impact. Interest rates on deposits decreased between the periods, offsetting the net change in interest ~~bearing deposits with banks~~income between volume and ~~lower rates on loans, partially offset by lower rates on interest bearing demand deposits over the previous period.~~rate.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was ~~3.17~~2.91 percent for the first ~~nine~~six months of ~~2020,~~2021, representing ana decrease compared to the ~~3.68~~3.25 percent net interest margin for the first ~~nine~~six months of ~~2019.~~2020. The net interest margin contraction was a result of lower interest rates on ~~interest bearing deposits with banks, lower rates~~loans and higher volume and rate on ~~loans,~~long-term debt, partially offset by lower rates on interest bearing demand ~~deposits.~~and time deposits and volume of commercial loans.

Total interest income for the first ~~nine~~six months of ~~2020~~2021 totaled ~~$57,438,000,~~$35,871,000, a decrease of ~~$6,439,000~~$3,156,000 or 108 percent below the amount of total interest income for the first ~~nine~~six months of ~~2019.~~2020. The change was primarily a result of a decrease in loan interest income due to lower rates on commercial loans and lower rates on interest bearing deposits with ~~banks.~~banks, partially offset by a higher volume of commercial loans.

Interest income on loans decreased ~~$5,098,000~~$2,560,000 or 97 percent in the first ~~nine~~six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The average balance of outstanding loans increased approximately ~~$72,498,000~~$22,881,000 or 52 percent in the first ~~nine~~six months of ~~2020~~2021 compared to the first ~~nine~~six months of ~~2019,~~2020, reflecting commercial loan growth, primarily related to SBA PPP loans, between the two periods.

Investment income for the first ~~nine~~six months of ~~2020~~2021 decreased ~~$316,000~~$296,000 or 1016 percent compared to the first ~~nine~~six months of ~~2019.~~2020. The tax-equivalent yield on investments for the first ~~nine~~six months of ~~2020~~2021 was ~~2.28~~1.84 percent or 3762 basis points lower than the ~~2.65~~2.46 percent experienced during the first ~~nine~~six months of ~~2019.~~2020.

Total interest expense for the first ~~nine~~six months of ~~2020~~2021 was ~~$12,190,000,~~$5,480,000, a decrease of ~~$3,900,000~~$3,280,000 or 2437 percent as compared to total interest expense of ~~$16,090,000~~$8,760,000 for the first ~~nine~~six months of ~~2019.~~2020. The change in interest expense was primarily a result of a decrease in the cost of interest bearing demand and time deposits.

Interest expense on deposits decreased ~~$3,163,000~~$3,608,000 or 2346 percent in the first ~~nine~~six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. The change was due primarily to a decrease in the cost of interest bearing demand and time deposits. The average balance of interest-bearing deposits for the first ~~nine~~six months of ~~2020,~~2021, primarily in lower cost core deposits, increased by ~~$118,273,000~~$106,971,000 or 98 percent compared to the average for the first ~~nine~~six months of ~~2019.~~2020. The average rate paid on interest-bearing deposits in the first ~~nine~~six months of ~~2020~~

- 46 -

2021 was ~~1.05~~0.57 percent, a decrease from the average rate of ~~1.48~~1.14 percent paid on interest-bearing deposits during the first ~~nine~~six months of ~~2019.~~2020. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the first ~~nine~~six months of ~~2020~~2021 increasing to ~~$349,717,000,~~$447,259,000, as compared to ~~$255,691,000~~$322,962,000 for the first ~~nine~~six months of ~~2019.~~2020. The increase was primarily related to deposits associated with the origination of Paycheck Protection Program (PPP) loans.

Interest expense on borrowings for the first ~~nine~~six months of ~~2020 decreased 36~~2021 increased 33 percent compared to the first ~~nine~~six months of ~~2019,~~2020, due to the issuance of subordinated debt in December 2020, offset by a lower volume of existing long-term debt. Outstanding long-term debt, consisting primarily of subordinated debentures and Federal Home Loan Bank of Pittsburgh (FHLBP) advances, averaged ~~$66,754,000~~$75,430,000 for the first ~~nine~~six months of ~~2020,~~2021, compared to an average balance of approximately ~~$108,493,000~~$75,538,000 for the same period of ~~2019.~~2020. The rate on average long-term debt for the first ~~nine~~six months of ~~2020~~2021 was ~~2.55~~3.46 percent, an increase as compared to the rate of ~~2.47~~2.56 percent for the same period of ~~2019.~~2020.

- 43 -



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

	Nine months ended September 30,														Six months ended June 30,
	2020							2019							2021							2020
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	183,152	$	497		0.36	%	$	87,959	$	1,522		2.31	%	$	354,477	$	186		0.11	%	$	163,666	$	440		0.54	%
Investment securities:
Taxable		142,406		2,328		2.18			128,533		2,492		2.59			163,224		1,421		1.76			141,878		1,676		2.38
Tax-exempt		21,499		474		2.95			30,784		660		2.87			20,014		226		2.28			22,442		332		2.97
Total investment securities		163,905		2,802		2.28			159,317		3,152		2.65			183,238		1,647		1.81			164,320		2,008		2.46

