UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________

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

For the quarterly period ended  March 31, 2024

or

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

For the transition period from____________to______________

Commission file number: 0-15536

CODORUS VALLEY BANCORP, INC. 

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2428543
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

105 Leader Heights Road, York, Pennsylvania 17403 

(Address of principal executive offices)(Zip code)

717-747-1519

(Registrant’s telephone number, including area code)

Not Applicable 

(Former name, former address and former fiscal year, 

if changed since the last report.)

_____________________________________________

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

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

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

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

Yes ☒   No ☐

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

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On April 30, 2024 there were 9,662,378 shares of common stock, par value $2.50, outstanding.

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Codorus Valley Bancorp, Inc.

Form 10-Q Index

PART I – FINANCIAL INFORMATION		Page #
Item 1.	Financial statements (unaudited):
	Consolidated balance sheets	3
	Consolidated statements of income	4
	Consolidated statements of comprehensive income (loss)	5
	Consolidated statements of cash flows	6
	Consolidated statements of changes in shareholders’ equity	7
	Notes to consolidated financial statements	8
Item 2.	Management’s discussion and analysis of financial condition and results of operations	37
Item 3.	Quantitative and qualitative disclosures about market risk	48
Item 4.	Controls and procedures	49
PART II – OTHER INFORMATION
Item 1.	Legal proceedings	49
Item 1A.	Risk factors	50
Item 2.	Unregistered sales of equity securities and use of proceeds	50
Item 3.	Defaults upon senior securities	50
Item 4.	Mine safety disclosures	50
Item 5.	Other information	50
Item 6.	Exhibits	51
SIGNATURES		52

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

	March 31,		December 31,
(dollars in thousands, except per share data)	2024		2023
Assets
Interest bearing deposits with banks	$	11,128		$	10,882
Cash and due from banks		15,534			22,809
Total cash and cash equivalents		26,662			33,691
Securities, available-for-sale, at fair value (amortized cost $382,516 at March 31, 2024
and $390,397 at December 31, 2023, respectively)		339,495			349,767
Restricted investment in bank stocks, at cost		3,186			3,146
Loans held for sale		958			822
Loans (net of deferred fees of $3,636 - 2024 and $3,752 - 2023)		1,739,269			1,705,608
Less-allowance for credit losses		(21,645)			(20,506)
Net loans		1,717,624			1,685,102
Premises and equipment, net		19,090			19,563
Operating leases right-of-use assets		2,591			2,746
Goodwill		2,301			2,301
Other assets		96,686			97,660
Total assets	$	2,208,593		$	2,194,798
Liabilities
Deposits
Noninterest bearing	$	365,358		$	379,288
Interest bearing		1,549,705			1,494,054
Total deposits		1,915,063			1,873,342
Short-term borrowings		30,314			56,541
Long-term debt and junior subordinated debt		11,513			11,520
Subordinated notes - face amount $31,000 (less discount and debt
issuance cost of $135 at March 31, 2024 and $155 at December 31, 2023)		30,865			30,845
Operating leases liabilities		2,687			2,848
Allowance for credit losses on off-balance sheet credit exposures		1,503			2,278
Other liabilities		15,654			17,819
Total liabilities		2,007,599			1,995,193
Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at March 31, 2024 and 0 at December 31, 2023		0			0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
shares issued: 9,883,660 at March 31, 2024 and December 31, 2023;
and shares outstanding: 9,662,378 at March 31, 2024 and 9,642,851 at December 31, 2023		24,709			24,709
Additional paid-in capital		142,816			142,633
Retained earnings		71,249			68,633
Accumulated other comprehensive loss		(32,911)			(31,082)
Treasury stock shares outstanding, at cost: 221,282 shares at March 31, 2024
and 240,809 at December 31, 2023		(4,869)			(5,288)
Total shareholders' equity		200,994			199,605
Total liabilities and shareholders' equity	$	2,208,593		$	2,194,798

See accompanying notes.
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Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	Three months ended
	March 31,
(dollars in thousands, except per share data)	2024		2023
Interest income
Loans, including fees	$	26,855	$	23,034
Investment securities:
Taxable		2,651		2,457
Tax-exempt		109		101
Dividends		74		17
Other		155		684
Total interest income		29,844		26,293
Interest expense
Deposits		10,738		5,137
Federal funds purchased and other short-term borrowings		878		38
Long-term debt and junior subordinated debt		217		194
Subordinated notes		369		369
Total interest expense		12,202		5,738
Net interest income		17,642		20,555
Provision for credit losses - loans		891		492
(Recovery of) provision for credit losses - unfunded commitments		(775)		246
Net interest income after provision for credit losses		17,526		19,817
Noninterest income
Trust and investment services fees		1,421		1,202
Income from mutual fund, annuity and insurance sales		314		369
Service charges on deposit accounts		1,455		1,485
Income from bank owned life insurance		414		322
Other income		467		862
Gain on sales of loans held for sale		105		10
Gain on sales of assets held for sale		0		118
Loss on sales of securities		0		(388)
Total noninterest income		4,176		3,980
Noninterest expense
Personnel		9,879		9,042
Occupancy of premises, net		894		978
Furniture and equipment		828		838
Professional and legal		283		467
Marketing		312		276
FDIC insurance		246		250
Debit card processing		470		478
External data processing		1,111		1,010
Merger related expenses		118		0
Committee & director fees		320		358
PA shares tax		363		343
Impaired (recovery of) loan carrying costs		74		(98)
Other		1,363		869
Total noninterest expense		16,261		14,811
Income before income taxes		5,441		8,986
Provision for income taxes		1,186		1,994
Net income	$	4,255	$	6,992
Net income per share, basic	$	0.44	$	0.73
Net income per share, diluted	$	0.44	$	0.73

See accompanying notes.
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Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

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

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

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

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Treasury
(dollars in thousands, except per share data)	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance, January 1, 2024	$	24,709	$	142,633	$	68,633	$	(31,082)	$	(5,288)	$	199,605
Net income						4,255						4,255
Other comprehensive loss, net of tax								(1,829)				(1,829)
Cash dividends ($0.17 per share)						(1,639)						(1,639)
Stock-based compensation				655								655
Forfeiture of restricted stock and withheld shares - 8,734 shares										(197)		(197)
Issuance and reissuance of stock:
6,472 shares under the dividend reinvestment and stock purchase plan				11						136		147
(182) shares under employee stock purchase plan				1						(4)		(3)
21,971 shares of stock-based compensation awards				(484)						484		0
Balance, March 31, 2024	$	24,709	$	142,816	$	71,249	$	(32,911)	$	(4,869)	$	200,994
Balance, January 1, 2023	$	24,709	$	141,896	$	52,146	$	(34,764)	$	(6,687)	$	177,300
Cumulative change in adoption of accounting principle ASC 326 as discussed in Note 1						(2,149)						(2,149)
Balance, January 1, 2023 (as adjusted for change in accounting principle)	$	24,709	$	141,896	$	49,997	$	(34,764)	$	(6,687)	$	175,151
Net income						6,992						6,992
Other comprehensive income, net of tax								3,823				3,823
Cash dividends ($0.16 per share)						(1,533)						(1,533)
Stock-based compensation				454								454
Forfeiture of restricted stock and withheld shares - 8,039 shares				25						(164)		(139)
Issuance and reissuance of stock:
6,079 shares under the dividend reinvestment and stock purchase plan				15						137		152
3,131 shares under the employee stock option plan				(25)						71		46
11,816 shares of stock-based compensation awards				(267)						267		0
Balance, March 31, 2023	$	24,709	$	142,098	$	55,456	$	(30,941)	$	(6,376)	$	184,946

See accompanying notes. 

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Note 1—Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2023 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). As of March 31, 2024, PeoplesBank operates one wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Board of Governors of the Federal Reserve System and the Pennsylvania Department of Banking and Securities.

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended March 31, 2024. The accounts of CVB Statutory Trust No. I and No. II are not included in the consolidated financial statements as discussed in Note 6—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

These consolidated statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year.

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of March 31, 2024 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

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

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

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

Allowance for Credit Losses—Available-for-Sale Securities

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

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collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities, which totaled $1,600,000 as of March 31, 2024, is excluded from the estimate of credit losses.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of deferred loan fees and costs. Accrued interest receivable totaled $6,800,000 at March 31, 2024 and was reported in other assets on the consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The loans receivable portfolio is disaggregated into segments. The segments include commercial, commercial real estate – construction, commercial real estate – owner occupied, commercial real estate – non-owner occupied, residential real estate – construction, residential real estate – revolving, residential real estate – multi family, residential real estate - other, and consumer loans.

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

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

As disclosed in Note 4—Loans and Allowance for Credit Losses, the Corporation engages in commercial and consumer lending. Loans are made within the Corporation’s primary market area and surrounding areas, and include the purchase of whole loan or participation interests in loans from other financial institutions. Commercial loans, which pose the greatest risk of loss to the Corporation, whether originated or purchased, are generally secured by real estate.

Allowance for credit losses – loans

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

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

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

Commercial loans

Commercial real estate – construction

Commercial real estate – owner occupied

Commercial real estate – non-owner occupied

Residential real estate – construction

Residential real estate – revolving

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Residential real estate – multi family

Residential real estate – other

Consumer loans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allowance for credit losses – off-balance sheet credit exposures

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

Loan-Level Interest Rate Swaps

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

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

Derivatives contain an element of credit risk, including the possibility that PeoplesBank will incur a loss because a party to the agreements, which may be a dealer counterparty or a client, fails to meet its contractual obligations. Derivative contracts may only be executed with dealer counterparties as approved by the Board of Directors.  Similarly, derivatives with clients may only be executed with clients within credit exposure limits approved by the Board of Directors.

