Codorus Valley Bancorp (CVLY) 10-Q 2011 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period endedJune 30, 2011

or

o 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

(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.)

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. Yesx Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yesx Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
	Large accelerated filero	Accelerated filero
	Non-accelerated filero	Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Nox

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 August 1, 2011, 4,161,759 shares of common stock, par value $2.50, were outstanding.

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Codorus Valley Bancorp, Inc.
Form 10-Q Index

		Page #
PART I – FINANCIAL INFORMATION
Item 1.	Financial statements (unaudited):
	Consolidated balance sheets	3
	Consolidated statements of income	4
	Consolidated statements of cash flows	5
	Consolidated statements of changes in shareholders’ equity	6
	Notes to consolidated financial statements	7
Item 2.	Management’s discussion and analysis of financial condition and results of operations	30
Item 3.	Quantitative and qualitative disclosures about market risk	51
Item 4.	Controls and procedures	51
PART II – OTHER INFORMATION
Item 1.	Legal proceedings	51
Item 1A.	Risk factors	51
Item 2.	Unregistered sales of equity securities and use of proceeds	51
Item 3.	Defaults upon senior securities	51
Item 4.	Removed and Reserved	51
Item 5.	Other information	51
Item 6.	Exhibits	52
SIGNATURES		53

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
Unaudited

(dollars in thousands, except share and per share data)	June 30, 2011			December 31, 2010
Assets
Interest bearing deposits with banks	$	93		$	32,219
Cash and due from banks		11,435			8,050
Federal funds sold		0			3,000
Total cash and cash equivalents		11,528			43,269
Securities, available-for-sale		235,968			222,536
Restricted investment in bank stocks, at cost		3,677			4,067
Loans held for sale		966			4,990
Loans (net of deferred fees of $723 - 2011 and $713 - 2010)		680,069			640,849
Less-allowance for loan losses		(8,351	)		(7,626	)
Net loans		671,718			633,223
Premises and equipment, net		10,633			10,766
Other assets		42,755			38,481
Total assets	$	977,245		$	957,332
Liabilities
Deposits
Noninterest bearing	$	71,388		$	65,642
Interest bearing		760,815			740,468
Total deposits		832,203			806,110
Short-term borrowings		10,796			6,763
Long-term debt		33,830			51,732
Junior subordinated debt		10,310			10,310
Other liabilities		8,570			5,878
Total liabilities		895,709			880,793
Shareholders’ equity
Preferred stock, par value $2.50 per share; $1,000 liquidation preference, 1,000,000 shares authorized; 16,500 shares issued and outstanding - 2011 and 2010		16,061			15,983
Common stock, par value $2.50 per share; 10,000,000 shares authorized; 4,162,627 shares issued and outstanding - 2011 and 4,131,802 - 2010		10,407			10,330
Additional paid-in capital		37,662			37,290
Retained earnings		12,986			10,798
Accumulated other comprehensive income		4,420			2,138
Total shareholders’ equity		81,536			76,539
Total liabilities and shareholders’ equity	$	977,245		$	957,332
See accompanying notes.

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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited

	Three months ended June 30,				Six months ended June 30,
(dollars in thousands, except per share data)	2011		2010		2011			2010
Interest income
Loans, including fees	$	9,600	$	9,517	$	18,912		$	18,647
Investment securities:
Taxable		1,045		799		1,987			1,628
Tax-exempt		606		583		1,242			1,168
Dividends		2		1		4			4
Other		10		20		25			28
Total interest income		11,263		10,920		22,170			21,475
Interest expense
Deposits		2,839		2,781		5,674			5,610
Federal funds purchased and other short-term borrowings		25		22		53			42
Long-term and junior subordinated debt		263		429		543			897
Total interest expense		3,127		3,232		6,270			6,549
Net interest income		8,136		7,688		15,900			14,926
Provision for loan losses		550		630		1,225			1,350
Net interest income after provision for loan losses		7,586		7,058		14,675			13,576
Noninterest income
Trust and investment services fees		383		373		740			719
Income from mutual fund, annuity and insurance sales		241		443		583			762
Service charges on deposit accounts		676		649		1,277			1,211
Income from bank owned life insurance		160		161		325			319
Other income		159		132		300			286
Gains on sales of loans held for sale		120		217		296			361
Gain (loss) on sales of securities		0		108		(25	)		108
Total noninterest income		1,739		2,083		3,496			3,766
Noninterest expense
Personnel		3,433		3,213		6,964			6,419
Occupancy of premises, net		487		493		984			994
Furniture and equipment		422		419		871			859
Postage, stationery and supplies		129		162		269			277
Professional and legal		173		138		275			244
Marketing and advertising		233		223		383			350
FDIC insurance		218		316		562			624
Debit card processing		165		145		319			280
Charitable donations		8		27		235			356
Foreclosed real estate including (gains) losses on sales		606		911		1,091			984
Impaired loan carrying costs		160		387		426			583
Other		898		808		1,591			1,356
Total noninterest expense		6,932		7,242		13,970			13,326
Income before income taxes		2,393		1,899		4,201			4,016
Provision for income taxes		521		274		818			680
Net income		1,872		1,625		3,383			3,336
Preferred stock dividends and discount accretion		246		245		491			490
Net income available to common shareholders	$	1,626	$	1,380	$	2,892		$	2,846
Net income per common share, basic	$	0.39	$	0.34	$	0.70		$	0.70
Net income per common share, diluted	$	0.39	$	0.34	$	0.69		$	0.70
See accompanying notes.

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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited

	Six months ended June 30,
(dollars in thousands)	2011			2010
Cash flows from operating activities
Net income	$	3,383		$	3,336
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/amortization		652			689
Net amortization of securities		724			464
Amortization of deferred loan origination fees and costs		(132	)		(166	)
Amortization of intangible assets		19			20
Provision for loan losses		1,225			1,350
Provision for losses on foreclosed real estate		235			722
Deferred income tax expense (benefit)		(21	)		34
Amortization of investment in real estate partnership		291			281
Increase in cash surrender value of life insurance investment		(325	)		(319	)
Originations of loans held for sale		(16,266	)		(21,036	)
Proceeds from sales of loans held for sale		20,585			20,994
Net gain on sales of loans held for sale		(296	)		(361	)
Loss on disposal of premises and equipment		1			8
Net loss (gain) on sales of securities available-for-sale		25			(108	)
Gain on sales of held for sale assets		0			(35	)
Net gain on sales of foreclosed real estate		(45	)		(110	)
Stock-based compensation expense		157			67
Decrease in accrued interest receivable		54			165
(Increase) decrease in other assets		(242	)		399
Decrease in accrued interest payable		(25	)		(50	)
Increase in other liabilities		2,722			4,387
Net cash provided by operating activities		12,721			10,731
Cash flows from investing activities
Securities, available-for-sale
Purchases		(34,296	)		(33,567	)
Maturities, repayments and calls		17,495			18,246
Sales		6,077			4,845
Redemption of restricted investment in bank stock		390			0
Net increase in loans made to customers		(41,281	)		(9,626	)
Purchases of premises and equipment		(520	)		(420	)
Investment in foreclosed real estate		(4,190	)		(50	)
Proceeds from sales of foreclosed real estate		464			7,395
Net cash used in investing activities		(55,861	)		(13,177	)
Cash flows from financing activities
Net increase in demand and savings deposits		29,412			29,985
Net (decrease) increase in time deposits		(3,319	)		4,955
Net increase in short-term borrowings		4,033			1,924
Repayment of long-term debt		(17,902	)		(21,626	)
Cash dividends paid to preferred shareholders		(413	)		(413	)
Cash dividends paid to common shareholders		(704	)		(367	)
Issuance of common stock		292			111
Net cash provided by financing activities		11,399			14,569
Net (decrease) increase in cash and cash equivalents		(31,741	)		12,123
Cash and cash equivalents at beginning of year		43,269			26,179
Cash and cash equivalents at end of period	$	11,528		$	38,302
See accompanying notes.

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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Unaudited

(dollars in thousands, except per share data)	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance, January 1, 2011	$	15,983	$	10,330	$	37,290	$	10,798		$	2,138	$	76,539
Comprehensive income:
Net income								3,383					3,383
Other comprehensive gain, net of tax:
Unrealized gains on securities, net											2,282		2,282
Total comprehensive income													5,665
Preferred stock discount accretion		78						(78	)				0
Common stock cash dividends ($0.17 per share)								(704	)				(704	)
Preferred stock dividends								(413	)				(413	)
Stock-based compensation						157							157
Issuance of common stock:
12,853 shares under dividend reinvestment and stock purchase plan				32		105							137
12,642 shares under stock option plan				32		81							113
5,330 shares under employee stock purchase plan				13		29							42
Balance, June 30, 2011	$	16,061	$	10,407	$	37,662	$	12,986		$	4,420	$	81,536
Balance, January 1, 2010	$	15,828	$	10,187	$	37,004	$	6,592		$	2,401	$	72,012
Comprehensive income:
Net income								3,336					3,336
Other comprehensive gain, net of tax:
Unrealized gains on securities, net											1,728		1,728
Total comprehensive income													5,064
Preferred stock discount accretion		77						(77	)				0
Common stock cash dividends ($0.09 per share)								(367	)				(367	)
Preferred stock dividends								(413	)				(413	)
Stock-based compensation						67							67
Issuance of common stock:
10,627 shares under dividend reinvestment and stock purchase plan				26		48							74
7,930 shares under employee stock purchase plan				20		17							37
Balance, June 30, 2010	$	15,905	$	10,233	$	37,136	$	9,071		$	4,129	$	76,474
See accompanying notes.

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Notes to Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2010 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 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 are of a normal and recurring nature.

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, 2010.

The consolidated financial statements include the accounts of Codorus Valley Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank), and its wholly owned nonbank subsidiary, SYC Realty Company, Inc. (collectively referred to as Codorus Valley or the Corporation). PeoplesBank has four wholly-owned subsidiaries, Codorus Valley Financial Advisors, Inc. and SYC Settlement Services, Inc. and two subsidiaries whose purpose is to temporarily hold foreclosed properties pending eventual liquidation. All significant intercompany account balances and transactions have been eliminated in consolidation. The combined results of operations of the nonbank subsidiaries are not material to the consolidated financial statements.

The results of operations for the six-month period ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year.

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of June 30, 2011, and through the date these financial statements were issued for potential recognition or disclosure.

Note 2—Significant Accounting Policies

Loans

Loans 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 loan 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 and all other. Consumer loans consist of the following classes: residential mortgage, home equity and all other.

For all classes of loans, 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 is currently performing. A loan may remain on accrual status if it is in the process of collection and is either adequately guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. 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, 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 is determined based on contractual due dates for loan payments.

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Allowance for Loan Losses

The allowance for loan losses represents our 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 uncollectible 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 are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. 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 allocations and an unallocated component. The specific allocation relates to loans that are classified as impaired, generally substandard and nonaccrual loans. 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 allocation component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative (environmental) risk factors. Historical loss rates are based on a two year rolling average of net charge-offs. Qualitative risk factors that supplement historical losses in the evaluation of loan pools include:

• Changes in national 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

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. An unallocated component is maintained to cover uncertainties that could affect the Corporation’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

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As disclosed in Note 5-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 loans or participation interests in loans from other financial institutions. Commercial related 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 increased 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.

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. Commercial loans that are collateral dependent and deemed impaired are generally evaluated for impairment loss based on the fair value of the collateral. For commercial loans that are not collateral dependent, we rely on the present value of expected future cash flows, discounted at the loan’s effective interest rate, to determine any impairment loss. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value less estimated selling costs (i.e., net realizable value). For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. 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 original appraisal and the condition of the property. Appraised values 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.

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 a reduction of the debt, accrued interest or interest rate, or extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk. 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. Loans classified as troubled debt restructurings are designated as impaired.

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Federal regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to the Corporation. Based on a comprehensive analysis of the loan portfolio, the Corporation believes that the current level of the allowance for loan losses is adequate.