Loans:
Taxable (1)		1,558,421		53,996		4.63			1,485,177		59,080		5.32			1,566,236		33,934		4.37			1,541,876		36,468		4.76
Tax-exempt		9,754		297		4.07			10,500		313		3.99			9,486		188		4.00			10,965		221		4.05
Total loans		1,568,175		54,293		4.62			1,495,677		59,393		5.31			1,575,722		34,122		4.37			1,552,841		36,689		4.75
Total earning assets		1,915,232		57,592		4.02			1,742,953		64,067		4.91			2,113,437		35,955		3.43			1,880,827		39,137		4.18
Other assets (2)		99,283							92,883							105,481							97,972
Total assets	$	2,014,515						$	1,835,836						$	2,218,918						$	1,978,799
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	736,686	$	2,476		0.45	%	$	678,104	$	6,372		1.26	%	$	825,096	$	856		0.21	%	$	721,070	$	1,951		0.54	%
Savings		96,385		50		0.07			86,158		64		0.10			124,616		31		0.05			92,527		35		0.08
Time		551,617		8,362		2.02			502,153		7,615		2.03			523,865		3,282		1.26			553,009		5,791		2.11
Total interest bearing deposits		1,384,688		10,888		1.05			1,266,415		14,051		1.48			1,473,577		4,169		0.57			1,366,606		7,777		1.14
Short-term borrowings		8,188		29		0.47			7,698		31		0.54			9,184		18		0.40			7,637		20		0.53
Long-term debt		66,754		1,273		2.55			108,493		2,008		2.47			75,430		1,293		3.46			75,538		963		2.56
Total interest bearing liabilities		1,459,630		12,190		1.12			1,382,606		16,090		1.56			1,558,191		5,480		0.71			1,449,781		8,760		1.22

Noninterest bearing deposits		349,717							255,691							447,259							322,962
Other liabilities		11,876							12,023							15,427							13,172
Shareholders' equity		193,292							185,516							198,041							192,884

Total liabilities and
shareholders' equity	$	2,014,515						$	1,835,836						$	2,218,918						$	1,978,799
Net interest income (tax equivalent basis)			$	45,402						$	47,977						$	30,475						$	30,377
Net interest margin (3)						3.17	%						3.68	%						2.91	%						3.25	%
Tax equivalent adjustment				(154)							(190)							(84)							(110)
Net interest income			$	45,248						$	47,787						$	30,391						$	30,267

(1)Average balance includes average nonaccrual loans of ~~$23,728,000~~$38,259,000 for ~~2020~~2021 and ~~$22,515,000~~$26,148,000 for ~~2019.~~2020.

Interest includes net loan fees of ~~$3,471,000~~$4,660,000 for ~~2020~~2021 and ~~$2,010,000~~$2,009,000 for ~~2019.~~2020.

(2)Average balance includes average bank owned life insurance and foreclosed real ~~estate and unrealized holding gains (losses) on investment securities.~~estate.

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

- 4447 -



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

	Nine months ended						Six months ended
	September 30,						June 30,
	2020 vs. 2019						2021 vs. 2020
	Increase (decrease) due to change in*						Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate		Net		Volume		Rate		Net

Interest Income
Interest bearing deposits with banks	$	1,647	$	(2,672)	$	(1,025)	$	513	$	(767)	$	(254)
Investment securities:
Taxable		221		(385)		(164)		356		(611)		(255)
Tax-exempt		(168)		(18)		(186)		(35)		(71)		(106)
Loans:
Taxable		4,161		(9,245)		(5,084)		2,950		(5,484)		(2,534)
Tax-exempt		(22)		6		(16)		(30)		(3)		(33)
Total interest income		5,839		(12,314)		(6,475)		3,754		(6,936)		(3,182)
Interest Expense
Deposits:
Interest bearing demand		440		(4,336)		(3,896)		240		(1,335)		(1,095)
Savings		8		(22)		(14)		12		(16)		(4)
Time		750		(3)		747		(305)		(2,204)		(2,509)
Short-term borrowings		2		(4)		(2)		4		(6)		(2)
Long-term debt		(712)		(23)		(735)		(377)		707		330
Total interest expense		488		(4,388)		(3,900)		(426)		(2,854)		(3,280)
Net interest income (tax equivalent basis)	$	5,351	$	(7,926)	$	(2,575)	$	4,180	$	(4,082)	$	98

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

Provision for Loan Losses

For the first ~~nine~~six months of ~~2020,~~2021, the provision for loan losses was ~~$13,915,000,~~$1,583,000, as compared to a provision of ~~$2,250,000~~$11,985,000 for the first ~~nine~~six months of ~~2019, an increase~~2020, a decrease of ~~$11,665,000.~~ $10,402,000. The ~~increased~~decreased provision expense in ~~2020~~the first six months of 2021 was attributed primarily ~~due~~ to ~~partial charge offs on commercial lending relationships. Although some of the lending relationships did have specific reserve allocations to adequately cover the~~a partial charge off ~~historical loss factors were negatively impacted which increased the provision expense. One partial charge off~~arising from several large commercial lending relationships in the ~~first quarter 2020 did not have a specific reserve allocation, which also increased~~prior period and the ~~provision expense. In addition, changes~~impacts of COVID-19 in the prior period. Changes in the external environment created by COVID-19 ~~caused management~~continue to ~~increase~~impact the qualitative factors for certain loan segments in the allowance for loan loss ~~analysis, which resulted in additional provision for loan losses during the year. The provision for both~~analysis. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was ~~1.33~~1.43 percent at ~~September~~June 30, ~~2020,~~2021, as compared to ~~1.40~~1.38 percent at December 31, ~~2019,~~2020 and ~~1.42~~1.31 percent at ~~September~~June 30, ~~2019.~~2020.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page ~~51.~~54.