Interest rate swaps, recorded at fair value, are included in other assets on the Consolidated Balance Sheets. Additional information is provided in Note 14 – Interest Rate Swaps.

Bank Premises and Equipment Held for Sale

Bank premises and equipment designated as held for sale are carried at the lower of cost or fair value. There were no bank premises and equipment designated as held for sale as of March 31, 2024 or December 31, 2023.

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Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for credit losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a write-down. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest income or expense. At March 31, 2024 there was $408,000 of foreclosed real estate compared to $383,000 at December 31, 2023. As of March 31, 2024, there was $39,000 consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction, compared to $133,000 as of December 31, 2023.

Mortgage Servicing Rights

Mortgage servicing rights (MSRs) associated with sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. An independent third party firm calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an estimate of future net servicing income of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At March 31, 2024, the balance of residential mortgage loans serviced for third parties was $50,246,000 compared to $51,069,000 at December 31, 2023.

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

Goodwill and Core Deposit Intangible Assets

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test. This test consists of a qualitative analysis. If the Corporation determines events or circumstances indicate that it is more likely than not that goodwill is impaired, a quantitative analysis must be completed. Analyses may also be performed between annual tests. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The Corporation completes its annual goodwill impairment test on October 1st of each year. Based upon a qualitative analysis of goodwill, the Corporation concluded that the amount of recorded goodwill was not impaired as of October 1, 2023. There were no conditions or events that would trigger an analysis or impairment since October 1, 2023.

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

Revenue from Contracts with Customers

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

The majority of the Corporation’s revenue-generating transactions are not within the scope of ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our

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

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

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

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

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

Per Share Data

The computation of net income per share is provided in the table below.

	Three months ended
	March 31,
(in thousands, except per share data)	2024		2023
Net income	$	4,255	$	6,992
Weighted average shares outstanding (basic)		9,649		9,585
Effect of dilutive stock options		21		27
Weighted average shares outstanding (diluted)		9,670		9,612
Basic earnings per share	$	0.44	$	0.73
Diluted earnings per share	$	0.44	$	0.73

Comprehensive Income

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

Cash Flow Information

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

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Supplemental cash flow information is provided in the table below.

		Three months ended
		March 31,
(dollars in thousands)		2024		2023
Cash paid during the period for:
Income taxes	$	250	$	3,930
Interest	$	11,568	$	5,129
Noncash investing and financing activities:
Transfer of loans to foreclosed real estate	$	25	$	0
Transfer of loans to held for sale	$	783	$	2,018

Recent Accounting Pronouncements

Pronouncements Not Yet Effective

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

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

Note 2 – Securities

A summary of securities available-for-sale at March 31, 2024 and December 31, 2023 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof, investments in the obligations of states and municipalities and selected corporate securities, including subordinated debt. At March 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the US Government and its agencies, in an amount greater than 10% of shareholders’ equity.

	Amortized			Allowance for	Gross Unrealized				Fair
(dollars in thousands)	Cost			Credit Losses	Gains		Losses		Value
March 31, 2024
Debt securities:
U.S. Treasury notes	$	19,883	$	0	$	0	$	(337)	$	19,546
U.S. agency		13,875		0		0		(1,196)		12,679
U.S. agency mortgage-backed, residential		276,260		0		155		(31,620)		244,795
State and municipal		35,302		0		27		(4,961)		30,368
Corporates		37,196		0		33		(5,122)		32,107
Total debt securities	$	382,516	$	0	$	215	$	(43,236)	$	339,495
December 31, 2023
Debt securities:
U.S. Treasury notes	$	19,843	$	0	$	0	$	(369)	$	19,474
U.S. agency		13,953		0		0		(1,116)		12,837
U.S. agency mortgage-backed, residential		283,058		0		342		(29,121)		254,279
State and municipal		35,351		0		53		(4,732)		30,672
Corporates		38,192		0		1		(5,688)		32,505
Total debt securities	$	390,397	$	0	$	396	$	(41,026)	$	349,767

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

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

The amortized cost and estimated fair value of debt securities at March 31, 2024 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.

	Available-for-sale
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	18,549	$	18,258
Due after one year through five years		105,899		99,048
Due after five years through ten years		215,655		186,226
Due after ten years		42,413		35,963
Total debt securities	$	382,516	$	339,495

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

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

	Less than 12 months					12 months or more					Total
	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized
(dollars in thousands)	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
March 31, 2024
Debt securities:
U.S. Treasury notes	0	$	0	$	0	4	$	19,546	$	(337)	4	$	19,546	$	(337)
U.S. agency	2		1,115		(10)	10		11,564		(1,186)	12		12,679		(1,196)
U.S. agency mortgage-backed, residential	25		18,515		(119)	216		212,304		(31,501)	241		230,819		(31,620)
State and municipal	4		1,532		(11)	33		26,005		(4,950)	37		27,537		(4,961)
Corporates	1		1,358		(144)	29		29,222		(4,978)	30		30,580		(5,122)
Total	32	$	22,520	$	(284)	292	$	298,641	$	(42,952)	324	$	321,161	$	(43,236)
December 31, 2023
Debt securities:
U.S. Treasury notes	0	$	0	$	0	4	$	19,474	$	(369)	4	$	19,474	$	(369)
U.S. agency	2	$	1,192	$	(11)	10	$	11,645	$	(1,105)	12	$	12,837	$	(1,116)
U.S. agency mortgage-backed, residential	14		12,996		(101)	208		211,658		(29,020)	222		224,654		(29,121)
State and municipal	2		634		(23)	32		25,907		(4,709)	34		26,541		(4,732)
Corporates	1		1,261		(239)	31		30,751		(5,449)	32		32,012		(5,688)
Total	19	$	16,083	$	(374)	285	$	299,435	$	(40,652)	304	$	315,518	$	(41,026)

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

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As of March 31, 2024, the Corporation’s security portfolio consisted of 349 securities, 324 of which were in an unrealized loss position. Through March 31, 2024 the Corporation has collected all interest and principal on its investment securities as scheduled. The majority of the unrealized losses are related to the Corporation’s mortgage-backed securities, as discussed below:

Mortgage-Backed Securities

At March 31, 2024, 100% of the mortgage-backed securities held by the Corporation were issued by U.S. government-sponsored entities and agencies. The decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Corporation does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to have credit impairment at March 31, 2024.

Note 3—Restricted Investment in Bank Stocks

Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of March 31, 2024 and December 31, 2023, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLBP”) and, to a lesser degree, Atlantic Community Bancshares, Inc. (“ACBI”), the parent company of Atlantic Community Bankers Bank (“ACBB”). Under the FHLBP’s Capital Plan, member banks, including PeoplesBank, are required to maintain a minimum stock investment. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

The FHLBP paid dividends during the periods ended March 31, 2024 and 2023. The FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of five percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes no impairment charge was necessary related to the restricted stock during the periods ended March 31, 2024 and 2023.

Note 4—Loans and Allowance for Credit Losses

The Corporation uses a lifetime expected loss model referred to as the current expected credit loss (CECL) methodology. The Corporation segments the loan portfolio based on collateral using federal call code targeting similar risk characteristics. Management selected national civilian unemployment rates, housing price index and real gross domestic product (GDP) as the drivers of the quantitative portion of the collectively evaluated reserves. These third party supplied economic driver forecasts are updated within the model quarterly to calculate expected life and related loan default rates.

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

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

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

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

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

Delinquency trends;

Quality of the loan review system;

Value of underlying collateral;

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

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

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The qualitative adjustments and projected impact are reviewed and considered by the Corporation’s Chief Credit Officer in discussion with the appropriate finance and executive personnel. For the quarter ending March 31, 2024, the quantitative allowance was positively impacted by forecasted improvements in the macroeconomic conditions such as national civilian unemployment rates and GDP. While these changes project an improvement in credit conditions, potential declines in commercial real estate prices continued to support added risk to the portfolio. This results in a continuation of the higher level of qualitative loss related to changes in national, regional and local conditions along with changes in the value of underlying collateral for commercial real estate loans. This higher-level risk will continue to be monitored and would expect to remain until forecasts for the unemployment rate and GDP again align with projections for commercial real estate pricing. While other areas of risk beyond the quantitative risk have been identified within the model, no additional changes were considered warranted in the allocated reserve ratios.

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at March 31, 2024 and December 31, 2023. The portfolio is comprised of nine segments, commercial, commercial real estate construction, commercial real estate owner occupied, commercial real estate non-owner occupied, residential real estate construction, residential real estate revolving, residential real estate multi family, residential real estate other and consumer as presented in the table below. Certain portfolio segments are further disaggregated for the purpose of estimating credit losses. The Corporation has not engaged in sub-prime residential mortgage originations.

	March 31,		% Total			December 31,	% Total
(dollars in thousands)	2024		Loans			2023	Loans
Commercial loans	$	170,319		9.8	$	154,189		9.0
Commercial real estate:
Construction		181,107		10.4		178,756		10.5
Owner occupied		353,133		20.3		355,236		20.8
Non-owner occupied		472,560		27.2		455,171		26.7
Residential real estate:
Construction		28,239		1.6		27,383		1.6
Revolving		103,614		6.0		107,968		6.3
Multi family		128,918		7.4		130,666		7.7
Other		289,180		16.6		283,387		16.6
Consumer		12,199		0.7		12,852		0.8
Gross Loans		1,739,269		100.0		1,705,608		100.0
Less: Allowance for credit losses		21,645				20,506
Net Loans	$	1,717,624			$	1,685,102

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

- 17 -

The following tables presents the activity in the allowance for credit losses by segment as of and for the three months ended March 31 2024 and March 31, 2023.