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding, property that is acquired through acceptance of a deed-in-lieu of foreclosure and property that has not yet been acquired but which is classified as an insubstance 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. Appraisals 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. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition. Revenue and expense from operations and changes in the valuation allowance are included in expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At June 30, 2011, foreclosed real estate, net of allowance was $15,801,000, compared to $10,572,000 for December 31, 2010.

Per Common Share Computations

The weighted average number of shares of common stock outstanding used for basic and diluted calculations are provided below:

	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2011		2010		2011		2010
Net income available to common shareholders	$	1,626	$	1,380	$	2,892	$	2,846
Weighted average shares outstanding (basic)		4,150		4,083		4,144		4,080
Effect of dilutive stock options		58		11		51		2
Weighted average shares outstanding (diluted)		4,208		4,094		4,195		4,082
Basic earnings per common share	$	0.39	$	0.34	$	0.70	$	0.70
Diluted earnings per common share	$	0.39	$	0.34	$	0.69	$	0.70
Anti-dilutive stock options and common stock warrants excluded from the computation of earnings per share		83		421		83		421

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Comprehensive Income

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

	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2011			2010			2011			2010
Unrealized holding gains arising during the period	$	3,066		$	2,034		$	3,432		$	2,726
Reclassification adjustment for (gains) losses included in income		0			(108	)		25			(108	)
Net unrealized gains		3,066			1,926			3,457			2,618
Tax effect		(1,042	)		(655	)		(1,175	)		(890	)
Net of tax amount	$	2,024		$	1,271		$	2,282		$	1,728

Cash Flow Information

For purposes of the statements of cash flows, the Corporation considers interest bearing deposits with banks, cash and due from banks, and federal funds sold to be cash and cash equivalents. Noncash items for the six-month period ended June 30, 2011 consisted of the transfer of loans to foreclosed real estate in the amount of $1,693,000. The increase in other liabilities includes pre-funded client ACH disbursements of $1,883,000 and accounts payable for investment in foreclosed real estate of $545,000. Comparatively, for the six-month period ended June 30, 2010, non-cash items consisted of the transfer of loans to foreclosed real estate in the amount of $8,291,000 and the transfer of loans held for sale to investment in the amount of $160,000.

Recent Accounting Pronouncements

The FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The provisions of this Update amend FASB ASC Topic 220,Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The Update prohibits the presentation of the components of comprehensive income in the statement of shareholders’ equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all 3 presentations were acceptable. Regardless of the presentation selected, the reporting entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this Update are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. As the two remaining options for presentation existed prior to the issuance of this Update, early adoption is permitted. The Corporation is evaluating the impact of the Update on its consolidated financial statements.

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The FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRSs.” This Update amends FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The Update clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The Update also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The Update also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. This Update is effective for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Corporation is evaluating the impact of this Update on its consolidated financial statements.

The FASB issued ASU No. 2011-02, “Receivables” (Topic 310) – “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” to clarify the accounting principles applied to loan modifications as defined by FASB ASC Subtopic 310-40, “Receivables – Troubled Debt Restructurings by Creditors.” This guidance was prompted by the increased volume of loan modifications prompted by the prolonged economic downturn. The Update clarifies guidance on a creditor’s evaluation of whether or not a concession has been granted, with an emphasis on evaluating all aspects of the modification rather than a focus on specific criteria, such as the effective interest rate test, to determine a concession. The Update goes on to provide guidance on specific types of modifications such as changes in the interest rate of the borrowing, and insignificant delays in payments, as well as guidance on the creditor’s evaluation of whether or not a debtor is experiencing financial difficulties. For public entities, the amendments in the Update are effective for the first interim or annual periods beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The entity should also disclose related information required by ASU 2010-20. The requirements of this ASU will expand disclosures related to troubled debt restructurings and is not expected to have a material impact on the Corporation’s consolidated financial statements.

In November 2008, the Securities and Exchange Commission (SEC) released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, the Corporation may be required to prepare financial statements in accordance with IFRS as early as 2015. The SEC has indicated it will make a determination in 2011 regarding the mandatory adoption of IFRS. The Corporation is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

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Note 3-Securities

A summary of securities, available-for-sale at June 30, 2011 and December 31, 2010 is provided below:

	Amortized Cost							Estimated Fair Value
			Gross Unrealized
(dollars in thousands)			Gains		Losses
June 30, 2011
Debt securities:
U.S. Treasury notes	$	10,006	$	146	$	0		$	10,152
U.S. agency		29,631		513		0			30,144
U.S. agency mortgage-backed, residential		107,088		3,061		(104	)		110,045
State and municipal		82,546		3,115		(34	)		85,627
Total debt securities	$	229,271	$	6,835	$	(138	)	$	235,968
December 31, 2010
Debt securities:
U.S. Treasury notes	$	8,014	$	126	$	0		$	8,140
U.S. agency		13,519		155		(31	)		13,643
U.S. agency mortgage-backed, residential		108,967		2,213		(827	)		110,353
State and municipal		88,796		2,079		(475	)		90,400
Total debt securities	$	219,296	$	4,573	$	(1,333	)	$	222,536

The amortized cost and estimated fair value of debt securities at June 30, 2011 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
(dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	11,575	$	11,700
Due after one year through five years		138,283		143,349
Due after five years through ten years		75,590		77,065
Due after ten years		3,823		3,854
Total debt securities	$	229,271	$	235,968

Gross realized gains and losses on sales of securities are shown below.

	Three months ended June 30,				Six months ended June 30,
(dollars in thousands)	2011		2010		2011			2010
Realized gains	$	0	$	108	$	79		$	108
Realized losses		0		0		(104	)		0
Net gains (losses)	$	0	$	108	$	(25	)	$	108

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Realized gains and losses from the sale of securities, available-for-sale 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.

Securities, issued by agencies of the federal government, with a carrying value of $120,581,000 and $125,785,000 on June 30, 2011 and December 31, 2010, respectively, were pledged to secure public and trust deposits, repurchase agreements, other short-term borrowings and Federal Home Loan Bank debt.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities, available-for-sale that have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010.

	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2011
Debt securities:
U.S. agency mortgage-backed, residential	$	34,449	$	104	$	0	$	0	$	34,449	$	104
State and municipal		3,243		20		381		14		3,624		34
Total temporarily impaired debt securities	$	37,692	$	124	$	381	$	14	$	38,073	$	138
December 31, 2010
Debt securities:
U.S. agencies	$	4,969	$	31	$	0	$	0	$	4,969	$	31
U.S. agency mortgage-backed, residential		50,982		827		0		0		50,982		827
State and municipal		20,382		429		350		46		20,732		475
Total temporarily impaired debt securities	$	76,333	$	1,287	$	350	$	46	$	76,683	$	1,333

At June 30, 2011, the unrealized losses within the less than 12 months category of $124,000 were attributable to seven U.S. agency securities rated AAA and seven different municipal issues rated AA by the Standard and Poor rating service. Unrealized losses of $14,000 in the 12 months or more category was attributed to a single municipal security rated Aa2 by the Moody’s rating service.

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

The Corporation believes that unrealized losses at June 30, 2011 were primarily the result of changes in market interest rates and that it has the ability to hold these investments for a time necessary to recover the amortized cost. To date, the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and therefore, all impairment is considered to be temporary.

Note 4—Restricted Investment in Bank Stocks

Restricted stock represents required investments in the common stock of correspondent banks, consisting primarily of the common stock of Federal Home Loan Bank of Pittsburgh (FHLB) and, to a lesser degree, Atlantic Central Bankers Bank (ACBB) and is carried at cost as of June 30, 2011 and December 31, 2010. Under the FHLB’s Capital Plan, PeoplesBank is required to maintain a minimum member stock investment, both as a condition of becoming and remaining a member and as a condition of borrowing from the FHLB. In December 2008, the FHLB notified member banks that it was suspending dividend payments and the repurchase of capital stock as strategies to preserve its capital. During 2010, the FHLB partially lifted its restriction on capital stock repurchases.

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The Corporation evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. The determination of whether these investments are impaired is based on an assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as: (1) the significance of the decline in net assets of the issuer as compared to the capital stock amount for the issuer and the length of time this situation has persisted, (2) commitments by the issuer to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuer, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuer. We believe that no impairment charge was necessary related to the restricted stock during the periods ended June 30, 2011 and 2010.

Note 5—Loans

The table below provides the composition of the loan portfolio at June 30, 2011 and December 31, 2010. The portfolio is comprised of two segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows us to monitor risk and performance. Those industries representing the largest dollar investment and most risk are listed separately. The other commercial loans category is comprised of a multitude of industries, including: health services, professional services, public administration, restaurant, service, transportation, finance, natural resources, recreation and religious organizations. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation does not engage in sub-prime residential mortgage originations.

(dollars in thousands)	June 30, 2011		December 31, 2010
Builder & developer	$	104,188	$	95,735
Commercial real estate investor		108,121		95,281
Residential real estate investor		59,792		55,930
Hotel/Motel		49,931		48,041
Wholesale & retail		50,589		44,963
Manufacturing		25,202		24,989
Agriculture		16,675		14,247
Other		134,154		136,198
Total commercial related loans		548,652		515,384
Residential mortgage		21,697		20,357
Home equity		57,838		56,294
Other		51,882		48,814
Total consumer related loans		131,417		125,465
Total loans	$	680,069	$	640,849

Note 6— Loan Quality

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans and residential mortgages held for investment are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer loans, and commercial loans up to $750,000, the Corporation uses third-party credit scoring software models 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 are generally performed by the Special Asset Committee, which includes senior management. The Committee, which meets monthly, 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.

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The Corporation uses ten risk ratings to grade loans. The first seven ratings, representing the lowest risk, are combined and given a “pass” rating. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current net worth or paying capacity of the borrower 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 loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk rated “nonaccrual” and the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. Accordingly, 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.

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The table below presents a summary of loan risk ratings by loan class at June 30, 2011 and December 31, 2010.

(dollars in thousands)	Pass		Special Mention		Substandard		Nonaccrual		Total
June 30, 2011
Builder & developer	$	94,477	$	1,522	$	460	$	7,729	$	104,188
Commercial real estate investor		95,449		10,484		365		1,823		108,121
Residential real estate investor		57,107		2,109		73		503		59,792
Hotel/Motel		49,931		0		0		0		49,931
Wholesale & retail		42,005		2,323		1,419		4,842		50,589
Manufacturing		24,472		730		0		0		25,202
Agriculture		16,177		0		498		0		16,675
Other		118,290		9,087		2,805		3,972		134,154
Total commercial related loans		497,908		26,255		5,620		18,869		548,652
Residential mortgage		21,382		0		42		273		21,697
Home equity		57,549		81		188		20		57,838
Other		50,747		417		313		405		51,882
Total consumer related loans		129,678		498		543		698		131,417
Total loans	$	627,586	$	26,753	$	6,163	$	19,567	$	680,069
December 31, 2010
Builder & developer	$	84,409	$	2,647	$	453	$	8,226	$	95,735
Commercial real estate investor		85,420		9,534		148		179		95,281
Residential real estate investor		55,346		94		0		490		55,930
Hotel/Motel		48,041		0		0		0		48,041
Wholesale & retail		37,252		1,850		1,019		4,842		44,963
Manufacturing		24,989		0		0		0		24,989
Agriculture		13,747		0		500		0		14,247
Other		123,965		6,300		1,913		4,020		136,198
Total commercial related loans		473,169		20,425		4,033		17,757		515,384
Residential mortgage		20,109		0		43		205		20,357
Home equity		56,183		12		0		99		56,294
Other		47,933		418		0		463		48,814
Total consumer related loans		124,225		430		43		767		125,465
Total loans	$	597,394	$	20,855	$	4,076	$	18,524	$	640,849

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The table below presents a summary of impaired loans at June 30, 2011 and December 31, 2010. Generally, impaired loans are loans risk rated substandard and nonaccrual. An allowance is established for those individual loans where the Corporation has doubt as to full recovery of the outstanding principal balance. The recorded investment represents outstanding unpaid principal loan balances adjusted for charge-offs.