- 4548 -

Noninterest Income

The following table presents the components of total noninterest income for the first ~~nine~~six months of ~~2020,~~2021, compared to the first ~~nine~~six months of ~~2019.~~

2020.



Table 7 - Noninterest income

	Nine months ended				Change					Six months ended				Change
	September 30,				Increase (Decrease)					June 30,				Increase (Decrease)
(dollars in thousands)	2020		2019		$		%			2021		2020		$		%

Trust and investment services fees	$	2,932	$	2,642	$	290		11	%	$	2,195	$	1,940	$	255		13	%
Income from mutual fund, annuity and insurance sales		797		786		11		1			644		510		134		26
Service charges on deposit accounts		3,287		3,605		(318)		(9)			2,540		2,105		435		21
Income from bank owned life insurance		851		960		(109)		(11)			697		565		132		23
Other income		1,136		1,497		(361)		(24)			922		921		1		0
Gain on sales of loans held for sale		2,134		849		1,285		151			1,983		852		1,131		133
Gain (loss) on sales of securities		65		(1)		66		*nm
Loss on write down of assets held for sale											(1,174)		0		(1,174)		*nm
(Loss) gain on sales of securities											(23)		65		(88)		(135)
Total noninterest income	$	11,202	$	10,338	$	864		8	%	$	7,784	$	6,958	$	826		12	%

*nm – not meaningful

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

~~Other income~~Income from mutual fund, annuity and insurance sales—The ~~$361,000~~$134,000 or 2426 percent ~~decrease~~increase in ~~other~~ income from mutual fund, annuity and insurance sales is ~~primarily~~due to an increase in the ~~result~~client base during the first half of ~~lower swap referral fees in 2020~~2021 compared to the first half of 2020.

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

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

Gain on sales of loans held for sale—The ~~$1,285,000~~$1,131,000 or ~~151~~133 percent increase in gain on sales of loans is due to the sale of a larger volume of mortgage loans to the secondary market.

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

- 4649 -

Noninterest Expense

The following table presents the components of total noninterest expense for the first ~~nine~~six months of ~~2020,~~2021, compared to the first ~~nine~~six months of ~~2019.~~2020.



Table 8 - Noninterest expense

	Nine months ended				Change					Six months ended				Change
	September 30,				Increase (Decrease)					June 30,				Increase (Decrease)
(dollars in thousands)	2020			2019		$	%			2021			2020		$	%

Personnel	$	22,471	$	22,946	$	(475)		(2)	%	$	16,696	$	15,001	$	1,695		11	%
Occupancy of premises, net		2,596		2,728		(132)		(5)			1,829		1,791		38		2
Furniture and equipment		2,550		2,334		216		9			1,631		1,694		(63)		(4)
Postage, stationery and supplies		582		549		33		6
Professional and legal		748		603		145		24			604		450		154		34
Marketing		988		1,164		(176)		(15)			703		636		67		11
FDIC insurance		664		465		199		43			418		339		79		23
Debit card processing		1,017		903		114		13			677		673		4		1
Charitable donations		1,030		1,316		(286)		(22)			938		965		(27)		(3)
Telecommunications		387		380		7		2
External data processing		2,039		1,821		218		12			1,678		1,408		270		19
(Gain)/loss on foreclosed real estate, including (recovery of) provision for losses		(170)		144		(314)		(218)
Gain on foreclosed real estate, including recovery of losses											0		(173)		173		100
Impaired loan carrying costs		604		145		459		317			187		476		(289)		(61)
Other		2,572		2,418		154		6			2,125		2,189		(64)		(3)
Total noninterest expense	$	38,078	$	37,916	$	162		0	%	$	27,486	$	25,449	$	2,037		8	%

*nm - not meaningful

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

Personnel—The ~~$475,000~~$1,695,000 or 211 percent ~~decrease~~increase in personnel is primarily the result of ~~lower~~higher variable compensation accruals and higher actual medical claims expense in ~~2020~~2021 compared to the prior period.

Professional and legal—The ~~$145,000~~$154,000 or 2434 percent increase in professional and legal is primarily due to an increase in CPA ~~and consulting~~ fees.

~~Marketing~~—~~The $176,000 or 15 percent decrease in marketing is primarily attributed to marketing campaigns delayed in 2020 due to the COVID-19 pandemic.~~

FDIC insurance—The ~~$199,000~~$79,000 or 4323 percent increase in FDIC insurance is due to asset growth which results in a higher assessment.

~~Charitable donations~~External data processing—The ~~$286,000~~$270,000 or 2219 percent ~~decrease~~increase in ~~charitable donations~~external data processing is attributed to ~~a delay in donations due to the COVID-19 pandemic~~increased reliance on technology.

~~(Gain)/loss~~Gain on foreclosed real estate, including ~~(recovery of) provision for~~recovery of losses—The ~~$314,000 or 218 percent decrease~~$173,000 change in foreclosed real estate including ~~provision~~recovery for losses is attributed to the recovery ~~of provision~~ for ~~loss associated with the sale of~~losses on foreclosed real ~~estate.~~estate that was sold during the second quarter 2020.

Impaired loan carrying costs—The ~~$459,000~~$289,000 or ~~317~~61 percent ~~increase~~decrease in impaired loan carrying costs is attributed to ~~the volume of~~fewer costs associated with impaired loans ~~and~~incurred during the ~~associated costs to maintain these loans.~~current period.