(dollars in thousands)		Balance, January 1, 2024		Provision for credit losses		Loan charge-offs		Loan recoveries		Balance, March 31, 2024
Commercial loans	$	2,254	$	938	$	(56)	$	356	$	3,492
Commercial real estate:
Construction		3,658		(596)		0		0		3,062
Owner occupied		4,096		36		(66)		0		4,066
Non-owner occupied		6,279		32		0		0		6,311
Residential real estate:
Construction		82		9		(11)		0		80
Revolving		475		(123)		0		3		355
Multi family		1,519		251		0		0		1,770
Other		1,986		403		(62)		64		2,391
Consumer		157		(59)		(9)		29		118
Total	$	20,506	$	891	$	(204)	$	452	$	21,645
(dollars in thousands)		Balance, January 1, 2023		Impact of adopting ASC 326		Provision for credit losses		Loan charge-offs		Loan recoveries		Balance, March 31, 2023
Commercial loans	$	4,783	$	(235)	$	(904)	$	(64)	$	116	$	3,697
Commercial real estate:
Construction		1,829		1,121		590		0		0		3,539
Owner occupied		4,341		(69)		333		(683)		33		3,956
Non-owner occupied		6,387		(468)		249		0		0		6,168
Residential real estate:
Construction		230		(144)		(6)		0		0		79
Revolving		417		192		58		(27)		0		641
Multi family		1,205		194		25		0		0		1,424
Other		1,511		169		167		0		13		1,859
Consumer		33		167		(20)		(4)		5		181
Total	$	20,736	$	927	$	492	$	(778)	$	167	$	21,544

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Non-accrual Loans

The table below presents a summary of non-accrual loans at March 31, 2024, March 31, 2023 and December 31, 2023. An allowance is established for those individual loans where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, individually evaluated consumer related loans are partially or fully charged-off eliminating the need for specific allowance. Interest income on loans with no related allowance is the result of interest collected on a cash basis.

		With a		Without a		Related		Interest Income
(dollars in thousands)		Related Allowance		Related Allowance		Allowance		Three months ended
March 31, 2024
Commercial loans	$	3,010	$	150	$	1,753	$	175
Commercial real estate:
Construction		0		35		0		0
Owner occupied		733		613		115		0
Non-owner occupied		0		155		0		4
Residential real estate:
Construction		0		264		0		0
Revolving		0		474		0		2
Multi family		0		0		0		0
Other		0		1,542		0		0
Consumer		0		0		0		0
Total	$	3,743	$	3,233	$	1,868	$	181
March 31, 2023
Commercial loans	$	1,854	$	2,910	$	1,629	$	245
Commercial real estate:
Construction		0		0		0		107
Owner occupied		0		2,241		0		42
Non-owner occupied		0		0		0		0
Residential real estate:
Construction		0		282		0		0
Revolving		209		428		152		7
Multi family		0		0		0		0
Other		0		710		0		0
Consumer		0		0		0		0
Total	$	2,063	$	6,571	$	1,781	$	401
December 31, 2023
Commercial loans	$	1,000	$	513	$	500	$	663
Commercial real estate:
Construction		0		38		0		107
Owner occupied		463		0		56		401
Non-owner occupied		0		205		0		0
Residential real estate:
Construction		0		0		0		36
Revolving		0		439		0		35
Multi family		0		0		0		0
Other		0		951		0		38
Consumer		0		0		0		0
Total	$	1,463	$	2,146	$	556	$	1,280

Asset Quality

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $500,000 may be scored using a third-party credit scoring software model for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Watch and Special Asset Committees, which includes senior management. The Committees, which typically meet at least quarterly, make changes, as appropriate, to these risk ratings. In addition to review by the Committees, existing loans are monitored by the primary loan officer and loan portfolio risk management officer to determine if any changes, upward or downward, in risk ratings are appropriate. Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing

- 19 -

loans, except to non-accrual status. Only the President/CEO or CFO may approve a downgrade of a loan to non-accrual status. The Special Asset Committee or President/CEO may upgrade a loan that is criticized or classified.

The Corporation uses nine risk ratings to grade commercial loans. The first six ratings are considered “pass” ratings. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current net worth or paying capacity of the obligor, or of the collateral pledged. A “substandard” loan has a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to potential loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk-rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed.

The following table summarizes designated internal risk rating categories by portfolio segment, by origination year, in the current period. It does not include the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses.

	Term Loans Amortized Cost Basis by Origination Year															Revolving Loans
														Revolving Loans		converted to Term
														Amortized Cost		Loans Amortized
(dollars in thousands)		2024		2023		2022		2021		2020		Prior		Basis		Cost Basis		Total
Commercial loans
Pass	$	15,381	$	18,394	$	39,744	$	11,115	$	3,737	$	18,563	$	50,399	$	0	$	157,333
Special Mention		0		1,669		59		145		0		502		591		0		2,966
Substandard		0		0		391		2,364		0		959		3,146		0		6,860
Nonaccrual		0		0		0		258		0		1,040		1,862		0		3,160
Total		15,381		20,063		40,194		13,882		3,737		21,064		55,998		0		170,319
Gross write-offs		0		(8)		(12)		0		0		0		(36)		0		(56)
Commercial real estate:
Construction
Pass	$	9,449	$	57,045	$	55,381	$	20,535	$	11,720	$	15,713	$	6,707	$	0	$	176,550
Special Mention		0		0		3,259		0		0		0		0		0		3,259
Substandard		0		0		596		0		667		0		0		0		1,263
Nonaccrual		0		0		0		0		0		35		0		0		35
Total		9,449		57,045		59,236		20,535		12,387		15,748		6,707		0		181,107
Gross write-offs		0		0		0		0		0		0		0		0		0
Owner occupied
Pass	$	2,029	$	41,133	$	58,604	$	75,779	$	23,207	$	117,929	$	17,318	$	0	$	335,999
Special Mention		0		950		0		0		0		3,187		0		0		4,137
Substandard		0		237		599		1,371		2,482		6,083		879		0		11,651
Nonaccrual		0		0		0		0		779		484		83		0		1,346
Total		2,029		42,320		59,203		77,150		26,468		127,683		18,280		0		353,133
Gross write-offs		0		0		0		0		0		0		(66)		0		(66)
Non-owner occupied
Pass	$	12,532	$	36,981	$	135,945	$	110,661	$	52,840	$	109,877	$	1,595	$	0	$	460,431
Special Mention		0		0		0		0		9,921		0		0		0		9,921
Substandard		0		0		0		1,181		0		872		0		0		2,053
Nonaccrual		0		0		0		0		0		155		0		0		155
Total		12,532		36,981		135,945		111,842		62,761		110,904		1,595		0		472,560
Gross write-offs		0		0		0		0		0		0		0		0		0
Residential real estate:
Construction
Pass	$	1,257	$	15,641	$	5,493	$	1,216	$	958	$	1,528	$	1,882	$	0	$	27,975
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0		0

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Nonaccrual		0		0		0		0		0		264		0		0		264
Total		1,257		15,641		5,493		1,216		958		1,792		1,882		0		28,239
Gross write-offs		0		0		0		0		0		(11)		0		0		(11)
Revolving
Pass	$	821	$	10,405	$	15,136	$	990	$	304	$	2,380	$	72,806	$	0	$	102,842
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		298		0		298
Nonaccrual		71		0		34		0		0		0		369		0		474
Total		892		10,405		15,170		990		304		2,380		73,473		0		103,614
Gross write-offs		0		0		0		0		0		0		0		0		0
Multi family
Pass	$	0	$	5,989	$	34,265	$	33,091	$	19,344	$	31,536	$	989	$	0	$	125,214
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		3,704		0		0		3,704
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		0		5,989		34,265		33,091		19,344		35,240		989		0		128,918
Gross write-offs		0		0		0		0		0		0		0		0		0
Other
Pass	$	10,960	$	64,990	$	60,399	$	42,093	$	37,062	$	69,751	$	736	$	0	$	285,991
Special Mention		0		0		0		80		49		905		42		0		1,076
Substandard		0		0		101		0		129		341		0		0		571
Nonaccrual		0		0		725		299		0		518		0		0		1,542
Total		10,960		64,990		61,225		42,472		37,240		71,515		778		0		289,180
Gross write-offs		0		0		(62)		0		0		0		0		0		(62)
Consumer
Pass	$	362	$	3,640	$	2,927	$	1,217	$	139	$	335	$	3,572	$	0	$	12,192
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		0		1		6		0		0		0		0		0		7
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		362		3,641		2,933		1,217		139		335		3,572		0		12,199
Gross write-offs		0		(9)		0		0		0		0		0		0		(9)
Total Loans
Pass	$	52,791	$	254,218	$	407,894	$	296,697	$	149,311	$	367,612	$	156,004	$	0	$	1,684,527
Special Mention		0		2,619		3,318		225		9,970		4,594		633		0		21,359
Substandard		0		238		1,693		4,916		3,278		11,959		4,323		0		26,407
Nonaccrual		71		0		759		557		779		2,496		2,314		0		6,976
Total		52,862		257,075		413,664		302,395		163,338		386,661		163,274		0		1,739,269
Total Gross Charge-Offs	$	0	$	(17)	$	(74)	$	0	$	0	$	(11)	$	(102)	$	0	$	(204)

The following table summarizes designated internal risk rating categories by portfolio segment, by origination year, in the period ended December 31, 2023. It does not include the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses.