	June 30, 2011						December 31, 2010
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance:
Builder & developer	$	5,721	$	5,721	$	0	$	8,260	$	8,260	$	0
Commercial real estate investor		2,020		2,020		0		0		0		0
Residential real estate investor		483		483		0		394		394		0
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,419		1,419		0		1,019		1,019		0
Manufacturing		0		0		0		0		0		0
Agriculture		0		0		0		0		0		0
Other commercial		6,075		6,091		0		5,219		5,219		0
Residential mortgage		315		385		0		248		294		0
Home equity		208		208		0		99		99		0
Other consumer		718		718		0		463		463		0
Total impaired loans with no related allowance	$	16,959	$	17,045	$	0	$	15,702	$	15,748	$	0
Impaired loans with a related allowance:
Builder & developer	$	2,468	$	2,468	$	672	$	419	$	419	$	25
Commercial real estate investor		168		268		25		327		427		185
Residential real estate investor		93		93		30		96		96		10
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		4,842		4,842		675		4,842		4,842		675
Manufacturing		0		0		0		0		0		0
Agriculture		498		498		100		500		500		100
Other commercial		702		702		200		714		714		200
Residential mortgage		0		0		0		0		0		0
Home equity		0		0		0		0		0		0
Other consumer		0		0		0		0		0		0
Total impaired loans with a related allowance	$	8,771	$	8,871	$	1,702	$	6,898	$	6,998	$	1,195
Total impaired loans:
Builder & developer	$	8,189	$	8,189	$	672	$	8,679	$	8,679	$	25
Commercial real estate investor		2,188		2,288		25		327		427		185
Residential real estate investor		576		576		30		490		490		10
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		6,261		6,261		675		5,861		5,861		675
Manufacturing		0		0		0		0		0		0
Agriculture		498		498		100		500		500		100
Other commercial		6,777		6,793		200		5,933		5,933		200
Residential mortgage		315		385		0		248		294		0
Home equity		208		208		0		99		99		0
Other consumer		718		718		0		463		463		0
Total impaired loans	$	25,730	$	25,916	$	1,702	$	22,600	$	22,746	$	1,195

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The table below presents a summary of average impaired loans and related interest income for three and six months ended June 30, 2011.

	Three months ended June 30, 2011						Six months ended June 30, 2011
(dollars in thousands)	Average Recorded Investment		Interest Income		Cash Basis		Average Recorded Investment		Interest Income		Cash Basis
Impaired loans with no related allowance:
Builder & developer	$	6,081	$	156	$	150	$	6,807	$	232	$	220
Commercial real estate investor		1,010		15		12		673		14		12
Residential real estate investor		438		0		0		423		0		0
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,219		22		0		1,152		40		0
Manufacturing		0		0		0		0		0		0
Agriculture		0		0		0		0		0		0
Other commercial		5,658		111		89		5,512		237		199
Residential mortgage		316		5		4		293		10		9
Home equity		114		0		0		109		0		0
Other consumer		616		8		3		565		19		10
Total impaired loans with no related allowance	$	15,452	$	317	$	258	$	15,534	$	552	$	450
Impaired loans with a related allowance:
Builder & developer	$	1,517	$	7	$	7	$	1,151	$	12	$	12
Commercial real estate investor		171		0		0		223		0		0
Residential real estate investor		94		0		0		95		0		0
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		4,842		0		0		4,842		0		0
Manufacturing		0		0		0		0		0		0
Agriculture		499		9		0		499		18		0
Other commercial		705		8		0		708		15		0
Residential mortgage		0		0		0		0		0		0
Home equity		0		0		0		0		0		0
Other consumer		0		0		0		0		0		0
Total impaired loans with a related allowance	$	7,828	$	24	$	7	$	7,518	$	45	$	12
Total impaired loans:
Builder & developer	$	7,598	$	163	$	157	$	7,958	$	244	$	232
Commercial real estate investor		1,181		15		12		896		14		12
Residential real estate investor		532		0		0		518		0		0
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		6,061		22		0		5,994		40		0
Manufacturing		0		0		0		0		0		0
Agriculture		499		9		0		499		18		0
Other commercial		6,363		119		89		6,220		252		199
Residential mortgage		316		5		4		293		10		9
Home equity		114		0		0		109		0		0
Other consumer		616		8		3		565		19		10
Total impaired loans	$	23,280	$	341	$	265	$	23,052	$	597	$	462

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The performance and credit quality of the loan portfolio is also monitored by using an aging schedule which shows the length of time a loan is past due. The table below presents a summary of past due loans, current loans and nonaccrual loans by loan segment and class at June 30, 2011 and December 31, 2010. Both periods include one troubled debt restructuring which is included in nonaccrual loans within the other commercial related loans class.

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Nonaccrual		Current		Total Loans
June 30, 2011
Builder & developer	$	2,030	$	2,289	$	0	$	4,319	$	7,729	$	92,140	$	104,188
Commercial real estate investor		0		0		0		0		1,823		106,298		108,121
Residential real estate investor		0		56		0		56		503		59,233		59,792
Hotel/Motel		0		0		0		0		0		49,931		49,931
Wholesale & retail		0		1,016		0		1,016		4,842		44,731		50,589
Manufacturing		0		0		0		0		0		25,202		25,202
Agriculture		0		0		0		0		0		16,675		16,675
Other		10		501		0		511		3,972		129,671		134,154
Total commercial related loans		2,040		3,862		0		5,902		18,869		523,881		548,652
Residential mortgage		0		0		0		0		273		21,424		21,697
Home equity		0		15		0		15		20		57,803		57,838
Other		530		78		168		776		405		50,701		51,882
Total consumer related loans		530		93		168		791		698		129,928		131,417
Total loans	$	2,570	$	3,955	$	168	$	6,693	$	19,567	$	653,809	$	680,069
December 31, 2010
Builder & developer	$	33	$	370	$	0	$	403	$	8,226	$	87,106	$	95,735
Commercial real estate investor		0		0		0		0		179		95,102		95,281
Residential real estate investor		212		0		0		212		490		55,228		55,930
Hotel/Motel		0		0		0		0		0		48,041		48,041
Wholesale & retail		0		0		0		0		4,842		40,121		44,963
Manufacturing		0		0		0		0		0		24,989		24,989
Agriculture		0		0		0		0		0		14,247		14,247
Other		0		392		0		392		4,020		131,786		136,198
Total commercial related loans		245		762		0		1,007		17,757		496,620		515,384
Residential mortgage		0		409		0		409		205		19,743		20,357
Home equity		264		50		0		314		99		55,881		56,294
Other		304		43		197		544		463		47,807		48,814
Total consumer related loans		568		502		197		1,267		767		123,431		125,465
Total loans	$	813	$	1,264	$	197	$	2,274	$	18,524	$	620,051	$	640,849

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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 three and six months ended June 30, 2011 and in summary fashion for the same periods of 2010.

(dollars in thousands)	Builder & developer			Commercial real estate investor		Residential real estate investor			Hotel/Motel		Wholesale & retail			Manufacturing		Agriculture		Other		Total commercial related
Allowance for loan losses:
Balance, April 1,	$	1,801		$	1,705	$	700		$	345	$	1,011		$	150	$	167	$	1,014	$	6,893
Charge-offs		(25	)		0		0			0		0			0		0		0		(25	)
Recoveries		0			0		0			0		1			0		0		1		2
Provisions		600			192		(112	)		52		(74	)		1		22		144		825
Balance, June 30,	$	2,376		$	1,897	$	588		$	397	$	938		$	151	$	189	$	1,159	$	7,695

(dollars in thousands)	Residential mortgage			Home equity			Other			Total consumer related			Unallocated			2011			2010
Allowance for loan losses:
Balance, April 1,	$	130		$	244		$	262		$	636		$	327		$	7,856		$	7,711
Charge-offs		0			0			(42	)		(42	)		0			(67	)		(2,041	)
Recoveries		0			7			3			10			0			12			66
Provisions		(57	)		(96	)		(39	)		(192	)		(83	)		550			630
Balance, June 30,	$	73		$	155		$	184		$	412		$	244		$	8,351		$	6,366

(dollars in thousands)	Builder & developer			Commercial real estate investor		Residential real estate investor			Hotel/Motel		Wholesale & retail			Manufacturing			Agriculture		Other			Total commercial related
Allowance for loan losses:
Balance, January 1,	$	1,561		$	1,887	$	698		$	345	$	843		$	155		$	175	$	1,123		$	6,787
Charge-offs		(33	)		0		0			0		(146	)		0			0		(39	)		(218	)
Recoveries		0			0		0			0		1			0			0		1			2
Provisions		848			10		(110	)		52		240			(4	)		14		74			1,124
Balance, June 30,	$	2,376		$	1,897	$	588		$	397	$	938		$	151		$	189	$	1,159		$	7,695

(dollars in thousands)	Residential mortgage			Home equity			Other			Total consumer related			Unallocated			2011			2010
Allowance for loan losses:
Balance, January 1,	$	30		$	83		$	201		$	314		$	525		$	7,626		$	7,175
Charge-offs		(56	)		(164	)		(75	)		(295	)		0			(513	)		(2,249	)
Recoveries		0			7			4			11			0			13			90
Provisions		99			229			54			382			(281	)		1,225			1,350
Balance, June 30,	$	73		$	155		$	184		$	412		$	244		$	8,351		$	6,366

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The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment at June 30, 2011 and December 31, 2010.

(dollars in thousands)	Builder & developer		Commercial real estate investor		Residential real estate investor		Hotel/Motel		Wholesale & retail		Manufacturing		Agriculture		Other		Total commercial related
Allowance for loan losses:
Individually evaluated for impairment	$	672	$	25	$	30	$	0	$	675	$	0	$	100	$	200	$	1,702
Collectively evaluated for impairment		1,704		1,872		558		397		263		151		89		959		5,993
Balance, June 30, 2011	$	2,376	$	1,897	$	588	$	397	$	938	$	151	$	189	$	1,159	$	7,695
Loans:
Individually evaluated for impairment	$	8,189	$	2,188	$	576	$	0	$	6,261	$	0	$	498	$	6,777	$	24,489
Collectively evaluated for impairment		95,999		105,933		59,216		49,931		44,328		25,202		16,177		127,377		524,163
Balance, June 30, 2011	$	104,188	$	108,121	$	59,792	$	49,931	$	50,589	$	25,202	$	16,675	$	134,154	$	548,652

(dollars in thousands)	Residential mortgage		Home equity		Other		Total consumer related		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	1,702
Collectively evaluated for impairment		73		155		184		412		244		6,649
Balance, June 30, 2011	$	73	$	155	$	184	$	412	$	244	$	8,351
Loans:
Individually evaluated for impairment	$	0	$	188	$	0	$	188			$	24,677
Collectively evaluated for impairment		21,697		57,650		51,882		131,229				655,392
Balance, June 30, 2011	$	21,697	$	57,838	$	51,882	$	131,417			$	680,069

(dollars in thousands)	Builder & developer		Commercial real estate investor		Residential real estate investor		Hotel/Motel		Wholesale & retail		Manufacturing		Agriculture		Other		Total commercial related
Allowance for loan losses:
Individually evaluated for impairment	$	25	$	185	$	10	$	0	$	675	$	0	$	100	$	200	$	1,195
Collectively evaluated for impairment		1,536		1,702		688		345		168		155		75		923		5,592
Balance, December 31, 2010	$	1,561	$	1,887	$	698	$	345	$	843	$	155	$	175	$	1,123	$	6,787
Loans:
Individually evaluated for impairment	$	8,679	$	327	$	490	$	0	$	5,861	$	0	$	500	$	5,933	$	21,790
Collectively evaluated for impairment		87,056		94,954		55,440		48,041		39,102		24,989		13,747		130,265		493,594
Balance, December 31, 2010	$	95,735	$	95,281	$	55,930	$	48,041	$	44,963	$	24,989	$	14,247	$	136,198	$	515,384

(dollars in thousands)	Residential mortgage		Home equity		Other		Total consumer related		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	1,195
Collectively evaluated for impairment		30		83		201		314		525		6,431
Balance, December 31, 2010	$	30	$	83	$	201	$	314	$	525	$	7,626
Loans:
Individually evaluated for impairment	$	0	$	0	$	0	$	0			$	21,790
Collectively evaluated for impairment		20,357		56,294		48,814		125,465				619,059
Balance, December 31, 2010	$	20,357	$	56,294	$	48,814	$	125,465			$	640,849

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Note 7—Deposits

The composition of deposits was as follows:

(dollars in thousands)	June 30, 2011		December 31, 2010
Noninterest bearing demand	$	71,388	$	65,642
NOW		67,606		61,398
Money market		235,339		220,923
Savings		30,079		27,037
Time deposits less than $100,000		250,334		255,674
Time deposits $100,000 or more		177,457		175,436
Total deposits	$	832,203	$	806,110

Note 8—Long-term Debt

PeoplesBank’s long-term debt obligations to FHLB are primarily fixed rate instruments, which are secured by FHLB stock, U.S. agency mortgage backed securities and under a blanket collateral agreement, qualifying loan receivables, principally mortgage loans. A summary of long-term debt at June 30, 2011 and December 31, 2010, is provided below.