Provision for Income Taxes

The income tax ~~benefit~~expense for the first ~~nine~~six months of ~~2020~~2021 was ~~$772,000, a decrease~~$1,924,000, an increase of ~~$3,034,000~~$2,194,000 or 80812 percent as compared to the first ~~nine~~six months of ~~2019.~~2020, during which time a tax benefit of $270,000 was realized. The effective tax benefit for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~17.3 percent and the effective~~21.1 percent. The Company realized a tax ~~rate~~benefit for the ~~nine~~six months ended ~~September~~June 30, 2019 was 21.2 percent. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.2020.

- 4750 -

BALANCE SHEET REVIEW

Interest Bearing Deposits with Banks

On ~~September~~June 30, ~~2020,~~2021, interest bearing deposits with banks totaled ~~$222,143,000,~~$377,588,000, an increase of ~~$111,401,000~~$64,119,000 or ~~101~~20 percent, compared to the level at year-end ~~2019.~~2020. The increase is primarily the result of the growth in client deposits related to PPP loan proceeds deposited, receipt of stimulus payments and organic growth, offset by ~~loan growth and a decrease in long-term debt.~~purchases of investment securities.

Investment Securities (Available-for-Sale)

The Corporation’s entire investment securities portfolio is classified available-for-sale, and is comprised ~~primarily~~ of interest-earning debt securities. The overall composition of the Corporation’s investment securities portfolio is provided in Note 2—Securities. On ~~September~~June 30, ~~2020,~~2021, the fair value of investment securities available-for-sale totaled ~~$197,796,000,~~$208,611,000, which represented an increase of ~~$38,121,000~~$23,609,000 as compared to the fair value of investment securities at year-end ~~2019. Additional investments~~2020. Purchases of securities exceeded the cash flows from principal reductions, sales and maturities during the first ~~nine~~six months of ~~2020 were primarily pledged as collateral to support growth of municipal deposits.~~2021.

Loans

On ~~September~~June 30, ~~2020,~~2021, total loans, net of deferred fees, were ~~$1.55~~$1.52 billion, which was ~~$70,033,000~~$1,524,000 or 5less than one percent ~~higher~~lower than the level at year-end ~~2019.~~2020. The change in volume was due primarily to ~~an increase~~a decrease in PPP loans, which totaled approximately ~~$181 million~~$99,000,000 at ~~September~~June 30, 2021, compared to $143,000,000 at December 31, 2020. Commercial loans within the ~~builder and developer,~~ commercial real estate investor and residential real estate investor sectors each represented more than 10 percent of the total portfolio. The composition of the Corporation’s loan portfolio is provided in Note 4—Loans.

Deposits

Deposits are the Corporation’s principal source of funding for earning assets. On ~~September~~June 30, ~~2020,~~2021, deposits totaled ~~$1.85~~$1.96 billion, which reflected a ~~$255,309,000~~$91,791,000 or 165 percent increase compared to the level at year-end ~~2019.~~2020. Of the increase in total deposits, ~~$130,157,000~~$75,207,000 is attributable to noninterest bearing deposits and ~~$125,152,000~~$16,584,000 is related to growth in interest bearing deposits. The composition of the Corporation’s total deposit portfolio is provided in Note 6—Deposits.

Short-term Borrowings

Short-term borrowings, which consist of securities sold under agreements to repurchase (repurchase agreements), federal funds purchased, and other short-term borrowings, totaled ~~$9,309,000~~$13,393,000 at ~~September~~June 30, ~~2020,~~2021, which reflected a ~~$1,384,000~~$4,853,000 or 1757 percent increase compared to the level at year-end ~~2019.~~2020.

Long-term Debt

The Corporation uses long-term borrowings as a secondary funding source for asset growth and to manage interest rate risk. On ~~September~~June 30, ~~2020,~~2021, long-term debt, including subordinated debentures totaled ~~$46,613,000~~$52,234,000 compared to ~~$81,632,000~~$77,208,000 at year-end ~~2019.~~2020. The ~~$35,019,000~~$24,974,000 or 32 percent decrease ~~is primarily~~in long-term debt resulted from the ~~result~~maturity of ~~$10,000,000 in FHLBP borrowings that were repaid at maturity during the first quarter 2020 and $25,000,000 in FHLBP borrowings that were repaid at maturity during the second quarter 2020.~~two FHLB advances totaling $25,000,000. A listing of outstanding long-term debt obligations is provided in Note 7—Short-Term Borrowings and Long-Term Debt. The composition of the Corporation’s leases is provided in Note 8—Leases.

Other Liabilities

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

Shareholders’ Equity and Capital Adequacy

Shareholders’ equity, or capital, enables Codorus Valley to maintain asset growth and absorb losses. Capital adequacy can be affected by a multitude of factors, including profitability, new stock issuances, corporate expansion and acquisitions, dividend policy and distributions, and regulatory mandates. The Corporation’s total shareholders’ equity was approximately ~~$194,261,000~~$199,273,000 on ~~September~~June 30, ~~2020,~~2021, an increase of approximately ~~$3,093,000~~$1,313,000 or 21 percent compared to the level at year-end ~~2019.~~2020.