- 21 -

	Term Loans Amortized Cost Basis by Origination Year															Revolving Loans
														Revolving Loans			converted to Term
														Amortized Cost			Loans Amortized
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Basis			Cost Basis		Total
Commercial loans
Pass	$	19,859	$	40,037	$	14,742	$	4,183	$	10,482	$	8,928	$	44,105	$		0	$	142,336
Special Mention		0		12		0		0		530		128		2,071			0		2,741
Substandard		36		227		2,559		10		0		1,098		3,669			0		7,599
Nonaccrual		0		21		33		0		310		1,000		149			0		1,513
Total		19,895		40,297		17,334		4,193		11,322		11,154		49,994			0		154,189
Gross write-offs		0		(26)		(11)		(15)		0		(1,009)		(387)			0		(1,448)
Commercial real estate:
Construction
Pass	$	53,320	$	63,945	$	19,825	$	11,790	$	7,743	$	8,160	$	4,879	$		0	$	169,662
Special Mention		0		3,279		0		0		0		0		500			0		3,779
Substandard		0		1,175		0		4,102		0		0		0			0		5,277
Nonaccrual		0		0		0		0		0		38		0			0		38
Total		53,320		68,399		19,825		15,892		7,743		8,198		5,379			0		178,756
Gross write-offs		0		0		0		0		0		0		0			0		0
Owner occupied
Pass	$	40,600	$	59,363	$	76,868	$	24,384	$	30,913	$	92,524	$	16,343	$		0	$	340,995
Special Mention		139		0		0		0		0		3,510		0			0		3,649
Substandard		247		0		1,240		2,502		0		5,711		429			0		10,129
Nonaccrual		0		0		0		0		0		463		0			0		463
Total		40,986		59,363		78,108		26,886		30,913		102,208		16,772			0		355,236
Gross write-offs		0		0		0		0		0		(682)		0			0		(682)
Non-owner occupied
Pass	$	38,259	$	124,825	$	111,364	$	53,115	$	11,406	$	102,011	$	1,856	$		0	$	442,836
Special Mention		0		0		0		9,941		0		85		0			0		10,026
Substandard		0		0		1,189		0		0		915		0			0		2,104
Nonaccrual		0		0		0		50		0		155		0			0		205
Total		38,259		124,825		112,553		63,106		11,406		103,166		1,856			0		455,171
Gross write-offs		0		0		0		0		0		0		0			0		0
Residential real estate:
Construction
Pass	$	14,200	$	7,554	$	1,199	$	965	$	1,294	$	537	$	1,634	$		0	$	27,383
Special Mention		0		0		0		0		0		0		0			0		0
Substandard		0		0		0		0		0		0		0			0		0
Nonaccrual		0		0		0		0		0		0		0			0		0
Total		14,200		7,554		1,199		965		1,294		537		1,634			0		27,383
Gross write-offs		0		0		0		0		0		0		0			0		0
Revolving
Pass	$	10,935	$	16,175	$	1,042	$	319	$	605	$	1,975	$	76,178	$		0	$	107,229
Special Mention		0		0		0		0		0		0		0			0		0
Substandard		0		0		0		0		0		0		300			0		300
Nonaccrual		0		35		0		0		0		0		404			0		439
Total		10,935		16,210		1,042		319		605		1,975		76,882			0		107,968
Gross write-offs		0		0		0		0		0		(8)		(55)			0		(63)
Multi family

- 22 -

Pass	$	6,300	$	34,966	$	32,692	$	19,487	$	23,751	$	8,238	$	1,023	$	0	$	126,457
Special Mention		0		0		0		0		0		1,800		0		0		1,800
Substandard		0		0		0		0		0		2,409		0		0		2,409
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		6,300		34,966		32,692		19,487		23,751		12,447		1,023		0		130,666
Gross write-offs		0		0		0		0		0		0		0		0		0
Other
Pass	$	65,759	$	62,257	$	42,183	$	37,607	$	17,649	$	54,210	$	1,232	$	0	$	280,897
Special Mention		0		0		0		50		0		916		42		0		1,008
Substandard		0		102		0		129		0		300		0		0		531
Nonaccrual		0		0		425		0		0		526		0		0		951
Total		65,759		62,359		42,608		37,786		17,649		55,952		1,274		0		283,387
Gross write-offs		0		0		0		0		0		0		0		0		0
Consumer
Pass	$	3,982	$	3,282	$	1,521	$	160	$	81	$	259	$	3,560	$	0	$	12,845
Special Mention		0		0		0		0		0		0		0		0		0
Substandard		1		6		0		0		0		0		0		0		7
Nonaccrual		0		0		0		0		0		0		0		0		0
Total		3,983		3,288		1,521		160		81		259		3,560		0		12,852
Gross write-offs		0		(6)		0		(2)		0		(1)		(53)		0		(62)
Total Loans
Pass	$	253,214	$	412,404	$	301,436	$	152,010	$	103,924	$	276,842	$	150,810	$	0	$	1,650,640
Special Mention		139		3,291		0		9,991		530		6,439		2,613		0		23,003
Substandard		284		1,510		4,988		6,743		0		10,433		4,398		0		28,356
Nonaccrual		0		56		458		50		310		2,182		553		0		3,609
Total		253,637		417,261		306,882		168,794		104,764		295,896		158,374		0		1,705,608
Total Gross Charge-Offs	$	0	$	(32)	$	(11)	$	(17)	$	0	$	(1,700)	$	(495)	$	0	$	(2,255)

- 23 -

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by class segment at March 31, 2024 and December 31, 2023.

						≥ 90 Days				Total Past
		30-59 Days		60-89 Days		Past Due				Due and
(dollars in thousands)		Past Due		Past Due		and Accruing		Nonaccrual		Nonaccrual		Current		Total Loans
March 31, 2024
Commercial loans	$	0	$	0	$	0	$	3,160	$	3,160	$	167,159	$	170,319
Commercial real estate:
Construction		0		0		0		35		35		181,072		181,107
Owner occupied		1,349		0		0		1,346		2,695		350,438		353,133
Non-owner occupied		0		0		0		155		155		472,405		472,560
Residential real estate:
Construction		331		0		0		264		595		27,644		28,239
Revolving		151		15		0		474		640		102,974		103,614
Multi family		0		0		0		0		0		128,918		128,918
Other		1,681		0		0		1,542		3,223		285,957		289,180
Consumer		0		3		0		0		3		12,196		12,199
Total	$	3,512	$	18	$	0	$	6,976	$	10,506	$	1,728,763	$	1,739,269
December 31, 2023
Commercial loans	$	307	$	12	$	0	$	1,513	$	1,832	$	152,357	$	154,189
Commercial real estate:
Construction		0		0		0		38		38		178,718		178,756
Owner occupied		348		0		0		463		811		354,425		355,236
Non-owner occupied		346		0		0		205		551		454,620		455,171
Residential real estate:
Construction		0		0		0		0		0		27,383		27,383
Revolving		304		26		0		439		769		107,199		107,968
Multi family		0		0		0		0		0		130,666		130,666
Other		911		0		0		951		1,862		281,525		283,387
Consumer		17		0		0		0		17		12,835		12,852
Total	$	2,233	$	38	$	0	$	3,609	$	5,880	$	1,699,728	$	1,705,608

Collateral Dependent Loans

A loan is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Corporation elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Corporation records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists of various types of real estate, including residential properties, commercial properties, such as retail centers, office buildings, lodging, agriculture land, and vacant land. At March 31, 2024 collateral dependent loans totaled $6,976,000 compared to $3,609,000 at December 31, 2023.

Modifications

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

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

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The following table presents the amortized costs basis of loans at March 31, 2024 and March 31, 2023 that were both experiencing financial difficulty and modified during the three months ended March 31, by segment and type of modification. The percentage of the amortized costs basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of loan is also presented below:

		Interest Rate		Term		Payment
(dollars in thousands)		Reduction		Extension		Delay		Total Loan Class
March 31, 2024
Commercial loans	$	0	$	0	$	150		0.09	%
Commercial real estate:
Construction		0		6,542		0		3.61
Total	$	0	$	6,542	$	150		0.38	%
March 31, 2023
Commercial loans	$	2,145	$	2,586	$	0	$	2.57	%
Commercial real estate:
Owner occupied		0		1,961		0		0.58
Total	$	2,145	$	4,547	$	0	$	0.41	%

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three months ended March 31, 2024 and March 31, 2023:

	Weighted-Average		Weighted-Average		Weighted Average	Weighted-Average
	Interest Rate		Interest Rate		Term Extension	Payment Delay
(dollars in thousands)	Reduction		Reduction Range		(months)	(months)
March 31, 2024
Commercial loans	0	%	0	%	0	2
Commercial real estate:
Construction	0		0		12	0
March 31, 2023
Commercial loans	3.15	%	3.15 - 3.15	%	7	0
Commercial real estate:
Owner occupied	0		0		4	0

The Corporation has committed to lend additional amounts totaling $3,400,000 to the borrowers included in the previous table for period ended March 31, 2024 compared to $23,000 commitments to lend for the period ended March 31, 2023.

The Corporation closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. None of the loans that have been modified in the three months ended March 31, 2024 and March 31, 2023 were past due or had a payment default within the last twelve months.

Note 5—Deposits

The composition of deposits as of March 31, 2024 and December 31, 2023 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $128,000 at March 31, 2024, compared to $163,000 at December 31, 2023.

	March 31,		December 31,
(dollars in thousands)	2024		2023
Noninterest bearing demand	$	365,358	$	379,288
Interest bearing demand		266,572		266,747
Money market		660,756		644,235
Savings		130,679		131,077
Time deposits less than $100		249,758		233,666
Time deposits $100 to $250		159,824		147,622
Time deposits $250 or more		82,116		70,707
Total deposits	$	1,915,063	$	1,873,342

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

Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At March 31, 2024, the balance of securities sold under agreements to repurchase was $4,272,000 compared to $10,799,000 at December 31, 2023. At March 31, 2024 other short-term borrowings was $26,042,000 compared to $45,742,000 at December 31, 2023. Short-term borrowings at March 31, 2024 and December 31, 2023 consisted of FHLB Open Repo Line of Credit advances at a variable rate. The rate at March 31, 2024 was 5.67 percent compared to 5.68 percent at December 31, 2023.