(dollars in thousands)	June 30, 2011		December 31, 2010
PeoplesBank’s obligations to FHLB:
Due January 2011, 2.06%	$	0	$	14,000
Due January 2011, 4.30%, amortizing		0		3,401
Due August 2011, 2.42%		12,000		12,000
Due January 2012, 2.34%		10,000		10,000
Due June 2012, 4.25%, amortizing		371		567
Due December 2012, 1.91%		5,000		5,000
Due May 2013, 3.46%, amortizing		1,097		1,371
Due December 2013, 2.39%		5,000		5,000
		33,468		51,339
Capital lease obligation		362		393
Total long-term debt	$	33,830	$	51,732

Note 9—Regulatory Matters

Codorus Valley and PeoplesBank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on Codorus Valley’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Codorus Valley and PeoplesBank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators.

Quantitative measures established by regulators to ensure capital adequacy require Codorus Valley and PeoplesBank to maintain minimum ratios, as set forth below, to total and Tier 1 capital as a percentage of risk-weighted assets, and of Tier 1 capital to quarter-to-date average assets (leverage ratio). Management believes that Codorus Valley and PeoplesBank were well capitalized on June 30, 2011 based on regulatory capital guidelines.

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	Actual					Minimum for Capital Adequacy					Well Capitalized Minimum*
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Codorus Valley Bancorp, Inc.(consolidated)
at June 30, 2011
Capital ratios:
Tier 1 risk based	$	86,850		12.18	%	$	28,533		4.00	%		n/a		n/a
Total risk based		95,202		13.35			57,066		8.00			n/a		n/a
Leverage		86,850		9.03			38,477		4.00			n/a		n/a
at December 31, 2010
Capital ratios:
Tier 1 risk based	$	84,116		12.51	%	$	26,905		4.00	%		n/a		n/a
Total risk based		91,742		13.64			53,811		8.00			n/a		n/a
Leverage		84,116		8.81			38,194		4.00			n/a		n/a
PeoplesBank, A Codorus Valley Company
at June 30, 2011
Capital ratios:
Tier 1 risk based	$	83,867		11.80	%	$	28,429		4.00	%	$	42,643		6.00	%
Total risk based		92,219		12.98			56,858		8.00			71,072		10.00
Leverage		83,867		8.74			38,372		4.00			47,966		5.00
at December 31, 2010
Capital ratios:
Tier 1 risk based	$	81,292		12.13	%	$	26,805		4.00	%	$	40,207		6.00	%
Total risk based		88,918		13.27			53,610		8.00			67,012		10.00
Leverage		81,292		8.54			38,079		4.00			47,599		5.00

* To be well capitalized under prompt corrective action provisions.

Note 10—Shareholders’ Equity

Preferred Stock Issued to the United States Department of the Treasury

In connection with the Emergency Economic Stabilization Act of 2008 (EESA), the U.S. Treasury Department (Treasury) initiated a Capital Purchase Program (CPP) which allowed for qualifying financial institutions to issue preferred stock to the Treasury, subject to certain limitations and terms. The EESA was developed to attract broad participation by strong financial institutions, to stabilize the financial system and increase lending to benefit the national economy and citizens of the United States.

On January 9, 2009, the Corporation entered into a Securities Purchase Agreement with the Treasury pursuant to which the Corporation sold to the Treasury, for an aggregate purchase price of $16.5 million, 16,500 shares of non-voting cumulative perpetual preferred stock, $1,000 liquidation value, $2.50 par value, and warrants to purchase up to 263,859 shares of common stock, par value $2.50 per share, with an exercise price of $9.38 per share. As a condition under the CPP, without the consent of the Treasury, the Corporation’s share repurchases are limited to purchases in connection with the administration of any employee benefit plan, including purchases to offset share dilution in connection with any such plans. This restriction is effective until January 9, 2012 or until the Treasury no longer owns any of the Corporation’s preferred shares issued under the CPP. The Corporation’s preferred stock is included as a component of Tier 1 capital in accordance with regulatory capital requirements. See Note 9, “Regulatory Matters” for details of the Corporation’s regulatory capital.

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The preferred stock ranks senior to the Corporation’s common shares and pays a compounded cumulative dividend at a rate of 5 percent per year for the first five years, and 9 percent per year thereafter. Dividends are payable quarterly on February 15th, May 15th, August 15th and November 15th. The Corporation is prohibited from paying any dividend with respect to shares of common stock or repurchasing or redeeming any shares of the Corporation’s common shares in any quarter unless all accrued and unpaid dividends are paid on the preferred stock for all past dividend periods (including the latest completed dividend period), subject to certain limited exceptions. In addition, without the prior consent of the Treasury, the Corporation is prohibited from declaring or paying quarterly cash dividends on common shares in excess of $0.12 per share, which was the last quarterly cash dividend per share declared prior to October 14, 2008. The CPP also places restrictions on incentive compensation to senior executives. The preferred stock is non-voting, other than class voting rights on matters that could adversely affect the preferred stock, and is generally redeemable at the liquidation value at any time in whole or in part (i.e., a minimum of 25 percent of the issue price) with regulatory permission.

Common Stock Warrants

The 263,859 shares of common stock warrants issued to the Treasury have a term of 10 years (expiring January 9, 2019) and are exercisable at any time, in whole or in part, at an exercise price of $9.38 per share (subject to certain anti-dilution adjustments). The $16.5 million of proceeds was allocated to the preferred stock and the warrants based on their relative fair values at issuance ($15.7 million was allocated to the preferred stock and $783,000 to the warrants). The fair value of the preferred stock was based on a 10 percent assumed market discount rate. The fair value of the stock warrants was calculated by a third-party software model based on many financial assumptions, including market price of the stock, stock price volatility and risk free interest rate. The difference between the initial value allocated to the preferred stock of approximately $15.7 million and the liquidation value of $16.5 million, i.e., the preferred stock discount, will be charged to retained earnings over the first five years of the life of the preferred stock as an adjustment to the dividend yield using the effective yield method.

Note 11—Contingent Liabilities

The Corporation is not aware of any material contingent liabilities as of June 30, 2011.

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 customer 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 customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $10,738,000 of standby letters of credit outstanding on June 30, 2011, compared to $8,793,000 on December 31, 2010. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The amount of the liability as of June 30, 2011 and December 31, 2010, 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.

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Note 13—Fair Value Measurements and Fair Values of Financial Instruments

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. Therefore, the fair value estimates herein are not necessarily indicative of the amounts that could be realized in sales transactions on the dates indicated. 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 measurement guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed, and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

This guidance further clarifies that, when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

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.

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For financial assets measured at fair value, the fair value measurements by level within the fair value hierarchy are as follows:

(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, 2011
Measured at fair value on a recurring basis:
Securities available-for-sale:
U.S. Treasury notes	$	10,152	$	10,152	$	0	$	0
U.S. agency		30,144		0		30,144		0
U.S. agency mortgage-backed, residential		110,045		0		110,045		0
State and municipal		85,627		0		85,627		0
Measured at fair value on a nonrecurring basis:
Impaired loans		7,069		0		0		7,069
Foreclosed real estate		12,895		0		0		12,895
December 31, 2010
Measured at fair value on a recurring basis:
Securities available-for-sale:
U.S. Treasury notes	$	8,140	$	8,140	$	0	$	0
U.S. agency		13,643		0		13,643		0
U.S. agency mortgage-backed, residential		110,353		0		110,353		0
State and municipal		90,400		0		90,400		0
Measured at fair value on a nonrecurring basis:
Impaired loans		5,703		0		0		5,703
Foreclosed real estate		4,447		0		0		4,447

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of certain assets and liabilities at June 30, 2011 and December 31, 2010:

Cash and cash equivalents (carried at cost)

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Securities, available-for-sale (carried at fair value)

The fair values of securities available-for-sale are determined by obtaining 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.

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Restricted investment in bank stocks (carried at cost)

The carrying amount of restricted investment in bank stocks approximates fair value, and considers the limited marketability of such securities.

Loans held for sale (carried at lower of cost or fair value)

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. At June 30, 2011 and December 31, 2010, the fair value of loans held for sale exceeded their cost basis.

Loans (carried at cost)

Generally, for variable and adjustable rate loans that reprice frequently and with no significant change in credit risk, fair value is based on carrying value. Fair values for other loans in the portfolio are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.

Impaired loans (generally carried at fair value)

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. A portion of the allowance for loan losses is allocated to impaired loans if the value of the collateral supporting such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when it is believed that the uncollectability of a loan is confirmed. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At June 30, 2011, the fair value of loan balances with a specific reserve allowance was $8,771,000, net of a valuation allowance of $1,702,000, compared to $6,898,000, net of a valuation allowance of $1,195,000 at December 31, 2010.

Foreclosed Real Estate (carried at lower of cost or fair value)

Real estate acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost, which becomes the cost basis. Subsequently, foreclosed real estate is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. At June 30, 2011, the carrying value of foreclosed real estate with a valuation allowance was $12,895,000 ($14,696,000 less a $1,801,000 allowance). At December 31, 2010, the carrying value of foreclosed real estate with a valuation allowance was $4,447,000 ($6,013,000 less a $1,566,000 allowance).

Interest receivable and payable (carried at cost)

The carrying amount of interest receivable and interest payable approximates its fair value.

Deposit liabilities (carried at cost)

The fair values disclosed for demand deposits (e.g., noninterest and interest bearing checking, money market and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for variable rate time deposits that reprice frequently are based on carrying value. Fair values for fixed rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities of time deposits.

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Short-term borrowings (carried at cost)
The carrying amount of short-term borrowings approximates their fair value.

Long-term debt (carried at cost)
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices are obtained from this active market and represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Junior subordinated debt (carried at cost)
The fair value of junior subordinated debt is estimated using discounted cash flow analysis, based on market rates and spread characteristics currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.

Off-balance sheet financial instruments (disclosed at cost)
Fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. These amounts were not considered to be material at June 30, 2011 and December 31, 2010.

The estimated fair values of the Corporation’s financial instruments were as follows at June 30, 2011 and December 31, 2010.