Cash Dividends on Stock

The Corporation has historically paid cash dividends on its stock on a quarterly basis. The Board of Directors determines the dividend rate after considering the Corporation's capital requirements, current and projected net income, and other relevant factors. As recently announced, the Board of Directors declared a quarterly cash dividend of ~~$0.10~~$0.11 per share and a special cash dividend of $0.02 per share on ~~October~~July 13, ~~2020,~~2021, payable on ~~November~~August 10, ~~2020,~~2021, to shareholders of record at the close of business on ~~October~~July 27, ~~2020. This~~2021. These cash ~~dividend follows the $0.16 cash dividend distributed in February 2020 and May 2020 as well as the $0.10 cash dividend distributed in August 2020.~~

- 4851 -

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

Capital Adequacy

The Corporation and PeoplesBank are subject to various regulatory capital requirements administered by banking regulators that involve quantitative guidelines and qualitative judgments. The regulatory capital measures for the Corporation and PeoplesBank as of ~~September~~June 30, ~~2020~~2021 and the minimum capital ratios established by regulators are set forth in Note 9—Regulatory Matters to the financial statements. We believe that ~~both Codorus Valley and~~ PeoplesBank ~~were~~is well capitalized on ~~September~~June 30, ~~2020~~2021 and had no regulatory dividend restrictions (see Note 9—Regulatory Matters to the financial statements).

RISK MANAGEMENT

Credit Risk Management

Credit risk represents the possibility that a loan client, counterparty or issuer may not perform in accordance with contractual terms, posing one of the most significant risks of loss to the Corporation. Accordingly, the Corporation emphasizes the management of credit risk, and has established a lending policy which management believes is sound given the nature and scope of our operations. The Credit Risk Management section included in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, provides a more detailed overview of the Corporation’s credit risk management process.

Nonperforming Assets

Nonperforming assets, as shown in the table below, are asset categories that pose the greatest risk of loss. The level of nonperforming assets at ~~September~~June 30, ~~2020~~2021 has ~~decreased~~increased by ~~approximately $5,538,000~~$520,000 or 211 percent when compared to year-end ~~2019. The decrease was primarily the result of a net decrease in nonaccrual loans offset by an increase in accruing loans 90 days or more past due~~.2020.

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

- 4952 -

The paragraphs and table below address significant changes in the nonperforming asset categories as of ~~September~~June 30, ~~2020~~2021 compared to December 31, ~~2019.~~2020.



Table 9 - Nonperforming Assets

	September 30,			December 31,			June 30,			December 31,
(dollars in thousands)	2020			2019			2021			2020

Nonaccrual loans	$	18,507		$	24,696		$	39,990		$	38,175
Nonaccrual loans, troubled debt restructurings		0			54
Accruing loans 90 days or more past due		1,782			280			0			1,295
Total nonperforming loans		20,289			25,030			39,990			39,470
Foreclosed real estate, net of allowance		0			797
Total nonperforming assets	$	20,289		$	25,827		$	39,990		$	39,470
Accruing troubled debt restructurings	$	1,447		$	1,596		$	1,058		$	1,395

Total period-end loans, net of deferred fees	$	1,574,998		$	1,505,135		$	1,543,812		$	1,544,589
Allowance for loan losses (ALL)	$	20,909		$	21,066		$	22,011		$	21,264
ALL as a % of total period-end loans		1.33	%		1.40	%		1.43	%		1.38	%
Net charge-offs year-to-date, annualized as a % of average total loans		1.20	%		0.04	%		0.11	%		0.93	%
ALL as a % of nonperforming loans		103.06	%		84.16	%		55.04	%		53.87	%
Nonperforming loans as a % of total period-end loans		1.29	%		1.66	%		2.59	%		2.56	%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate		1.29	%		1.72	%		2.59	%		2.56	%
Nonperforming assets as a % of total period-end assets		0.96	%		1.37	%		1.79	%		1.83	%
Nonperforming assets as a % of total period-end
shareholders' equity		10.44	%		13.51	%		20.07	%		19.94	%

Nonperforming loans

Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more past due. We generally place a loan on nonaccrual status and cease accruing interest income (i.e., recognize interest income on a cash basis, as long as the loan is sufficiently collateralized) when loan payment performance is unsatisfactory and the loan is past due 90 days or more. A loan is returned to interest accruing status when we determine that circumstances have improved to the extent that all of the principal and interest amounts contractually due are current for at least six consecutive payments and future payments are reasonably assured. Loans past due 90 days or more and still accruing interest represent loans that are contractually past due, but are well collateralized and in the process of collection. As of ~~September~~June 30, ~~2020,~~2021, the nonperforming loan portfolio balance totaled ~~$20,289,000,~~$39,990,000, compared to ~~$25,030,000~~$39,470,000 at year-end ~~2019, a decrease of $4,741,000.~~2020. During the first ~~nine~~six months of ~~2020,~~2021, loans totaling ~~$17,739,000~~$7,214,000 were transferred to nonaccrual status, offset by the transfer of loans out of nonaccrual status and payments to loans in nonaccrual status totaling approximately ~~$8,254,000 and charge offs totaling $15,728,000.~~$5,399,000. In addition, accruing loans 90 ~~day~~days or more past due ~~loans increased $1,502,000~~decreased $1,295,000 in the first ~~nine~~six months of ~~2020.~~2021. For both periods, the nonperforming portfolio balance was comprised primarily of collateralized commercial loans.

Foreclosed Real Estate

Foreclosed real estate represents real estate acquired to satisfy debts owed to PeoplesBank and is included in the Other Assets category on the Corporation’s balance sheet. As of ~~September~~June 30, 2021 and December 31, 2020 there was no foreclosed real estate compared to $797,000 at year-end 2019. The $797,000 decrease was the result of the disposition of one property totaling $797,000, also impacted by the addition and disposition of one property during the year.estate.