The following table presents a summary of long-term debt as of March 31, 2024 and December 31, 2023.

	March 31,		December 31,
(dollars in thousands)	2024		2023
Junior subordinated debt
Due 2034, 7.61%, floating rate based on 3 month
SOFR plus 2.02%, callable quarterly	$	3,093	$	3,093
Due 2036, 7.12% floating rate based on 3 month
SOFR plus 1.54%, callable quarterly		7,217		7,217
Lease obligations included in long-term debt:
Finance lease liabilities		1,203		1,210
Total long term debt and junior subordinated debt	$	11,513	$	11,520
Subordinated notes
Due 2030, 4.50% fixed rate, callable on or after December 2025		30,865		30,845
Total long-term debt	$	42,378	$	42,365

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

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

Note 7—Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property, ATM locations, and office space. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as right-of-use (“ROU”) assets and corresponding lease liabilities. The Corporation also has one finance lease for one financial center.

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

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

The components of lease expense were as follows:

	Three months ended
	March 31,
(dollars in thousands)	2024		2023
Operating lease cost	$	174	$	174
Finance lease cost:
Amortization of right-of-use assets	$	12	$	12
Interest on lease liability		11		11
Total finance lease cost	$	23	$	23
Total lease cost	$	197	$	197

Supplemental cash flow information related to leases was as follows:

	Three months ended
	March 31,
	2024		2023
Operating cash flows from operating leases	$	179	$	179
Operating cash flows from financing leases		11		11
Financing cash flows from financing leases		8		8
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		0		0
Finance leases		0		0

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

	March 31,		December 31,
	2024		2023
Assets:
Operating leases right-of-use assets	$	2,591	$	2,746
Finance leases assets		935		947
Total lease assets	$	3,526	$	3,693
Liabilities:
Operating	$	2,687	$	2,848
Financing		1,203		1,210
Total lease liabilities	$	3,890	$	4,058
Weighted Average Remaining Lease Term (years)
Operating leases		6.2		6.3
Finance leases		19.9		20.2
Weighted Average Discount Rate
Operating leases		2.37%		2.38%
Finance leases		3.69%		3.69%

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Future minimum payments for financing leases and operating leases as of March 31, 2024 and December 31, 2023 were as follows:

(dollars in thousands:)	March 31, 2024
Year Ending December 31,	Operating Leases		Finance Leases
2024	$	522	$	56
2025		494		79
2026		389		80
2027		380		80
2028		351		80
Thereafter		737		1,349
Total lease payments		2,873		1,724
Less imputed interest		(186)		(521)
Total	$	2,687	$	1,203

(dollars in thousands:)	December 31, 2023
Year Ending December 31,	Operating Leases		Finance Leases
2024	$	699	$	75
2025		494		79
2026		389		80
2027		380		80
2028		351		80
Thereafter		737		1,348
Total lease payments		3,050		1,742
Less imputed interest		(202)		(532)
Total	$	2,848	$	1,210

Note 8—Regulatory Matters

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

Banks are also subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure of a bank to meet capital requirements can cause bank regulators to initiate certain regulatory actions.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes as of March 31, 2024, the Bank met all capital adequacy requirements to which it is subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2024 and December 31, 2023, the most recent regulatory notifications categorized PeoplesBank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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The table below sets for the Corporation’s and PeoplesBank’s capital positive relative to its respective regulatory capital requirements at March 31, 2024 and December 31, 2023.

									To Be Well Capitalized Under
					Required for Capital				Prompt Corrective Action
	Actual (1)				Adequacy Purposes (2) (3)				Provisions (2)
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Codorus Valley Bancorp, Inc. (consolidated)
at March 31, 2024
Capital ratios:
Common equity Tier 1	$	231,381	12.85	%	$	126,071	7.00	%	$	n/a	n/a	%
Tier 1 risk based		241,381	13.40			153,086	8.50			n/a	n/a
Total risk based		294,201	16.34			189,106	10.50			n/a	n/a
Leverage		241,381	10.80			89,386	4.00			n/a	n/a
at December 31, 2023
Capital ratios:
Common equity Tier 1	$	228,163	12.79	%	$	124,875	7.00	%	$	n/a	n/a	%
Tier 1 risk based		238,163	13.35			151,634	8.50			n/a	n/a
Total risk based		289,514	16.23			187,312	10.50			n/a	n/a
Leverage		238,163	10.75			88,627	4.00			n/a	n/a
PeoplesBank, A Codorus Valley Company
at March 31, 2024
Capital ratios:
Common equity Tier 1	$	267,241	14.86	%	$	125,860	7.00	%	$	116,870	6.50	%
Tier 1 risk based		267,241	14.86			152,829	8.50			143,839	8.00
Total risk based		288,886	16.07			188,789	10.50			179,799	10.00
Leverage		267,241	11.97			89,268	4.00			111,585	5.00
at December 31, 2023
Capital ratios:
Common equity Tier 1	$	264,967	14.89	%	$	124,606	7.00	%	$	115,705	6.50	%
Tier 1 risk based		264,967	14.89			151,307	8.50			142,407	8.00
Total risk based		285,473	16.04			186,909	10.50			178,008	10.00
Leverage		264,967	11.98			88,478	4.00			110,598	5.00

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

(2) The Corporation is currently not subject to the regulatory capital requirements imposed by Basel III on bank holding companies because the Corporation's consolidated assets did not exceed $3.0 billion as of March 31, 2024 and therefore qualified as a small bank holding company.

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

Note 9—Shareholders’ Equity

Share Repurchase

The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in January 2023. Under the approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of the common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for the purpose as and when determined by the Board of Directors including, without limitation pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation plan. There was no activity in the first quarter of 2023 under the program approved in January 2023, which expired by its own terms in December 2023. There was no plan in place in the first quarter of 2024.

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Note 10—Contingent Liabilities

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

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

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

Note 11—Guarantees

Codorus Valley does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are written conditional commitments issued by PeoplesBank to guarantee the performance of a client to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to clients.  The Corporation generally holds collateral and/or personal guarantees supporting these commitments.  The Corporation had $16,621,000 of standby letters of credit outstanding on March 31, 2024, compared to $16,019,000 on December 31, 2023. 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 March 31, 2024 and December 31, 2023, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

Note 12—Fair Value of Assets and Liabilities

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

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

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

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

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

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

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

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

Interest rate swap agreements

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

			Fair Value Measurements
(dollars in thousands)	Total		(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
March 31, 2024
Securities available-for-sale:
U.S. Treasury notes	$	19,546	$	19,546	$	0	$	0
U.S. agency		12,679		0		12,679		0
U.S. agency mortgage-backed, residential		244,795		0		244,795		0
State and municipal		30,368		0		30,368		0
Corporates		32,107		0		32,107		0
Other assets:
Loan-level interest rate swaps		90		0		90		0
December 31, 2023
Securities available-for-sale:
U.S. Treasury notes	$	19,474	$	19,474	$	0	$	0
U.S. agency		12,837		0		12,837		0
U.S. agency mortgage-backed, residential		254,279		0		254,279		0
State and municipal		30,672		0		30,672		0
Corporates		32,505		0		32,505		0
Other assets:
Loan-level interest rate swaps		651		0		651		0

Assets Measured at Fair Value on a Nonrecurring Basis

Individually evaluated loans

Individually evaluated loans are those for which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These loans are generally included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements.  At March 31, 2024, the fair value of individually evaluated loans with a valuation allowance or partial charge-off was $2,439,000, net of valuation allowances of $1,868,000 and charge-offs of $311,000.  At December 31, 2023 the fair value of impaired loans with a valuation allowance or charge-off was $2,526,000, net of valuation allowances of $556,000 and charge-offs of $487,000. 

Foreclosed real estate

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

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sales offer. At March 31, 2024 and December 31, 2023, the fair value of foreclosed real estate with a valuation allowance or write-down was $383,000, net of a write-down down of $584,000.

Mortgage servicing rights

Mortgage servicing rights are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and original time to maturity. Mortgage servicing rights are subsequently evaluated for impairment by an independent third party on a quarterly basis. Significant inputs to the valuation include expected cash flow, expected net servicing income, a cash flow discount rate and the expected life of the underlying loans. Mortgage servicing rights are evaluated periodically for impairment and carried at the lower of amortized cost or fair value. At March 31, 2024 and December 31, 2023, mortgage servicing rights are being carried at amortized cost.

			Fair Value Measurements
(dollars in thousands)		Total	(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
March 31, 2024
Individually evaluated commercial loans	$	1,407	$	0	$	0	$	1,407
Commercial real estate:
Owner Occuppied		701		0		0		701
Individually evaluated residential real estate:
Construction		268		0		0		268
Individually evaluated other		63		0		0		63
Other real estate owned		383		0		0		383
December 31, 2023
Individually evaluated commercial loans	$	1,465	$	0	$	0	$	1,465
Commercial real estate:
Owner Occupied		407		0		0		407
Individually evaluated residential real estate:
Individually evaluated revolving		34		0		0		34
Individually evaluated other		65		0		0		65
Other real estate owned		383		0		0		383

‎

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable		Weighted
(dollars in thousands)	Estimate		Techniques	Input	Range	Average
March 31, 2024
Individually evaluated commercial loans	$	223	Appraisal (1)	Appraisal adjustments (2)	12%-49%	44%
Commercial real estate:
Owner Occupied		701	Appraisal (1)	Appraisal adjustments (2)	1%-29%	20%
Individually evaluated residential real estate:
Construction		268	Appraisal (1)	Appraisal adjustments (2)	4%-4%	4%
Individually evaluated other		63	Appraisal (1)	Appraisal adjustments (2)	16%-16%	16%
Individually evaluated commercial loans		1,184	Business asset valuation (3)	Business asset valuation adjustments (4)	50%-100%	65%
Other real estate owned		383	Appraisal (1)	Appraisal adjustments (2)	0%-25%	22%
December 31, 2023
Individually evaluated commercial loans	$	944	Appraisal (1)	Appraisal adjustments (2)	9%-12%	10%
Commercial real estate:
Owner Occupied		407	Appraisal (1)	Appraisal adjustments (2)	1%-1%	1%
Individually evaluated residential real estate:
Individually evaluated revolving		34	Business asset valuation (3)	Business asset valuation adjustments (4)	7%-7%	7%
Individually evaluated other		65	Appraisal (1)	Appraisal adjustments (2)	16%-16%	16%
Individually evaluated commercial loans		521	Business asset valuation (3)	Business asset valuation adjustments (4)	20%-50%	50%
Other real estate owned		383	Appraisal (1)	Appraisal adjustments (2)	0%-25%	22%

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

(2)Appraisal amounts may be adjusted downward by the Corporation's management for qualitative factors such as economic conditions and estimated liquidation expenses.