	June 30, 2011				December 31, 2010
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	11,528	$	11,528	$	43,269	$	43,269
Securities, available-for-sale		235,968		235,968		222,536		222,536
Restricted investment in bank stocks		3,677		3,677		4,067		4,067
Loans held for sale		966		989		4,990		5,054
Loans, net		671,718		679,859		633,223		637,896
Interest receivable		3,536		3,536		3,590		3,590
Financial liabilities
Noninterest bearing demand, NOW, money market and savings deposits	$	404,412	$	404,412	$	375,000	$	375,000
Time deposits		427,791		435,762		431,110		438,907
Short-term borrowings		10,796		10,796		6,763		6,763
Long-term debt		33,830		34,213		51,732		52,294
Junior subordinated debt		10,310		4,040		10,310		4,330
Interest payable		662		662		687		687
Off-balance sheet instruments		0		0		0		0

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

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

Forward-looking statements

Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements are 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;

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

• a prolonged economic downturn;

• an increase in nonperforming assets requiring loss provisions and the incurrence of carrying costs related to nonperforming assets;

• declines in the market value of investment securities considered to be other than temporary;

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

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

• future legislative or administrative changes to U.S. governmental capital programs;

• unavailability of capital when needed or availability at less than favorable terms;

• political and competitive forces affecting banking, securities, asset management and credit services businesses; and

• the risk that management’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

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

We have identified critical accounting policies for the Corporation to include allowance for loan losses, valuation of foreclosed real estate and evaluation of other than temporary impairment losses of securities. There were no material changes made to the critical accounting policies disclosed in the 2010 Annual Report on Form 10-K in regards to application or related judgments and estimates used. A detailed disclosure pertaining to critical accounting policies is provided in Item 7 of the Corporation’s 2010 Annual Report on Form 10-K.

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Three months ended June 30, 2011,
compared to three months ended June 30, 2010

FINANCIAL HIGHLIGHTS

The Corporation earned net income available to common shareholders of $1,626,000 or $0.39 per share, basic and diluted, for the three-month period ended June 30, 2011, compared to $1,380,000 or $0.34 per share, basic and diluted, for the same period of 2010. The $246,000 or 18 percent increase in net income available to common shareholders was primarily the result of an increase in net interest income and decreases in the provision for loan losses and noninterest expense, which more than offset a decrease in noninterest income and an increase in the provision for income taxes.

The $448,000 or 6 percent increase in net interest income for the second quarter of 2011, compared to the same quarter of 2010, was primarily the result of an increase in the average volume of interest earning assets, a decrease in the average rates paid on deposit products and a decrease in the volume of long-term debt. Net interest income (tax equivalent basis) as a percentage of interest earning assets (i.e., net interest margin) was 3.76 percent for the second quarter of 2011 and 2010.

The provision for loan losses for the second quarter of 2011 totaled $550,000, representing an $80,000 or 13 percent decrease, compared to 2010. The provision for both periods remained elevated in comparison to the Corporation’s historic levels and was reflective of the risks and uncertainties associated with prolonged weakness in economic and business conditions, a relatively high level of unemployment and erosion of real estate values.

The $344,000 or 17 percent decrease in noninterest income for the second quarter of 2011, compared to the second quarter of 2010 was primarily the result of decreases in income from mutual fund, annuity and insurance sales and gains on the sales of loans held for sale. Additionally, the second quarter of 2010 included a gain from the sale of investment securities totaling $108,000. There was no comparable transaction involving the sale of securities during the current quarter.

The $310,000 or 4 percent decrease in noninterest expense for the second quarter of 2011, compared to the second quarter of 2010 was due primarily to decreases in carrying costs for foreclosed real estate and impaired loans. A decrease in FDIC insurance premiums, which resulted from the FDIC’s new assessment methodology, which became effective April 1, 2011, also contributed to the decrease in noninterest expense. Personnel expense increased as a result of normal business growth and increased health care insurance premiums.

The $247,000 or 90 percent increase in the provision for income taxes for the second quarter of 2011, compared to 2010 was primarily the result of the increase in income before income taxes.

A more detailed analysis of the factors and trends affecting corporate earnings follows.

INCOME STATEMENT ANALYSIS

Net interest income

Net interest income for the three-month period ended June 30, 2011, was $8,136,000, an increase of $448,000 or 6 percent above the second quarter of 2010. The increase was primarily the result of an increase in the average volume of interest earning assets, a decrease in the average rates paid on deposit products and a decrease in the average volume of long-term debt. Net interest income (tax equivalent basis) as a percentage of interest earning assets (i.e., net interest margin) was 3.76 percent for the second quarter of 2011 and 2010.

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Interest earning assets averaged $907 million and yielded 5.14 percent (tax equivalent basis) for the current quarter, compared to $856 million and 5.28 percent, respectively, for the second quarter of 2010. The $51 million or 6 percent increase in average interest earning assets was due primarily to an increase in investment securities. An increase in yield on floating rate commercial loans, due to the impact of minimum (floor) interest rates, contributed to the increase in interest income. While the average balance of the loan portfolio was generally flat for the second quarter of 2011 and 2010 due to the economic slowdown, commercial loan demand began to increase in the latter part of the current quarter, which is expected to increase interest income in future periods.

Total interest bearing liabilities averaged $809 million at an average rate of 1.55 percent for the current quarter, compared to $766 million and 1.69 percent, respectively, for the second quarter of 2010. The $43 million or 6 percent increase in average interest bearing liabilities reflected growth in all deposit categories. The increase of interest expense on deposits due to the increase in volume was largely offset by lower rates, which reflected historically low market interest rates. The decrease in the average volume of long-term debt for the current quarter, which resulted from maturing Federal Home Loan Bank loans that were not refinanced, was the primary driver of the decrease in total interest expense compared to the second quarter of 2010.

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

	Three months ended June 30,
	2011							2010
(dollars in thousands)	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Assets
Interest bearing deposits with banks	$	16,528	$	10		0.24	%	$	26,743	$	17		0.25	%
Federal funds sold		0		0		0.00			3,000		3		0.40
Investment securities:
Taxable		156,758		1,047		2.68			104,644		802		3.07
Tax-exempt		79,700		893		4.49			70,044		857		4.91
Total investment securities		236,458		1,940		3.29			174,688		1,659		3.81
Loans:
Taxable (1)		638,530		9,447		5.93			637,573		9,373		5.90
Tax-exempt		15,262		227		5.96			13,856		212		6.13
Total loans		653,792		9,674		5.93			651,429		9,585		5.90
Total earning assets		906,778		11,623		5.14			855,860		11,264		5.28
Other assets (2)		59,004							49,644
Total assets	$	965,782						$	905,504
Liabilities and Shareholders’ Equity
Deposits:
Interest bearing demand	$	296,161		495		0.67	%	$	257,172		504		0.79	%
Savings		30,428		30		0.40			27,610		27		0.40
Time		428,181		2,314		2.17			405,231		2,250		2.23
Total interest bearing deposits		754,770		2,839		1.51			690,013		2,781		1.62
Short-term borrowings		10,252		25		0.98			8,864		22		1.00
Long-term debt and junior subordinated debt		44,271		264		2.39			66,849		429		2.57
Total interest bearing liabilities		809,293		3,128		1.55			765,726		3,232		1.69
Noninterest bearing deposits		71,075							59,895
Other liabilities		5,065							4,729
Shareholders’ equity		80,349							75,154
Total liabilities and shareholders’ equity	$	965,782						$	905,504
Net interest income			$	8,496						$	8,032
Net interest margin (3)						3.76	%						3.76	%

(1)	Average balance includes average nonperforming loans of $17,882,000 for 2011 and $20,824,000 for 2010. Interest includes net loan fees of $232,000 for 2011 and $281,000 for 2010.
(2)	Average balance includes average bank owned life insurance, foreclosed real estate and unrealized holding gains (losses) on investment securities.
(3)	Net interest income as a percentage of average earning assets.

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

	Three months ended June 30, 2011 vs. 2010
	Increase (decrease) due to change in
(dollars in thousands)	Volume			Rate			Net
Interest Income
Interest bearing deposits with banks	$	(7	)	$	—		$	(7	)
Federal funds sold		(3	)		—			(3	)
Investment securities:
Taxable		399			(154	)		245
Tax-exempt		118			(82	)		36
Loans:
Taxable		14			60			74
Tax-exempt		21			(6	)		15
Total interest income		542			(182	)		360
Interest Expense
Deposits:
Interest bearing demand		76			(85	)		(9	)
Savings		3			—			3
Time		127			(63	)		64
Short-term borrowings		3			—			3
Long-term debt		(145	)		(20	)		(165	)
Total interest expense		64			(168	)		(104	)
Net interest income	$	478		$	(14	)	$	464

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 three-month period ended June 30, 2011 the provision for loan losses was $550,000, compared to $630,000 for the same period of 2010. The provision for both periods remained elevated in comparison to the Corporation’s historic levels and was reflective of the risks and uncertainties associated with prolonged weakness in economic and business conditions, a relatively high level of unemployment and erosion of real estate values. These factors can adversely affect our borrowers’ ability to service their loans. Information about loan quality is provided in the Nonperforming Assets section of this report on page 46.

Noninterest income

The following table presents the components of total noninterest income for the second quarter of 2011, compared to the second quarter of 2010. Total noninterest income for the current quarter was $1,739,000, a decrease of $344,000 or 17 percent below the second quarter of 2010. After removing the impact of gains from the sale of investment securities, total noninterest income for the current quarter decreased $236,000 or 12 percent below the same quarter of 2010. The decrease in core noninterest income was primarily the result of decreases in income from mutual fund, annuity and insurance sales and gains on the sales of loans held for sale, which is explained below.

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Table 3 - Noninterest income

	Three months ended June 30,				Change Increase (Decrease)
(dollars in thousands)	2011		2010		$			%
Trust and investment services fees	$	383	$	373	$	10			3	%
Income from mutual fund, annuity and insurance sales		241		443		(202	)		(46	)
Service charges on deposit accounts		676		649		27			4
Income from bank owned life insurance		160		161		(1	)		(1	)
Other income		159		132		27			20
Gain on sales of loans held for sale		120		217		(97	)		(45	)
Gain on sales of securities		0		108		(108	)		(100	)
Total noninterest income	$	1,739	$	2,083	$	(344	)		(17	)%

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

Income from mutual fund, annuity and insurance sales—The decrease in income from the sale of mutual funds, annuities and insurance products by Codorus Valley Financial Advisors (CVFA), a subsidiary of PeoplesBank, was a result of the resignation of four registered representatives who left CVFA in February 2011. The decrease in revenue is expected to be largely offset by a decrease in operating expense, principally personnel costs. Accordingly, the net impact on CVFA’s earnings is expected to be immaterial.

Service charges on deposit accounts—The increase was due primarily to an increase in debit card revenue, which reflected an increase in the volume of transactions.

Price restrictions imposed by the federal government under the Durbin Interchange Amendment may significantly reduce debit card revenue (i.e., interchange fees) for PeoplesBank in future periods. While the legislation targeted larger banks with total assets of $10 billion on more, market forces in the future may not make a distinction between large and small banks. Further, the Federal Deposit Insurance Corporation (FDIC) issued final guidance in November 2010 for automated overdraft payment programs. This guidance, effective July 1, 2011, recommends that financial institutions establish policies that, among other things, limit the number of daily overdraft fees per customer, set a de minimis limit whereby small dollar transactions that overdraw an account are not charged an overdraft fee, and to take meaningful steps to counsel customers that have more than six overdrafts in a rolling twelve month period about less costly alternatives to overdraft protection. Implementation of the FDIC guidance is expected to reduce service charge revenue as a result of decreased overdraft fees.

Gains on sales of loans held for sale—The decrease in gains from the sale of loans was due primarily to a decrease in the volume of mortgage loan sales. A decrease in pricing from secondary market sources also contributed to the decrease in gains. In spite of low market interest rates, current period mortgage loan activity is adversely affected by a decrease in refinancing activity (market saturation), the inability of some borrowers to qualify for loans or sell their existing homes and the high level of unemployment.

Gain on sales of securities—Gains from the sale of securities are recognized periodically to supplement earnings by taking advantage of low market interest. There was no comparable gain transaction for the second quarter of 2011.

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Noninterest expense

The following table presents the components of total noninterest expense for the second quarter of 2011, compared to the second quarter of 2010. Total noninterest expense for the current quarter was $6,932,000, a decrease of $310,000 or 4 percent below 2010 due primarily to decreases in carrying costs for foreclosed real estate and impaired loans.