Troubled Debt Restructurings

Troubled debt restructurings pertain to loans whose terms have been modified to include a concession that we would not ordinarily consider due to the debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a reduction of interest rate lower than the current market rate for new debt with similar risk, the deferral of payments or extension of the stated maturity date. Troubled debt restructurings are evaluated for impairment if they have been restructured during the most recent calendar year, or if they cease to perform in accordance with the modified terms. As of ~~September~~June 30, ~~2020,~~2021, the accruing troubled debt restructuring portfolio balance totaled ~~$1,447,000,~~$1,058,000, compared to ~~$1,596,000~~$1,395,000 at year-end ~~2019.~~2020. The ~~$149,000~~$337,000 decrease was the result of principal repayments and the payoff of ~~$98,000~~one relationship.

As of June 30, 2021, there are no modifications remaining for consumer loans, four mortgage loans totaling approximately $1,422,000 and ~~a charge-off of $51,000.~~16 commercial loans totaling approximately $67,734,000 under the CARES Act, which are not considered TDRs.

- 5053 -

As of September 30, 2020, there are 3 modifications remaining for consumer loans totaling approximately $20,000, 12 mortgage loans totaling approximately $4,200,000 and 88 commercial loans totaling approximately $93,100,000 under the CARES Act, which are not considered TDRs.

Allowance for Loan Losses

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

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

The following ~~table~~tables presents an analysis of the activity in the allowance for loan losses for the ~~nine~~three and six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:



Table 10 - Analysis of Allowance for Loan Losses

(dollars in thousands)	2020			2019			2021			2020
Balance-January 1,	$	21,066		$	19,144
Balance-April 1,							$	22,411		$	22,838

Provision charged to operating expense		13,915			2,250			352			2,550

Loans charged off:
Commercial, financial and agricultural		13,952			78			814			4,360
Real estate - construction and land development		97			0			0			0
Consumer and home equity		73			272			7			7
Total loans charged off		14,122			350			821			4,367
Recoveries:
Commercial, financial and agricultural		17			9			65			3
Consumer and home equity		33			111			4			14
Total recoveries		50			120			69			17
Net charge-offs		14,072			230			752			4,350
Balance-September 30,	$	20,909		$	21,164
Balance-June 30,							$	22,011		$	21,038

Ratios:
Annualized net charge-offs as a % of average total loans		1.20	%		0.02	%		0.11	%		1.55	%
Allowance for loan losses as a % of total period-end loans		1.33	%		1.42	%		1.43	%		1.31	%
Allowance for loan losses as a % of nonperforming loans		103.06	%		65.95	%		55.04	%		100.62	%

- 54 -



Table 11 - Analysis of Allowance for Loan Losses

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

Provision charged to operating expense		1,583			2,550

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

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

The provision for loan losses ~~increased $11,665,000~~decreased $10,402,000 from ~~September~~June 30, ~~2019~~2020 to ~~September~~June 30, ~~2020.~~2021. The ~~increased~~decreased provision expense in ~~2020~~the first six months of 2021 was attributed primarily ~~due~~ to ~~partial charge offs on commercial lending relationships. Although some of the lending relationships did have specific reserve allocations to adequately cover the~~a partial charge off ~~historical loss factors were negatively impacted which increased the provision expense. One partial charge off~~arising from several large commercial lending relationships in the ~~first quarter 2020 did not have a specific reserve allocation, which also increased the provision expense. In addition, changes~~prior period. Changes in the external environment created by COVID-19 ~~caused management~~continue to ~~increase~~impact the qualitative factors for certain loan segments in the allowance for loan loss analysis, ~~which resulted in additional provision for loan losses during~~but to a lesser extent than the ~~year.~~prior period. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments.

Net charge-offs for the first ~~nine~~six months of ~~2020~~2021 were ~~$14,072,000~~$836,000 compared to ~~$230,000~~$12,013,000 for the same period in ~~2019.~~2020. During the first ~~nine~~six months of ~~2020,~~2021, there were ~~$14,122,000~~$925,000 of charge-offs as compared to ~~$350,000~~$12,053,000 during the same period in 2019. Although the provision expense increased, a portion of the charge-off was part of the specific reserve allocation in the previous two quarters; therefore, the overall allowance as a percentage of total loans decreased in the current period.2020. The risks and uncertainties associated

- 51 -

with the COVID-19 pandemic, weak economic and business conditions, or the erosion of real estate values may adversely affect our borrowers’ ability to service their loans, causing significant fluctuations in the level of charge-offs and provision expense from one period to another. The allowance as a percentage of total loans was ~~1.33~~1.43 percent at ~~September~~June 30, ~~2020,~~2021, as compared to ~~1.40~~1.38 percent at December 31, ~~2019~~2020 and ~~1.42~~1.31 percent at ~~September~~June 30, ~~2019. There was no unallocated portion of the allowance as of September 30, 2020, as compared to $112,000 or 0.5 percent of the total allowance as of September 30, 2019.~~2020.

Liquidity Risk Management

Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan clients, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, adequate liquidity provides funds for growth and business opportunities as they arise. Liquidity is generated from transactions relating to both the Corporation's assets and liabilities. The primary sources of asset liquidity are funds received from client loan payments, investment maturities and cash inflows from mortgage-backed securities, and the net proceeds of asset sales. The primary sources of liability liquidity are deposit growth, and funds obtained from short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows, included in this report, present the changes in cash from operating, investing and financing activities. At ~~September~~June 30, ~~2020,~~2021, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately ~~$9,496,000~~$46,969,000 and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately ~~$549,831,000.~~$543,800,000. The Corporation’s loan-to-deposit ratio was ~~approximately 85~~78.7 percent as of ~~September~~June 30, ~~2020, 95~~2021, 82.9 percent as of December 31, ~~2019~~2020 and 9688.7 percent as of ~~September~~June 30, ~~2019.~~2020.