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

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

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The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of March 31, 2024 and December 31, 2023.

								Fair Value Estimates
							(Level 1)			(Level 2)			(Level 3)
							Quoted Prices			Significant			Significant
							in Active			Other			Other
	Carrying		Estimated			Markets for			Observable			Unobservable
(dollars in thousands)	Amount		Fair Value			Identical Assets			Inputs			Inputs
March 31, 2024
Financial assets
Cash and cash equivalents	$	26,662		$	26,662		$	26,662		$	0		$	0
Securities available-for-sale		339,495			339,495			19,546			319,949			0
Restricted investment in bank stocks		3,186			N/A			N/A			N/A			N/A
Loans held for sale		958			999			0			999			0
Loans, net		1,717,624			1,624,385			0			0			1,624,385
Interest receivable		8,377			8,377			0			1,590			6,787
Financial liabilities
Deposits	$	1,915,063		$	1,910,922		$	0		$	1,910,922		$	0
Short-term borrowings		30,314			30,314			0			30,314			0
Long-term debt and junior subordinated debt (1)		10,310			10,091			0			0			10,091
Subordinated notes		30,865			29,272			0			29,272			0
Interest payable		1,935			1,935			0			1,935			0
Off-balance sheet instruments		0			0			0			0			0
December 31, 2023
Financial assets
Cash and cash equivalents	$	33,691		$	33,691		$	33,691		$	0		$	0
Securities available-for-sale		349,767			349,767			19,474			330,293			0
Restricted investment in bank stocks		3,146			N/A			N/A			N/A			N/A
Loans held for sale		822			873			0			873			0
Loans, net		1,685,102			1,592,135			0			0			1,592,135
Interest receivable		7,997			7,997			0			1,202			6,795
Financial liabilities
Deposits	$	1,873,342		$	1,868,931		$	0		$	1,868,931		$	0
Short-term borrowings		56,541			56,541			0			56,541			0
Long-term debt and junior subordinated debt (1)		10,310			10,307			0			0			10,307
Subordinated notes		30,845			29,342			0			29,342			0
Interest payable		1,301			1,301			0			1,301			0
Off-balance sheet instruments		0			0			0			0			0
(1) Exclude leases included in Long-term debt

- 34 -

Note 13—Assets and Liabilities Subject to Offsetting

Securities Sold Under Agreements to Repurchase

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

							Gross amounts Not Offset in
							the Statements of Condition
							Financial Instruments
(dollars in thousands)	Gross ‎Amounts of ‎Recognized ‎Liabilities		Gross ‎Amounts ‎Offset in the ‎Statements ‎of Condition		Net Amounts ‎of Liabilities ‎Presented in ‎the Statements ‎of Condition		U.S. agency ‎mortgage-backed, ‎residential		U.S. agency		Cash ‎Collateral ‎Pledged		Net ‎Amount
March 31, 2024
Repurchase Agreements	$	4,272	$	0	$	4,272	$	(13,333)	$	0	$	0	$	(9,061)
December 31, 2023
Repurchase Agreements	$	10,799	$	0	$	10,799	$	(13,873)	$	0	$	0	$	(3,074)

Note 14 – Interest Rate Swaps

Loan Level Interest Rate Swaps

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

The fair value and notional amount related to loan-level interest rate swaps are presented below:

		March 31, 2024				December 31, 2023
		Notional		Asset (Liability)		Notional		Asset (Liability)
(dollars in thousands)		Amount		Fair Value		Amount		Fair Value
Interest Rate Swap with Customers
Positive Fair Values	$	39,597	$	90	$	37,684	$	651
Interest Rate Swaps with Counterparties
Negative Fair Values	$	39,597	$	(90)	$	37,684	$	(651)

- 35 -

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

(dollars in thousands)		March 31, 2024		December 31, 2023
Interest Rate Swap Contracts - Commercial Loans:
Gross amounts recognized	$	90	$	651
Gross amounts offset		90		651
Net amounts presented in the Consolidated Balance Sheets	$	0	$	0
Gross amounts not offset:
Cash Collateral	$	0	$	0
Net amounts	$	0	$	0

‎

- 36 -

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.

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

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

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

Cautionary Note Regarding Forward-looking Statements

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

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

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

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

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

monetary and fiscal policies of the federal government;

the effects of changes in accounting policies and practices;

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

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

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

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

- 37 -

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

geographic concentration of the Corporation’s business;

deterioration of commercial real estate values;

the adequacy of loan loss reserves;

deterioration in the credit quality of borrowers;

the Corporation’s ability to attract and retain key personnel, especially in light of the pending Merger with Orrstown;

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

failure or circumvention of our internal controls;

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

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

changes in government regulation and supervision and the potential for negative consequences resulting from regulatory examinations, investigations and violations, in particular, the effect that such occurrences could have on the pending Merger with Orrstown; 

the effects of adverse outcomes from claims and litigation;

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

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

In addition to the foregoing factors with respect to the Corporation’s business, the following factors and uncertainties exist with respect to the pending Merger with Orrstown:

the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive agreement and plan of merger between the Corporation and Orrstown;

the outcome of any legal proceedings that may be instituted against the Corporation or Orrstown;

delays in completing the pending Merger;

the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the pending Merger) or shareholder approvals;

the failure to satisfy any of the other conditions to the pending Merger on a timely basis or at all, including the ability of the Corporation or Orrstown to meet expectations regarding the timing, completion and accounting and tax treatments of the pending Merger;

the possibility that the anticipated benefits of the pending Merger are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Corporation and Orrstown do business;

the possibility that the pending Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

the possibility that revenues following the pending Merger may be lower than expected; the impact of certain restrictions during the pendency of the pending Merger on the parties’ ability to pursue certain business opportunities and strategic transactions;

diversion of management’s attention from ongoing business operations and opportunities;

potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or the completion of the pending Merger;

the ability to complete the pending Merger and integration of the Corporation and Orrstown successfully;

the dilution caused by Orrstown’s issuance of additional shares of its capital stock in connection with the pending Merger; and

the potential impact of general economic, political or market factors on the companies or the pending Merger and other factors that may affect future results of the Corporation or Orrstown.

For a discussion of other risks and uncertainties that could affect the Corporation, please refer to the “Risk Factors” section of the Corporation’s Annual Report on Form 10-K and 10-K/A for the year-ended December 31, 2023, and in its current and periodic reports that are, or will be, filed with the Securities and Exchange Commission (“SEC”) and available on the SEC’s website at www.sec.gov or in the Investor Relations section of the Corporation’s website at www.peoplesbanknet.com. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statement to reflect new information, events occurring after the date of this Form 10-Q or otherwise.

- 38 -

Critical Accounting Policies

The Corporation’s critical accounting policies, as summarized in Note 1—Summary of Significant Accounting Policies, include those related to the allowance for credit losses which requires management to make significant judgments, estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities. For this Form 10-Q, there were no material changes made to the Corporation’s critical accounting policies, which were fully described in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2023.

Three Months Ended March 31, 2024 vs. Three Months Ended March 31, 2023

The schedule below presents selected performance metrics for the first quarter of both 2024 and 2023.

	Three months ended
	March 31,
	2024			2023
Basic earnings per share	$	0.44		$	0.73
Diluted earnings per share	$	0.44		$	0.73
Cash dividend payout ratio		38.53	%		21.93	%
Return on average assets		0.77	%		1.29	%
Return on average equity		8.48	%		15.45	%
Net interest margin (tax equivalent basis)		3.34	%		4.00	%
Net overhead ratio		2.19	%		1.93	%
Efficiency ratio		73.91	%		59.05	%
Average equity to average assets		9.10	%		8.38	%

The Corporation’s net income (earnings) was $4,255,000 for the quarter ended March 31, 2024, as compared to $6,992,000 for the quarter ended March 31, 2023, a decrease of $2,737,000 or 39 percent.

INCOME STATEMENT ANALYSIS

Net Interest Income

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

Net interest income for the quarter ended March 31, 2024 was $17,642,000, a decrease of $2,913,000 or 14 percent compared to net interest income of $20,555,000 for the first quarter 2023.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 3.34 percent for the first quarter 2024 compared to 4.00 percent for the first quarter 2023. The net interest margin contraction was primarily the result of higher rates on interest bearing demand deposits and time deposits, partially offset by higher rates on commercial loans.

Total interest income for the first quarter 2024 totaled $29,844,000, an increase of $3,551,000 or 14 percent above the amount of total interest income for the first quarter 2023. The change was primarily a result of higher rates on commercial loans.