Table 4 - Noninterest expense

	Three months ended June 30,				Change Increase (Decrease)
(dollars in thousands)	2011		2010		$			%
Personnel	$	3,433	$	3,213	$	220			7	%
Occupancy of premises, net		487		493		(6	)		(1	)
Furniture and equipment		422		419		3			1
Postage, stationery and supplies		129		162		(33	)		(20	)
Professional and legal		173		138		35			25
Marketing and advertising		233		223		10			4
FDIC insurance		218		316		(98	)		(31	)
Debit card processing		165		145		20			14
Charitable donations		8		27		(19	)		(70	)
Foreclosed real estate including (gains) losses on sales		606		911		(305	)		(33	)
Impaired loan carrying costs		160		387		(227	)		-59
Other		898		808		90			11
Total noninterest expense	$	6,932	$	7,242	$	(310	)		(4	)%

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

Personnel—The increase in personnel expense reflected an increase in employee health care insurance costs and normal business growth as described more fully in the year-to-date section of this report.

Postage, stationery and supplies—The decrease in postage, stationery and supplies expense was due to the timing of usage.

FDIC insurance—The decrease in FDIC insurance premiums was the result of a change by the FDIC in its assessment methodology, effective April 1, 2011. The FDIC lowered assessment rates and applied them against average assets minus average tangible capital, instead of domestic deposits.

Foreclosed real estate including (gains) losses on sales—Foreclosed real estate costs remained elevated for both periods due to the level of carrying costs and impairment losses from deterioration of property values associated with specific properties as well as the size of the portfolio, which was reflective of prolonged weakness in economic and business conditions and the erosion of real estate values. Typical carrying costs include insurance, maintenance and repairs, real estate taxes, appraisals and legal fees. Costs for the current quarter included the recognition of a loss provision totaling $235,000 that pertained to two properties while the second quarter of 2010 included the recognition of a $722,000 loss provision for a specific property.

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Impaired loan carrying costs— The prolonged weakness in economic and business conditions may cause fluctuations in impaired loan carrying costs. Factors such as the number and size of the loans in the impaired loan portfolio, financial capacity of the borrower or guarantor and the value and liquidity of underlying collateral, can contribute to the variability of this expense from period to period.

Other—The increase in other expense, which is comprised of many underlying expenses, was primarily the result of a $65,000 expense associated with a client’s property held in the Wealth Management Division of PeoplesBank.

Income taxes

The provision for income taxes for the second quarter of 2011 was $521,000, compared to $274,000 for the same period in 2010. The increase in income taxes was primarily the result of the increase in income before income taxes. For both periods, the Corporation’s statutory federal income tax rate was 34 percent. The Corporation’s effective income tax rate was approximately 22 percent for the second quarter of 2011, compared to approximately 14 percent for the second quarter of 2010. The increase in the effective rate reflected an increase in taxable income. The effective tax rate differs from the statutory tax rate due to the impact of low-income housing credits and tax-exempt income, including income from bank owned life insurance.

Six months ended June 30, 2011,
compared to six months ended June 30, 2010

FINANCIAL HIGHLIGHTS

The Corporation earned net income available to common shareholders of $2,892,000 or $0.70 per share ($0.69 diluted) for the six month period ended June 30, 2011, compared to $2,846,000 or $0.70 per share ($0.70 diluted), for the same period of 2010. The $46,000 or 2 percent increase in net income available to common shareholders was primarily the result of an increase in net interest income and a decrease in the provision for loan losses, which more than offset increases in total noninterest expense and provision for income taxes and a decrease in total noninterest income.

The $974,000 or 7 percent increase in net interest income for the first six months of 2011, compared to the same period of 2010, was primarily the result of an increase in the average volume of investment securities and improved yield on floating rate commercial loans. Net interest income was also favorably impacted by lower rates paid on deposit products, which reflected record lows for short-term market interest rates, and deposit mix. Net interest income (tax equivalent basis) as a percentage of interest earning assets (i.e., net interest margin) was 3.71 percent for the first six months of 2011, compared to 3.73 percent for the same period of 2010.

The provision for loan losses for the first six months of 2011 totaled $1,225,000, representing a $125,000 or 9 percent decrease, compared to the $1,350,000 recorded for the same period of 2010. The provision for both periods remained elevated in comparison to the Corporation’s historic levels and was reflective of the risks and uncertainties associated with prolonged weakness in economic and business conditions, a relatively high level of unemployment and erosion of real estate values.

The $270,000 or 7 percent decrease in noninterest income for the first six months of 2011 compared to the same period of 2010 was primarily the result of decreases in income from mutual fund, annuity and insurance sales and gains on sales of securities and loans held for sale. After removing the impact of gains (losses) from the sale of securities, core noninterest income for the first six months of 2011 decreased $137,000 or 4 percent below 2010 levels.

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The $644,000 or 5 percent increase in total noninterest expense for the first six months of 2011 compared to the same period in 2010 was primarily attributable to increases in personnel and other operating expenses. The $138,000 or 21 percent increase in provision for income tax expense for the first six months of 2011 compared to 2010 was primarily the result of the increase in income before income taxes.

Total assets were approximately $977 million on June 30, 2011, an increase of $60 million or 7 percent above June 30, 2010. Compared to one year ago, asset growth occurred primarily in the investment securities and commercial loan portfolios, which were funded by an increase in core deposits.

Net income (annualized) as a percentage of average shareholders’ equity (ROE) was 8.56 percent for the first six months of 2011, compared to 8.99 percent for the same period of 2010. Net income (annualized) as a percentage of average total assets (ROA) was 0.70 percent for the first six months of 2011, compared to 0.74 percent for the same period of 2010. The efficiency ratio (noninterest expense as a percentage of net interest income plus noninterest income on a tax equivalent basis) was 68.5 percent for the first six months of 2011, compared to 68.3 percent for the same period of 2010.

On June 30, 2011, the nonperforming assets ratio (nonperforming assets as a percentage of total loans and net foreclosed real estate) was 5.11 percent, compared to 4.50 percent for December 31, 2010 and 3.55 percent for June 30, 2010. The increase in this ratio reflects prolonged weakness in economic and business conditions, a relatively high level of unemployment and erosion of real estate values. Net loan charge-offs for the current six month period totaled $500,000, compared to $2,159,000 for the same period of 2010. The Corporation’s annualized net loan charge-offs ratio was 0.15 percent at June 30, 2011, compared to 0.67 percent at June 30, 2010. Information regarding nonperforming assets is provided in the Risk Management section of this report, including Table 9—Nonperforming Assets. Based on a comprehensive analysis of the loan portfolio, we believe that the current level of the allowance for loan losses is adequate at June 30, 2011. An analysis of the allowance is provided in Table 10—Analysis of Allowance for Loan Losses.

Throughout the current period, Codorus Valley maintained a capital level well above minimum regulatory quantitative requirements. Currently, there are three federal regulatory definitions of capital that take the form of minimum ratios. As set forth in Note 9—Regulatory Matters, the Corporation and PeoplesBank were well capitalized on June 30, 2011.

A more detailed analysis of the factors and trends affecting corporate earnings follows.

INCOME STATEMENT ANALYSIS

Net interest income

Net interest income for the six-month period ended June 30, 2011, was $15,900,000, an increase of $974,000 or 7 percent above the same period of 2010. The increase was primarily the result of an increase in the average volume of interest earning assets, a decrease in the average rates paid on deposit products and a decrease in the average volume of long-term debt. Net interest income (tax equivalent basis) as a percentage of interest earning assets (i.e., net interest margin) was 3.71 percent for the first six months of 2011, compared to 3.73 percent for the same period of 2010.

Interest earning assets averaged $904 million and yielded 5.11 percent (tax equivalent basis) for the first six months of 2011, compared to $844 million and 5.29 percent, respectively, for the first half of 2010. The $60 million or 7 percent increase in average interest earning assets was due primarily to an increase in investment securities. An increase in yield on floating rate commercial loans, which reflected the imposition of minimum (floor) interest rates, contributed to the increase in interest income.

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Total interest bearing liabilities averaged $808 million at an average rate of 1.56 percent for the first six months of 2011, compared to $761 million and 1.74 percent, respectively, for the same period of 2010. The $47 million or 6 percent increase in average interest bearing liabilities reflected growth in all deposit categories. In contrast, the average volume of long-term debt for the first six months of 2011 decreased, which resulted from maturing Federal Home Loan Bank loans that were not refinanced. The decrease in long-term debt was the primary driver of the decrease in total interest expense compared to the same period of 2010. The increase of interest expense on deposits during the first six months of 2011 was insignificant due to the favorable impact of low product rates and deposit mix, which largely offset the effect of an increase in average volume.

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Table 5-Average Balances and Interest Rates (tax equivalent basis)
	Six months ended June 30,
	2011							2010
(dollars in thousands)	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Assets
Interest bearing deposits with banks	$	21,207	$	23		0.22	%	$	18,952	$	23		0.24	%
Federal funds sold		1,359		2		0.30			2,867		5		0.35
Investment securities:
Taxable		152,332		1,991		2.64			103,621		1,632		3.18
Tax-exempt		81,386		1,828		4.53			69,732		1,718		4.97
Total investment securities		233,718		3,819		3.30			173,353		3,350		3.90
Loans:
Taxable (1)		632,486		18,606		5.93			635,293		18,357		5.83
Tax-exempt		15,268		454		6.00			13,732		428		6.29
Total loans		647,754		19,060		5.93			649,025		18,785		5.84
Total interest earning assets		904,038		22,904		5.11			844,197		22,163		5.29
Other assets (2)		56,945							52,601
Total assets	$	960,983						$	896,798
Liabilities and Shareholders’ Equity
Deposits:
Interest bearing demand	$	291,411		974		0.67	%	$	250,765		1,006		0.81	%
Savings		29,379		58		0.40			26,276		52		0.40
Time		430,537		4,642		2.17			404,760		4,552		2.27
Total interest bearing deposits		751,327		5,674		1.52			681,801		5,610		1.66
Short-term borrowings		10,735		53		0.99			8,514		42		0.99
Long-term debt and junior subordinated debt		45,981		543		2.38			70,558		897		2.56
Total interest bearing liabilities		808,043		6,270		1.56			760,873		6,549		1.74
Noninterest bearing deposits		68,547							56,810
Other liabilities		5,361							4,869
Shareholders’ equity		79,032							74,246
Total liabilities and shareholders’ equity	$	960,983						$	896,798
Net interest income			$	16,634						$	15,614
Net interest margin (3)						3.71	%						3.73	%

(1)	Average balance includes average nonperforming loans of $17,888,000 for 2011 and $21,479,000 for 2010. Interest includes net loan fees of $451,000 for 2011 and $516,000 for 2010.
(2)	Average balance includes average bank owned life insurance, foreclosed real estate and unrealized holding gains (losses) on investment securities.
(3)	Net interest income as a percentage of average interest earning assets.

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Table 6-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis)
	Six months ended June 30, 2011 vs. 2010
	Increase (decrease) due to change in
(dollars in thousands)	Volume			Rate			Net
Interest Income
Interest bearing deposits with banks	$	3		$	(3	)	$	0
Federal funds sold		(3	)		0			(3	)
Investment securities:
Taxable		767			(408	)		359
Tax-exempt		287			(177	)		110
Loans:
Taxable		(81	)		330			249
Tax-exempt		48			(22	)		26
Total interest income		1,021			(280	)		741
Interest Expense
Deposits:
Interest bearing demand		163			(195	)		(32	)
Savings		6			0			6
Time		290			(200	)		90
Short-term borrowings		11			0			11
Long-term debt		(312	)		(42	)		(354	)
Total interest expense		158			(437	)		(279	)
Net interest income	$	863		$	157		$	1,020

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 six-month period ended June 30, 2011, the provision for loan losses was $1,225,000, compared to $1,350,000 for the same period of 2010. The provision for both periods remained elevated in comparison to the Corporation’s historic levels and was reflective of the risks and uncertainties associated with prolonged weakness in economic and business conditions, a relatively high level of unemployment and erosion of real estate values. These factors can adversely affect our borrowers’ ability to service their loans. Information about loan quality is provided in the Nonperforming Assets section of this report on page 46.