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans, unfunded commitments under existing loan facilities, and letters of credit issued under the same standards as on-balance sheet instruments. Unused commitments on ~~September~~June 30, ~~2020,~~2021, totaled ~~$555,992,000~~$608,965,000 and consisted of ~~$464,998,000~~$505,154,000 in unfunded commitments under existing loan facilities, ~~$75,424,000~~$88,892,000 to grant new loans and ~~$15,570,000~~$14,919,000 in letters of credit. Generally these commitments have fixed expiration dates or termination clauses and are for specific purposes. Accordingly, many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

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Recent Legislative Developments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to ~~not apply ASC 310-40 (TDRs)~~temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a ~~loan modification, related specifically~~limited period of time to account for the effects of COVID-19, ~~hardships, including the flexibility to not classify~~provided the loan was not past due as ~~impaired for accounting purposes.~~ of December 31, 2019. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in Section 4013 of the CARES Act to January 1, 2022. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of ~~September~~June 30, ~~2020,~~2021, the Corporation has remaining loan modifications totaling approximately ~~$97 million.~~$69,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program, with outstanding PPP loans as of ~~September~~June 30, ~~2020~~2021 of approximately ~~$181 million.~~$99,000,000.

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

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”), amended certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as certain other statutes administered by the federal banking agencies Some of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holding companies include: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call

- 52 -

Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which requires higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.

Section 201 of the Regulatory Relief Act directed the federal banking agencies to develop a community bank leverage ratio (“CBLR”) of not less than 8% and not more than 10% for qualifying community banks and bank holding companies with total consolidated assets of less than $10 billion. Qualifying community banking organizations that exceed the CBLR level established by the agencies, and that elect to be covered by the CBLR framework, will be considered to have met: (i) the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules; (ii) the capital ratio requirements necessary to be considered “well capitalized” under the banking agencies’ prompt corrective action framework in the case of insured depository institutions; and (iii) any other applicable capital or leverage requirements.

On September 17, 2019, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve Board, and the FDIC adopted a rule to implement the provisions of Section 201 of the Regulatory Relief Act. Under the rule, a qualifying community banking organization would be defined as a deposit institution or depository institution holding company with less than $10 billion in assets and specified limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and certain temporary difference deferred tax assets. A qualifying community banking organization would be permitted to elect the CBLR framework if its CBLR is greater than 9%. The rule also addresses opting in and opting out of the CBLR framework by a community banking organization, the treatment of a community banking organization that falls below the CBLR requirements, and the effect of various CBLR levels for purposes of the prompt corrective action categories applicable to insured depository institutions. Advanced approaches banking organizations (generally, institutions with $250 billion or more in consolidated assets) are not eligible to use the CBLR framework.

The Corporation continues to analyze the changes implemented by the Regulatory Relief Act, including the CBLR framework included in the recently proposed rulemaking. The Corporation does not believe, however, that such changes will materially impact the Corporation’s business, operations, or financial results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

- 53 -

The following table summarizes the expected impact of interest rate shocks on net interest income as well as the Corporation’s policy limits at each level. All scenarios ~~with the exception of a decrease of 100 basis points~~ were within policy limits at ~~September~~June 30, ~~2020. The -100 scenario is expected to return within policy limits during 2020.~~2021.



Change in Interest Rates	Annual Change in Net		% Change in Net		% Change		Annual Change in Net		% Change in Net		% Change
(basis points)	Interest Income (in thousands)		Interest Income		Policy Limit		Interest Income (in thousands)		Interest Income		Policy Limit
+100	$	4,641	7.65	%	(5.00)	%	$	5,796	9.26	%	(5.00)	%
-100	$	(3,690)	(6.08)	%	(5.00)	%	$	(3,102)	(4.96)	%	(5.00)	%

+200	$	10,285	16.96	%	(15.00)	%	$	12,706	20.30	%	(15.00)	%
-200	$	(6,848)	(11.29)	%	(15.00)	%	$	(6,098)	(9.74)	%	(15.00)	%

+300	$	15,793	26.04	%	(25.00)	%	$	19,460	31.09	%	(25.00)	%

+400	$	21,342	35.19	%	(35.00)	%	$	26,240	41.93	%	(35.00)	%

‎

- 5456 -

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Treasurer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive and Chief Financial Officers concluded that, as of ~~September~~June 30, ~~2020,~~2021, the Corporation’s disclosure controls and procedures were effective. The Corporation’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. A control system, no matter how well conceived and operated, must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There has been no change in the Corporation’s internal control over financial reporting that occurred during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

~~Except for the risk factor described immediately below, there~~There have been no material changes to the risk factors as previously disclosed in Item 1A – Risk Factors – in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

~~Coronavirus Outbreak~~ – In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States.

In response, many state and local governments, including the Commonwealth of Pennsylvania and the State of Maryland, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. It has been widely reported that these restrictions have resulted in significant adverse effects for many different types of businesses, particularly those in the travel, hospitality and food and beverage industries, among many others, and has resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus outbreak, and there is no guarantee that the Corporation's efforts to address the adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation's business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation's financial reporting and internal controls; declines in the demand for loans and other banking services and products; declines in demand resulting from adverse impacts of the disease on businesses deemed to be "non-essential" by governments; and branch or office closures and business interruptions.