Interest and dividend income on investments increased $259,000 or 10 percent in the first quarter 2024 compared to the same period in 2023. The average balance of the investment securities portfolio decreased $1,032,000 or less than 1 percent when comparing the first quarter 2024 to the same period in 2023. The tax-equivalent yield on investments for the first quarter 2024 was 2.93 percent or 25 basis points higher than the 2.68 percent realized in the first quarter 2023. The average balance of interest bearing deposits with banks decreased $49,161,000 or 82 percent in the first quarter 2024 compared to the first quarter 2023. The yield on the interest bearing deposits with banks increased 102 basis points when comparing the first quarter 2024 to the same period in 2023.

Interest income on loans increased $3,821,000 or 17 percent in the first quarter 2024 compared to the same period in 2023. The average balance of outstanding loans, primarily commercial loans, increased $93,184,000 or 6 percent comparing the first quarter 2024 to the same period in 2023. Higher rates on commercial loans was the primary driver of the increase in interest income on loans. The tax-equivalent yield on loans for the first quarter 2024 was 6.26 percent or 54 basis points higher than the 5.72 percent experienced in the first quarter 2023.

Total interest expense for the first quarter 2024 was $12,202,000, an increase of $6,464,000 or 113 percent as compared to total interest expense of $5,738,000 for the first quarter 2023. The change was primarily the result of the higher cost of interest bearing demand and time deposits.

- 39 -

Interest expense on deposits increased $5,601,000 or 109 percent in the first quarter 2024 compared to the same period in 2023. The average rate paid on interest bearing deposits was 2.86 percent in the first quarter 2024 or 143 basis points higher than the average rate paid of 1.43 percent in the first quarter 2023. The average balance of interest bearing deposits for the first quarter 2024 increased by $55,553,000 or 4 percent compared to the first quarter 2023. Also, noninterest-bearing deposits decreased, with the average volume for the first quarter 2024 decreasing 19 percent to $361,215,000 as compared to $444,416,000 for the first quarter 2023.

For the first quarter 2024 interest expense on all borrowings increased $863,000 or 144 percent compared to the first quarter 2023. Short-term borrowings consisting of repurchase agreements and other short-term borrowings, which includes borrowings from the Federal Home Loan Bank of Pittsburgh (FHLBP) Open Repo Line of Credit averaged $68,001,000 for the first quarter 2024, compared to an average balance of $12,894,000 for the first quarter 2023. The rate on average short-term borrowings for the first quarter 2024 was 5.19 percent, an increase as compared to a rate of 1.20 percent for the first quarter 2023. Long-term debt, which includes junior subordinated trust preferred securities, finance leases and long-term FHLBP borrowings, averaged $14,270,000 for the first quarter 2024 and $14,690,000 for the first quarter 2023. For the first quarter 2024, the rate on average long-term debt was 6.12 percent, an increase of 75 basis points as compared to a rate of 5.37 percent for the first quarter 2023. Subordinated notes, issued in December 2020 by the Corporation, averaged $30,858,000 for the first quarter 2024 and $30,777,000 for the first quarter 2023.

- 40 -

Table 1-Average Balances and Interest Rates (tax equivalent basis)
	Three months ended March 31,
	2024							2023
	Average				Yield/			Average				Yield/
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest bearing deposits with banks	$	11,125	$	155		5.62	%	$	60,286	$	684		4.60	%
Investment securities:
Taxable		369,223		2,725		2.97			369,154		2,474		2.72
Tax-exempt		22,436		131		2.35			23,537		125		2.15
Total investment securities		391,659		2,856		2.93			392,691		2,599		2.68
Loans:
Taxable (1)		1,707,857		26,687		6.28			1,613,154		22,860		5.75
Tax-exempt		21,078		207		3.95			22,597		217		3.89
Total loans		1,728,935		26,894		6.26			1,635,751		23,077		5.72
Total earning assets		2,131,719		29,905		5.64			2,088,728		26,360		5.12
Other assets (2)		73,213							71,428
Total assets	$	2,204,932						$	2,160,156
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	909,735	$	5,987		2.65	%	$	902,917	$	3,461		1.55	%
Savings		131,143		10		0.03			160,062		12		0.03
Time		471,386		4,741		4.05			393,732		1,664		1.71
Total interest bearing deposits		1,512,264		10,738		2.86			1,456,711		5,137		1.43
Short-term borrowings		68,001		878		5.19			12,894		38		1.20
Long-term debt and junior subordinated debt		14,270		217		6.12			14,690		194		5.37
Subordinated notes		30,858		369		4.81			30,777		369		4.86
Total interest bearing liabilities		1,625,393		12,202		3.02			1,515,072		5,738		1.54
Noninterest bearing deposits		361,215							444,416
Other liabilities		17,586							18,250
Shareholders' equity		200,738							182,418
Total liabilities and
shareholders' equity	$	2,204,932						$	2,160,156
Net interest income (tax equivalent basis)			$	17,703						$	20,622
Net interest margin (3)						3.34	%						4.00	%
Tax equivalent adjustment				(61)							(67)
Net interest income			$	17,642						$	20,555

(1)Average balance includes average nonaccrual loans of $3,936,000 for 2024 and $9,962,000 for 2023.

Interest includes net loan fees of $646,000 for 2024 and $641,000 for 2023.

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

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

- 41 -

Table 2-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis)
	Three months ended
	March 31,
	2024 vs. 2023
	Increase (decrease) due to change in*
(dollars in thousands)	Volume		Rate			Net
Interest Income
Interest bearing deposits with banks	$	(558)	$	29	$	(529)
Investment securities:
Taxable		9		242		251
Tax-exempt		(6)		12		6
Loans:
Taxable		796		3,031		3,827
Tax-exempt		(14)		4		(10)
Total interest income		227		3,318		3,545
Interest Expense
Deposits:
Interest bearing demand		176		2,350		2,526
Savings		(2)		0		(2)
Time		343		2,734		3,077
Short-term borrowings		727		113		840
Long-term debt and junior subordinated debt		(3)		26		23
Subordinated notes		1		(1)		0
Total interest expense		1,242		5,222		6,464
Net interest income (tax equivalent basis)	$	(1,015)	$	(1,904)	$	(2,919)

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

Provision for Credit Losses

The provision for credit losses is an expense charged to earnings to cover the estimated losses attributable to uncollected loans. The provision reflects management’s judgment of an appropriate level for the allowance for credit losses. Total provision for credit losses, including off-balance sheet exposures, for the first quarter 2024 was a provision of $116,000. Recoveries on previously charged-off loans attributed $452,000 and other impacts, primarily increases in quantitative reserves, attributed $1,282,000 to the change in provision for the quarter. These were offset by attributions related to charge-offs of $204,000 and attributions associated with changes in qualitative reserves related to economic conditions of $391,000, resulting in a net change in provision in the first quarter 2024 of $1,139,000. The allowance as a percentage of total loans was 1.24 percent at March 31, 2024, as compared to 1.20 percent at December 31, 2023 and 1.31 percent at March 31, 2023.

More information about the allowance for credit losses can be found in this report under the caption Allowance for Credit Losses on page 47.

- 42 -

Noninterest Income

The following table presents the components of total noninterest income for the first quarter 2024, compared to the first quarter 2023.

Table 3 - Noninterest income
		Three months ended				Change
		March 31,				Increase (Decrease)
(dollars in thousands)	2024		2023		$		%
Trust and investment services fees	$	1,421	$	1,202	$	219	18	%
Income from mutual fund, annuity and insurance sales		314		369		(55)	(15)
Service charges on deposit accounts		1,455		1,485		(30)	(2)
Income from bank owned life insurance		414		322		92	29
Other income		467		862		(395)	(46)
Gain on sales of loans held for sale		105		10		95	*nm
Gain on sales of assets held for sale		0		118		(118)	(100)
Loss on sales of securities		0		(388)		388	100
Total noninterest income	$	4,176	$	3,980	$	196	5	%
*nm - not meaningful

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

Trust and investment services fees – The $219,000 or 18 percent increase in trust and investment services fees is primarily due to new business as well as higher estate fee income than in the prior period.

Income from mutual fund, annuity and insurance sales —The $55,000 or 15 percent decrease in income from mutual fund, annuity and insurance sales is primarily due to a slowdown in referral volume compared to the prior period.

Income from bank owned life insurance—The $92,000 or 29 percent increase in income from bank owned life insurance is due to an additional bank owned life insurance asset of $5,000,000 purchased in the fourth quarter of 2023 and increasing rates in the historic portfolio.

Other income – The $395,000 or 46 percent decrease in other income is primarily due to a decrease in fees earned on swap transactions.

Gain on sales of assets held for sale—The $118,000 or 100 percent change in gain on sales of assets held for sale was due to the gain related to the sale of the former Gardenville branch real estate in the first quarter of 2023.

Loss on sales of securities - The $388,000 or 100 percent change in the loss on sales of securities is the result of selling securities in the first quarter of 2023.

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Noninterest Expense

The following table presents the components of total noninterest expense for the first quarter 2024, compared to the first quarter 2023.

Table 4 - Noninterest expense
		Three months ended				Change
		March 31,				Increase (Decrease)
(dollars in thousands)	2024		2023		$		%
Personnel	$	9,879	$	9,042	$	837	9	%
Occupancy of premises, net		894		978		(84)	(9)
Furniture and equipment		828		838		(10)	(1)
Professional and legal		283		467		(184)	(39)
Marketing		312		276		36	13
FDIC insurance		246		250		(4)	(2)
Debit card processing		470		478		(8)	(2)
External data processing		1,111		1,010		101	10
Committee & director fees		320		358		(38)	(11)
PA shares tax		363		343		20	6
Merger related		118		0		118	100
Impaired (recovery of) loan carrying costs		74		(98)		172	176
Other		1,363		869		494	57
Total noninterest expense	$	16,261	$	14,811	$	1,450	10	%

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

Personnel – The $837,000 or 9 percent increase in personnel expense is attributed to higher variable compensation accruals and stock compensation expense in the first quarter 2024.