Noninterest income

The following table presents the components of total noninterest income for the first six months of 2011, compared to the first six months of 2010. After removing the impact of gains (losses) from the infrequent sale of investment securities, total noninterest income for the current six-month period of 2011 decreased $137,000 or 4 percent below 2010. The decrease in core noninterest income was primarily the result of decreases in income from mutual fund, annuity and insurance sales and gains on the sale of loans, which is explained below.

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Table 7 - Noninterest income
	Six months ended June 30,					Change Increase (Decrease)
(dollars in thousands)	2011			2010		$			%
Trust and investment services fees	$	740		$	719	$	21			3	%
Income from mutual fund, annuity and insurance sales		583			762		(179	)		(23	)
Service charges on deposit accounts		1,277			1,211		66			5
Income from bank owned life insurance		325			319		6			2
Other income		300			286		14			5
Gains on sales of loans held for sale		296			361		(65	)		(18	)
Gain (loss) on sales of securities		(25	)		108		(133	)		(123	)
Total noninterest income	$	3,496		$	3,766	$	(270	)		(7	)%

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

Income from mutual fund, annuity and insurance sales—The decrease in income from the sale of mutual funds, annuities and insurance products by Codorus Valley Financial Advisors (CVFA), a subsidiary of PeoplesBank, was a result of the resignation of four registered representatives who left CVFA in February 2011. The decrease in revenue is expected to be largely offset by a decrease in operating expense, principally personnel costs. Accordingly, the net impact on CVFA’s earnings is expected to be immaterial.

Service charges on deposit accounts—The increase was due primarily to an increase in debit card revenue, which reflected an increase in the volume of transactions. Service charges on deposit accounts could decrease in the future as previously discussed in the current quarter section of this report.

Gains on sales of loans held for sale—The decrease in gains from the sale of mortgage loans was due primarily to a decrease in pricing from secondary market sources. In spite of low market interest rates, mortgage loan activity for the first six months of 2011 is adversely affected by a decrease in refinancing activity (market saturation), the inability of some borrowers to qualify for loans or sell their existing homes and the high level of unemployment.

Gain (loss) on sales of securities—The loss in the first six months of 2011 reflected the sale of approximately $6 million (par value) of municipal securities whose issuers did not have credit ratings on their own (i.e., the credit rating was based on the insurance company that guaranteed the bonds issued by the municipality) and that were located within selected states experiencing well publicized financial challenges. The 2010 period includes gains from the sale of U.S. agency mortgage-backed bonds, which supplemented earnings by taking advantage of low market interest rates.

Noninterest expense

The following table presents the components of total noninterest expense for the first six months of 2011, compared to the first six months of 2010. Total noninterest expense for 2011 was $13,970,000, an increase of $644,000 or 5 percent above 2010 due primarily to increases in personnel and other operating expenses.

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Table 8 - Noninterest expense
	Six months ended June 30,				Change Increase (Decrease)
(dollars in thousands)	2011		2010		$			%
Personnel	$	6,964	$	6,419	$	545			8	%
Occupancy of premises, net		984		994		(10	)		(1	)
Furniture and equipment		871		859		12			1
Postage, stationery and supplies		269		277		(8	)		(3	)
Professional and legal		275		244		31			13
Marketing and advertising		383		350		33			9
FDIC insurance		562		624		(62	)		(10	)
Debit card processing		319		280		39			14
Charitable donations		235		356		(121	)		(34	)
Foreclosed real estate including (gains) losses on sales		1,091		984		107			11
Impaired loan carrying costs		426		583		(157	)		(27	)
Other		1,591		1,356		235			17
Total noninterest expense	$	13,970	$	13,326	$	644			5	%

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

Personnel—The increase in personnel expense reflected an increase in employee health care insurance costs and normal business growth. Effective August 1, 2010, the Bank converted from a fully insured health care program to a self-insured program by joining a consortium of approximately 23 banks. For the first year under the new program the Bank will fund at the maximum liability based on pre-program claims experience, which is expected to result in an increase in health care costs. Thereafter, the benefits of the self-insured program are expected to help contain future health care costs over the long term. Employees have customarily reimbursed the Corporation for approximately 30 percent of the cost of health insurance.

FDIC insurance—The decrease in FDIC insurance premiums was the result of a change by the FDIC in its assessment methodology, effective April 1, 2011. The FDIC lowered assessment rates and applied them against average assets minus average tangible capital, instead of domestic deposits.

Charitable donations—The decrease in charitable donations for the first six months of 2011 resulted from the inability of nonprofits to obtain associated state tax credits as a result of curtailment by the state to help manage its budget deficit. PeoplesBank uses tax credits from donations to reduce its Pennsylvania Shares Tax expense, included below in other expenses.

Foreclosed real estate including (gains) losses on sales—Foreclosed real estate costs remained elevated for both periods due to the level of carrying costs and impairment losses from deterioration of property values associated with specific properties as well as the size of the portfolio, which was reflective of prolonged weakness in economic and business conditions and the erosion of real estate values. Typical carrying costs include insurance, maintenance and repairs, real estate taxes, appraisals and legal fees. Costs for the first six months of 2011 included the recognition of a loss provision totaling $235,000 that pertained to two properties while the first six months of 2010 included the recognition of a $722,000 loss provision for a specific property.

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Impaired loan carrying costs— The prolonged weakness in economic and business conditions may cause fluctuations in impaired loan carrying costs. Factors such as the number and size of the loans in the impaired loan portfolio, financial capacity of the borrower or guarantor and the value and liquidity of underlying collateral, contribute to the variability of this expense from period to period.

Other—The increase in other expense, which is comprised of many underlying expenses, was primarily the result of a $116,000 increase in Pennsylvania Shares Tax expense. Shares Tax in 2010 was relatively low due to the recognition of a greater level of tax credits that originated from an increase of charitable donations. The $65,000 expense in 2011 associated with a client’s property held in the Wealth Management Division of PeoplesBank, previously discussed in the quarter-to-date section of this report, also contributed to the increase in other expense.

Income taxes

The provision for income taxes for the first six months of 2011 was $818,000, compared to $680,000 for the same period in 2010. The increase in income taxes was primarily the result of the increase in income before income taxes. For both periods, the Corporation’s statutory federal income tax rate was 34 percent. The Corporation’s effective income tax rate was approximately 19 percent for the first six months of 2011, compared to approximately 17 percent for the first six months of 2010. The increase in the effective rate reflected an increase in taxable income. The effective tax rate differs from the statutory tax rate due to the impact of low-income housing credits and tax-exempt income, including income from bank owned life insurance.

BALANCE SHEET REVIEW

Overnight investments

There were no overnight investments, which are comprised of interest bearing deposits with banks and federal funds sold, on June 30, 2011, compared to $35 million on December 31, 2010. The decrease in overnight investments was the result of increased investment in commercial loans and securities available-for-sale.

Securities available-for-sale

At June 30, 2011, the fair value of securities available-for-sale totaled $236 million, compared to $223 million at December 31, 2010. Available funds were invested in fixed income securities to provide a return that exceeded the historically low yield on overnight investments.

Loans

On June 30, 2011, total loans, net of deferred fees, totaled $680 million, which was $39 million or 6 percent above year-end 2010 level. Most of the increase was due to a $33 million or 6% increase in commercial related loans followed by a $6 million or 5 percent increase in consumer related loans. The increase in loans occurred in the second quarter of this year following multiple quarters of lackluster loan demand, which was in response to the prolonged weak economic conditions and erosion of real estate values. The composition of the Corporation’s loan portfolio at June 30, 2011, compared to December 31, 2010, is provided in Note 5—Loans.

Deposits

On June 30, 2011, deposits totaled $832 million, which was $26 million or 3 percent above the year-end 2010 level. The increase in total deposits occurred primarily within the demand, savings and money market categories while total time deposits decreased slightly. Deposit growth reflected our competitive rates and our clients’ apparent preference for the liquidity and safety of FDIC insured deposit products. The Corporation does not rely on brokered deposits to fund its operation. The composition of the Corporation’s deposit portfolio at June 30, 2011, is provided in Note 7—Deposits.

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Long-term debt

On June 30, 2011, long-term debt totaled $34 million, which was $18 million or 35 percent below the year-end 2010 level. The decrease reflected Federal Home Loan Bank of Pittsburgh advances that matured and were not refinanced. A listing of outstanding long-term debt obligations is provided in Note 8—Long-term Debt.

Shareholders’ equity and capital adequacy

Shareholders’ equity, or capital, enables Codorus Valley to maintain asset growth and absorb losses. Total shareholders’ equity was approximately $81.5 million on June 30, 2011, an increase of approximately $5 million or 7 percent above the level at December 31, 2010. The increase was caused primarily by increases in retained earnings from profitable operations and in accumulated other comprehensive income from unrealized gains, net of federal income tax, on securities available-for-sale.

The Corporation typically pays cash dividends 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 factors. On July 12, 2011, the Board of Directors declared a quarterly cash dividend of $0.09 per common share payable on August 9, 2011, to shareholders of record July 26, 2011. This dividend follows a $0.09 per share dividend paid in May and a $0.08 per share dividend paid in February. The Corporation’s participation in the U.S. Department of the Treasury’s Capital Purchase Program (CPP) requires regulatory approval to increase quarterly cash dividends on common stock above the quarterly $0.12 per share level that was in effect at the time of the issuance of the preferred stock. More information about the Corporation’s participation in the CPP is provided in Note 10—Shareholders’ Equity.

During March 2011, the Corporation applied for participation in the U.S. Treasury’s Small Business Lending Fund (SBLF). A summary of the SBLF can be found in the Corporation’s Form 10-K for the period ended December 31, 2010 under the Supervision and Regulation section (reference the Small Business Jobs and Credit Act of 2010). Management requested $25 million of capital, of which $16.5 million would be used to refinance, with applicable regulatory approvals, all of the outstanding preferred stock issued under the Treasury’s CPP. Funds from the SBLF would be used primarily to support increased lending to creditworthy small businesses. The SBLF provides an attractive opportunity to the Corporation to obtain Tier 1 capital, lower the preferred stock dividend rate and to remove restrictions associated with the CPP. On July 27, 2011, the Corporation received preliminary approval from the Treasury to receive $25 million of funding from the SBLF with settlement scheduled for August 18, 2011. Management is evaluating whether or not to repurchase the outstanding common stock warrant issued under the CPP.

Codorus Valley and PeoplesBank are subject to various regulatory capital requirements administered by banking regulators that involve quantitative guidelines and qualitative judgments. Quantitative measures established by regulators pertain to minimum capital ratios, as set forth in Note 9—Regulatory Matters, to the financial statements. We believe that Codorus Valley and PeoplesBank were well capitalized on June 30, 2011, based on regulatory capital guidelines.

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RISK MANAGEMENT

Credit risk management

The Credit Risk Management section included in our 2010 Form 10-K provides a general overview of the Corporation’s credit risk management process and loan concentrations. 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 to the Corporation.

Nonperforming assets

The following table presents asset categories posing the greatest risk of loss and related ratios. 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. 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. Foreclosed real estate was acquired to satisfy debts owed to PeoplesBank. The final category, troubled debt restructurings, pertains 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 typically involve a temporary deferral of scheduled loan payments, an extension of the loan’s stated maturity date or a temporary reduction of interest rates. Troubled debt restructurings are evaluated for impairment if they have been restructured during the most recent calendar year, or if they cease to perform in accordance with the modified terms. The paragraphs below explain significant changes in the aforementioned categories for June 30, 2011, compared to December 31, 2010.