- 55 -

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

The Corporation relies on its subsidiary PeoplesBank, A Codorus Valley Company, for dividend distributions, which are subject to restrictions as reported in Note 9—Regulatory Matters of the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.



				Total Number of		Approximate Dollar					Total Number of		Approximate Dollar
				Shares Purchased as		Value of Shares that					Shares Purchased as		Value of Shares that
	Total Number			Part of Publicly		May Yet Be Purchased		Total Number			Part of Publicly		May Yet Be Purchased
	of Shares	Average Price		Announced Plans		Under the Plans or		of Shares	Average Price		Announced Plans		Under the Plans or
Period	Purchased	Paid per Share		or Programs		Programs		Purchased	Paid per Share		or Programs		Programs
July 1 - September 30, 2020	0	$	0		0	$	4,912,660
January 1 - 31, 2021								0	$	0		0	$	5,000,000
February 1 - 28, 2021								0	$	0		0	$	5,000,000
March 1 - 31, 2021								0	$	0		0	$	5,000,000
April 1 - 30, 2021								0	$	0		0	$	5,000,000
May 1 - 31, 2021								142,541	$	18.75		142,541	$	2,327,900
June 1 - 30, 2021								0	$	0		0	$	2,327,900

The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in ~~March 2020.~~January 2021. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. At the beginning of the second quarter 2020, and in response to COVID-19, the Corporation temporarily suspended the Program. There was no activity under the Program for the quarter ended September 30, 2020.

- 57 -

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

This Item 4 is not applicable to the Corporation.

Item 5. Other Information

None

‎

- 5658 -

Item 6. Exhibits


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

‎

- 5759 -

Signatures

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



		Codorus Valley Bancorp, Inc. (Registrant)


~~November~~August 2, ~~2020~~2021		/s/ Larry J. Miller
Date		Larry J. Miller,
		Chairman,President
		and Chief Executive Officer (Principal Executive Officer)


~~November~~August 2, ~~2020~~2021		/s/ Larry D. Pickett
Date		Larry D. Pickett, CPA
		Treasurer
		(Principal Financial and Accounting Officer)

- 5860 -



	Modifications
		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding		Recorded
	of	Recorded		Recorded		Investment
(dollars in thousands)	Contracts	Investments		Investments		at Period End
Three months ended:

September 30, 2020
None

September 30, 2019
None

Nine months ended:

September 30, 2020
None
September 30, 2019
Commercial related loans accruing	1	$	63	$	63	$	56



	Allowance for Loan Losses
	July 1, 2019								September 30, 2019
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,708	$	(8)	$	0	$	(495)	$	2,205
Commercial real estate investor		2,568		0		0		60		2,628
Residential real estate investor		3,888		0		3		33		3,924
Hotel/Motel		746		0		0		2		748
Wholesale & retail		3,482		(24)		0		144		3,602
Manufacturing		1,355		0		0		(74)		1,281
Agriculture		556		0		0		819		1,375
Other commercial		5,145		0		0		(380)		4,765
Total commercial related loans		20,448		(32)		3		109		20,528
Residential mortgage		137		0		0		13		150
Home equity		272		(30)		69		(97)		214
Other consumer		160		(35)		15		20		160
Total consumer related loans		569		(65)		84		(64)		524
Unallocated		157		0		0		(45)		112
Total	$	21,174	$	(97)	$	87	$	0	$	21,164



	Allowance for Loan Losses
	January 1, 2019								September 30, 2019
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,835	$	(8)	$	0	$	(622)	$	2,205
Commercial real estate investor		2,636		0		0		(8)		2,628
Residential real estate investor		3,945		0		9		(30)		3,924
Hotel/Motel		732		0		0		16		748
Wholesale & retail		1,813		(24)		0		1,813		3,602
Manufacturing		1,287		0		0		(6)		1,281
Agriculture		579		0		0		796		1,375
Other commercial		4,063		(46)		0		748		4,765
Total commercial related loans		17,890		(78)		9		2,707		20,528
Residential mortgage		126		0		0		24		150
Home equity		265		(147)		71		25		214
Other consumer		144		(125)		40		101		160
Total consumer related loans		535		(272)		111		150		524
Unallocated		719		0		0		(607)		112
Total	$	19,144	$	(350)	$	120	$	2,250	$	21,164



December 31, 2019
Builder & developer	$	238	$	2,025	$	2,263	$	1,094	$	158,218	$	159,312
Commercial real estate investor		0		2,565		2,565		1,370		205,857		207,227
Residential real estate investor		1,873		2,759		4,632		5,771		242,198		247,969
Hotel/Motel		0		742		742		0		80,260		80,260
Wholesale & retail		2,537		1,038		3,575		7,457		101,781		109,238
Manufacturing		463		789		1,252		1,135		85,376		86,511
Agriculture		701		603		1,304		2,842		77,877		80,719
Other commercial		1,608		2,596		4,204		5,499		307,872		313,371
Total commercial related		7,420		13,117		20,537		25,168		1,259,439		1,284,607
Residential mortgage		0		158		158		275		94,593		94,868
Home equity		0		203		203		677		100,150		100,827
Other consumer		0		167		167		226		24,607		24,833
Total consumer related		0		528		528		1,178		219,350		220,528
Unallocated		0		1		1		0		0		0
Total	$	7,420	$	13,646	$	21,066	$	26,346	$	1,478,789	$	1,505,135