Nonperforming assets are reviewed by management on a monthly basis. We generally rely on appraisals performed by independent licensed appraisers to determine the value of collateral for impaired collateral-dependent loans. Generally, an appraisal is performed when: an account reaches 60 days past due, unless a certified appraisal was completed within the past six months; market values have changed significantly; the condition of the property has changed significantly; or the existing appraisal is stale. In instances where the value of the collateral is less than the net carrying amount of the loan, a specific loss allowance is established for the difference by recording a loss provision to the income statement. When it is probable that some portion or all of the loan balance will not be collected, that amount is charged off as loss against the allowance. A loan is returned to interest accruing status when we determine that circumstances have improved to the extent that all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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Table 9-Nonperforming Assets

(dollars in thousands)	June 30, 2011			December 31, 2010
Nonaccrual loans	$	15,935		$	14,844
Nonaccrual loans, troubled debt restructurings		3,632			3,680
Accruing loans 90 days or more past due		168			197
Total nonperforming loans		19,735			18,721
Foreclosed real estate, net of allowance		15,801			10,572
Total nonperforming assets	$	35,536		$	29,293
Accruing troubled debt restructurings	$	188		$	0
Total period-end loans, net of deferred fees	$	680,069		$	640,849
Allowance for loan losses (ALL)	$	8,351		$	7,626
ALL as a % of total period-end loans		1.23	%		1.19	%
Annualized net charge-offs as a % of average total loans		0.15	%		0.39	%
ALL as a % of nonperforming loans		42.32	%		40.74	%
Nonperforming loans as a % of total period-end loans		2.90	%		2.92	%
Nonperforming assets as a % of total period-end loans and net foreclosed real estate		5.11	%		4.50	%
Nonperforming assets as a % of total period-end assets		3.64	%		3.06	%
Nonperforming assets as a % of total period-end shareholders’ equity		43.58	%		38.27	%

The level of nonperforming assets was relatively high in comparison to the Corporation’s historic levels for both periods primarily as a result of prolonged weakened economic conditions and the corresponding effects it has had on our commercial borrowers.

Nonaccrual loans

On June 30, 2011, the nonaccrual loan portfolio balance totaled $19,567,000 and was comprised primarily of collateralized commercial loans. Comparatively, nonaccrual loans totaled $18,524,000 at year-end 2010. During the first six months of 2011, nonaccrual loan additions, principally loan numbers 4 and 5, described below, more than offset loans reclassified to the foreclosed real estate portfolio and payments by borrowers. On June 30, 2011, the nonaccrual loans portfolio was comprised of twenty-two unrelated loan relationships whose outstanding principle balances ranged in size from $18,000 to $4,842,000. Five unrelated commercial relationships, which represent 83 percent of the total nonaccrual loan portfolio balance, are described below.

We evaluate the adequacy of the allowance for loan losses at least quarterly and have established a loss allowance for selected loan relationships where the net realizable value of the collateral is insufficient to repay the loan. In this regard allowances, if applicable, are noted below within the description of the loan. Collection efforts, including modification of contractual terms for individual accounts based on prevailing market conditions and liquidation of collateral assets, are being employed to maximize recovery. Further provisions for loan losses may be required for nonaccrual loans as additional information becomes available or conditions change or as required by bank regulators.

Loan no. 1—PeoplesBank owns a 62.5 percent participation interest, and its share of the outstanding principal balance of the loan relationship is $4,842,000. The collateral supporting this out of market loan is a 55 acre parcel of improved real estate, which is zoned commercial use. In December 2010, the borrower abruptly ceased operation and declared bankruptcy. As of December 31, 2010 we established a $675,000 loss allowance for this account based on the results of an independent appraisal of the primary property supporting this loan. Plans call for subdividing and selling the property at a public auction scheduled for August 2011. The Bank has additional collateral that can be liquidated to maximize recovery.

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Loan no. 2— PeoplesBank owns a 27 percent participation interest, and its share of the outstanding principal balance of the loan relationship is $4,266,000. The collateral supporting the loan is approximately 110 acres of undeveloped land, which is zoned mixed office. Based on a recent appraisal of the real estate, we believe that the loan is adequately collateralized. We may also rely on the personal guarantors of the loan, if necessary, for payment.

Loan no. 3— The outstanding principal balance of the loan relationship is $3,648,000. This account is collateralized by three acres of improved real estate located in a major commercial district, a small parcel of improved real estate and the assignment of a personal loan from a third-party whose payments are current. Based on recent appraisals of the real estate, we believe that the loan is adequately collateralized. The borrower is presently operating under a troubled debt restructuring and is current under that arrangement.

Loan no. 4—The outstanding principal balance of the loan relationship is $1,787,000, which is collateralized by real estate and receivables. We are presently in the process of evaluating the repayment capacity of the guarantors and our recovery options. As of June 30, 2011, we established a $500,000 loss allowance for this account.

Loan no. 5—The outstanding principal balance of the loan relationship is $1,655,000, which is collateralized by real estate comprised of commercial rental properties. Based on recent appraisals of the real estate, we believe that the loan relationship is adequately collateralized.

Foreclosed real estate

On June 30, 2011, foreclosed real estate, net of allowance, totaled $15,801,000, compared to $10,572,000 at December 31, 2010. The increase was due primarily to the significant capital improvements made to property no. 1, identified below, and the addition of property no. 4, identified below, which was reclassified from the nonaccrual loans category. On June 30, 2011, the portfolio was comprised of seven unrelated accounts ranging in size from $54,000 to $8,025,000, which we are actively attempting to liquidate. If a valuation allowance for probable loss was established for a particular property it is so noted in the property description below. Further valuation allowances may be required on any foreclosed property as additional information becomes available or conditions change. Foreclosed real estate is included in the other assets category on the Corporation’s balance sheet. Five unrelated foreclosed real estate properties, which represent 97 percent of the total foreclosed real estate portfolio balance, are described below.

Property no. 1—The carrying amount of this office building property is $8,025,000, which is net of a $140,000 allowance for probable loss based on an independent appraisal less estimated selling costs. Shell and tenant capital improvements costing approximately $4,191,000 have been incurred since the beginning of the year. Tenant improvements are reimbursable by the tenant as additional rent over the term of the lease. Capital improvements were largely completed by June 30, 2011. Additionally, pre-leasing expenses (net) totaling approximately $922,000 were also incurred since the beginning of the year for project management, repairs, legal, architectural, insurance and real estate taxes. A reputable tenant has signed a lease agreement to lease the majority of the building, and the recognition of rental income is scheduled to begin in August 2011. A marketing plan is being developed to sell the property. The value of the property is largely dependent upon the leasing assumptions, which are subject to adjustment.

Property no. 2— The carrying amount of this property is $2,423,000, which is net of a $292,000 allowance for probable loss based on an independent appraisal less estimated selling costs. This account is collateralized by 137 approved residential building lots. Of this total, 28 lots are improved and under contract with a local builder to takedown over an eighteen month period.

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Property no. 3— The carrying amount of this property is $2,024,000, which is net of a $1,274,000 allowance for probable loss based on an independent appraisal less estimated selling costs. This account is collateralized by 266 acres of unimproved land that is zoned for residential development. An engineer has been retained to create a development plan for the site.

Property no. 4—The carrying amount of this property is $1,617,000, which is collateralized by the borrower’s personal residence (presently listed for sale) and a 9.5 acre parcel of unimproved land (under contract of sale).

Property no. 5— PeoplesBank has a 64 percent interest in 42 improved lots within a 20.6 acre established residential subdivision, which represents the original collateral. The carrying value of PeoplesBank’s interest was $1,235,000 at June 30, 2011. During June 2010, a purchase agreement was executed which permitted the buyer to develop and sell the lots over a two-year period. The buyer has defaulted in its takedown requirements under the purchase agreement. Since inception through July 2011, eight lots have been sold.

Allowance for loan losses

Although the Corporation 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 components: specific allowances for individually impaired commercial loans, 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. 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 (2-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, general economic conditions and the local business outlook. Determining the level of the allowance for probable loan losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. We must make estimates using assumptions and information which are often subjective and fluid. There is also the potential for adjustment to the allowance as a result of regulatory examinations.

The following table presents an analysis of the activity in the allowance for loan losses for the six months ended June 30, 2011 and 2010. The allowance was $8,351,000 or 1.23 percent of total loans on June 30, 2011, compared to $6,366,000 or 0.99 percent, on June 30, 2010. During the current period, net charge-offs totaled $500,000, compared to $2,159,000 for the first six months of 2010. The annualized net charge-off ratio was 0.15 percent for the current period compared to 0.67 percent one year ago. The provision for both periods remained elevated in comparison to the Corporation’s historic levels and was reflective of the risks and uncertainties associated with prolonged weakness in economic and business conditions, a relatively high level of unemployment and erosion of real estate values. These factors can adversely affect our borrowers’ ability to service their loans. Based on a comprehensive analysis of the loan portfolio, we believe that the allowance for loan losses is adequate at June 30, 2011.

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Table 10 -Analysis of Allowance for Loan Losses

(dollars in thousands)	2011			2010
Balance-January 1,	$	7,626		$	7,175
Provision charged to operating expense		675			720
Loans charged off:
Commercial, industrial and agricultural		193			100
Real estate - residential and home equity		179			—
Consumer		74			108
Total loans charged off		446			208
Recoveries:
Commercial, industrial and agricultural		—			3
Consumer		1			21
Total recoveries		1			24
Net charge-offs		445			184
Balance-June 30,	$	7,856		$	7,711
Ratios:
Allowance for loan losses as a % of total period-end loans		1.23	%		0.99	%
Annualized net charge-offs as a % of average total loans		0.15	%		0.67	%
Allowance for loan losses as a % of nonperforming loans		42.32	%		40.74	%

Liquidity risk management

Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan customers, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, it 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 scheduled investment security maturities and cash inflows, funds received from customer loan payments, and asset sales. The primary sources of liability liquidity are deposit growth, short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows, included in this report, present the changes in cash from operating, investing and financing activities. At June 30, 2011, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately $112 million and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately $97 million. The Corporation’s loan-to-deposit ratio, which is used as a broad measure of liquidity, was approximately 82 percent at June 30, 2011, compared to 79 percent at December 31, 2010.

Off-balance sheet arrangements

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans, unfunded commitments under existing loan facilities, and letters of credit issued under the same standards as on-balance sheet instruments. Unused commitments on June 30, 2011, totaled $198 million and consisted of $146 million in unfunded commitments under existing loan facilities, $41 million to grant new loans and $11 million in letters of credit. Normally 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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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

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 Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, the Corporation’s disclosure controls and procedures are 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, that the benefits of controls must be considered relative to their costs, and inherent limitations that may not prevent fraud, particularly by collusion of two or more people or by management override of a control.

There has been no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended June 30, 2011, 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

There are no legal proceedings pending against Codorus Valley Bancorp, Inc. or any of its subsidiaries which are expected to have a material impact upon the financial position and/or operating results of the Corporation. Management is not aware of any proceedings known or contemplated by government authorities.

Item 1A. Risk factors

Not applicable to smaller reporting companies.

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

Nothing to report.

Item 3. Defaults upon senior securities

Nothing to report.

Item 4. Removed and reserved

Item 5. Other information

Nothing to report.

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Item 6. Exhibits

Exhibit Number	Description of Exhibit
3.1	Amended Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for September 30, 2010, filed with the Commission on November 15, 2010)
3.2	Amended By-laws (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 15, 2007)
3.3	Certificate of Designations for the Series A Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 15, 2009)
4	Rights Agreement dated as of November 4, 2005 (Incorporated by reference to Exhibit 4 to the Registrant’s Quarterly Report on Form 10-Q for September 30, 2010, filed with Commission on November 15, 2010), as amended January 9, 2009 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for September 30, 2010, filed with the Commission on November 15, 2010)
4.1	Securities Purchase Agreement dated as of January 9, 2009, between the Registrant and the United States Department of Treasury (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 15, 2009)
4.2	Warrant, dated January 9, 2009, to purchase shares of Common Stock of the Registrant (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 15, 2009)
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Signatures

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

	Codorus Valley Bancorp, Inc.
	(Registrant)
August 9, 2011	/s/ Larry J. Miller
Date	Larry J. Miller
	President & CEO
	(Principal Executive Officer)
August 9, 2011	/s/ Jann A. Weaver
Date	Jann A. Weaver
	Treasurer & Assistant Secretary
	(Principal Financial and Accounting Officer)

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