Professional and legal—The $184,000 or 39 percent decrease in professional and legal expense is attributed to lower legal fees associated with corporate matters and lower external audit fees related to CECL implementation.

Merger related – The $118,000 or 100 percent increase in merger related expenses is associated with the merger announced in December 2023.

Impaired (recovery of) loan carrying costs—The $172,000 or 176 percent increase in impaired loan carrying costs is attributed to the recovery of costs in the prior period.

Other—The $494,000 or 57 percent increase in other expense is primarily due to a reversal of expense associated with a corporate matter in the prior period.

Provision for Income Taxes

The provision for income taxes for the first quarter 2024 was $1,186,000 a decrease of $808,000 or 41 percent as compared to the first quarter 2023. The decrease was attributed to lower pre-tax net income for the first quarter 2024 compared to the first quarter 2023. The effective tax rate for the three months ended March 31, 2024 and March 31, 2023 was 21.8 percent and 22.2 percent, respectively. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.  

BALANCE SHEET REVIEW

Interest Bearing Deposits with Banks

On March 31, 2024, interest bearing deposits with banks totaled $11,128,000, an increase of $246,000 or 2 percent, compared to the level at year-end 2023. The increase is primarily due to an increase in deposits, partially offset by an increase in loans.

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Investment Securities (Available-for-Sale)

The Corporation’s entire investment securities portfolio is classified available-for-sale, and is comprised of interest-earning debt securities. The overall composition of the Corporation’s investment securities portfolio is provided in Note 2—Securities. On March 31, 2024, the fair value of investment securities available-for-sale totaled $339,495,000, which represented a decrease of $10,272,000 as compared to the fair value of investment securities at year-end 2023. Purchases of securities did not exceed the cash flows from principal reductions and maturities during the first three months of 2024.

Restricted Investments in Bank Stock, at Cost

On March 31, 2024, restricted investments in bank stock, at cost, was $3,186,000, which was $40,000 or 1 percent higher than the level at year-end 2023. This was attributable to short-term borrowings of $26,042,000 with FHLBP, which requires a corresponding membership stock purchase.

Loans Held For Sale

On March 31, 2024, loans held for sale totaled $958,000, which was $136,000 or 17 percent higher than the level at year-end 2023. This was primarily attributable to SBA loans held for sale at the end of the period.

Loans Held For Investment

On March 31, 2024, total loans, net of deferred fees, were $1.74 billion, which was $33,661,000 or 2 percent higher than the level at year-end 2023. The composition of the Corporation’s loan portfolio is provided in Note 4—Loans and Allowance for Credit Losses.

Deposits

Deposits are the Corporation’s principal source of funding for earning assets. On March 31, 2024, deposits totaled $1.92 billion, which reflected a $41,721,000 or 2 percent increase compared to the level at year-end 2023. Noninterest bearing deposits decreased by $13,930,000 or 4 percent, more than offset by a $55,651,000 increase in interest bearing deposits, primarily money market accounts and time deposits. The Corporation maintains a well-diversified deposit base and has a comparatively low level of uninsured deposits. At March 31, 2024, 84% of the Bank’s deposits were estimated to be FDIC-insured, and an additional 7% of deposits were fully collateralized. The composition of the Corporation’s total deposit portfolio is provided in Note 5—Deposits.

Short-term Borrowings

Short-term borrowings, which consist of securities sold under agreements to repurchase (repurchase agreements), federal funds purchased, and other short-term borrowings, totaled $30,314,000 at March 31, 2024, which reflected a $26,227,000 or 46 percent decrease compared to the level at year-end 2023. At March 31, 2024, the balance of other short-term borrowings was $26,042,000 compared to $45,742,000 at December 31, 2023, which consisted of FHLBP Open Repo line of credit advances.

Long-term Debt and Subordinated Debentures

The Corporation uses long-term borrowings as a secondary funding source for asset growth and to manage interest rate risk. On March 31, 2024, long-term debt, including subordinated debentures totaled $42,378,000 compared to $42,365,000 at year-end 2023. A listing of outstanding long-term debt obligations is provided in Note 6—Short-Term Borrowings and Long-Term Debt.

Shareholders’ Equity and Capital Adequacy

Shareholders’ equity, or capital, enables Codorus Valley to maintain asset growth and absorb losses. Capital adequacy can be affected by a multitude of factors, including profitability, new stock issuances, corporate expansion and acquisitions, dividend policy and distributions, and regulatory mandates. The Corporation’s total shareholders’ equity was approximately $200,994,000 on March 31, 2024, an increase of $1,389,000 or 1 percent compared to the level at year-end 2023. The increase was primarily attributable to net income of $4,255,000, partially offset by dividends paid of $1,639,000 for the three months ended March 31, 2024 and the accumulated other comprehensive loss of $1,829,000.

Cash Dividends on Stock

The Corporation has historically paid cash dividends on its stock on a quarterly basis. The Board of Directors determines the dividend rate after considering the Corporation's capital requirements, current and projected net income, and other relevant factors. As recently announced, the Board of Directors declared a quarterly cash dividend of $0.17 per share on April 9, 2024, payable on May 14, 2024, to shareholders of record at the close of business on May 7, 2024. The cash dividend follows a quarterly cash dividend of $0.17 per share distributed in February 2024.

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Capital Adequacy

The Corporation and PeoplesBank are subject to various regulatory capital requirements administered by banking regulators that involve quantitative guidelines and qualitative judgments. The regulatory capital measures for the Corporation and PeoplesBank as of March 31, 2024 and the minimum capital ratios established by regulators are set forth in Note 8—Regulatory Matters to the financial statements. We believe that PeoplesBank is well capitalized on March 31, 2024 and had no regulatory dividend restrictions (see Note 8—Regulatory Matters to the financial statements).

RISK MANAGEMENT

Credit Risk Management

Credit risk represents the possibility that a loan client, counterparty or issuer may not perform in accordance with contractual terms, posing one of the most significant risks of loss to the Corporation. Accordingly, the Corporation emphasizes the management of credit risk, and has established a lending policy which management believes is sound given the nature and scope of our operations. The Credit Risk Management section included in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2023, provides a more detailed overview of the Corporation’s credit risk management process.

Management regularly analyzes the commercial real estate portfolio, which includes the review of occupancy, cash flows, expenses and expiring leases, as well as the location of the real estate. At March 31, 2024, the Corporation has $134,800,000 outstanding loan balances related to office space compared to $132,500,000 at December 31, 2023. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metro markets.

Nonperforming Assets

Nonperforming assets, as shown in the table below, are asset categories that pose the greatest risk of loss. The level of nonperforming assets at March 31, 2024 was $7,384,000, which increased by $3,392,000 or 85 percent when compared to year-end 2023. The increase was primarily attributed to the new loans being placed on nonaccrual status during the quarter.

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

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The paragraphs and table below address significant changes in the nonperforming asset categories as of March 31, 2024 compared to December 31, 2023.

Table 5 – Nonperforming assets

(dollars in thousands)	March 31, 2024			December 31, 2023
Nonaccrual loans:
Commercial loans	$	3,160		1,513
Commercial real estate:
Construction		35		38
Owner occupied		1,346		463
Non-owner occupied		155		205
Residential real estate:
Construction		264		0
Revolving		474		439
Other		1,542		951
Total nonaccrual loans	$	6,976	$	3,609
Other Real Estate Owned	$	408	$	383
Total Nonperforming assets	$	7,384	$	3,992
Individually evaluated loans without a valuation allowance	$	3,233	$	2,146
Individually evaluated loans with a valuation allowance		3,743		1,463
Total individually evaluated loans	$	6,976	$	3,609
Valuation allowance related to individually evaluated loans	$	1,868	$	556
Nonperforming loans as a % of total loans		0.40	%	0.21	%
Nonperforming assets to total loans and foreclosed real estate		0.42	%	0.23	%
Nonperforming assets as a % of total period-end assets		0.33	%	0.18	%
ACL as a % of nonperforming loans		310.29	%	568.28	%
ACL as a % of nonperforming assets		293.13	%	513.72	%
ACL as a % of total loans		1.24	%	1.20	%
Nonaccrual loans as a % of applicable portfolio:
Commercial loans		1.86	%	0.98	%
Commercial real estate:
Construction		0.02	%	0.02	%
Owner occupied		0.38	%	0.13	%
Non-owner occupied		0.03	%	0.05	%
Residential real estate:
Construction		0.93	%	0.00	%
Revolving		0.46	%	0.41	%
Other		0.53	%	0.34	%

Nonperforming loans

Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more past due. We generally place a loan on nonaccrual status and cease accruing interest income (i.e., recognize interest income on a cash basis, as long as the loan is sufficiently collateralized) when loan payment performance is unsatisfactory and the loan is past due 90 days or more. A loan is returned to interest accruing status when we determine that circumstances have improved to the extent that all of the principal and interest amounts contractually due are current for at least six consecutive payments and future payments are reasonably assured. Loans past due 90 days or more and still accruing interest represent loans that are contractually past due, but are well collateralized and in the process of collection. As of March 31, 2024, the nonperforming loan portfolio balance totaled $6,976,000, compared to $3,609,000 at year-end 2023. For both periods, the nonperforming portfolio balance was comprised primarily of collateralized commercial loans.

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Foreclosed Real Estate

Foreclosed real estate represents real estate acquired to satisfy debts owed to PeoplesBank and is included in the Other Assets category on the Corporation’s balance sheet. Foreclosed real estate was $408,000 as of March 31, 2024 and $383,000 as of December 31, 2023. A new property totaling $25,000 was included during the three month period ended March 31, 2024.

Allowance for Credit Losses (ACL)

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

The ACL on loans was $21,645,000 as of March 31, 2024 and $20,506,000 as of December 31, 2023. As a percentage of period-end loans, the ACL was 1.24 percent as of March 31, 2024 and 1.20 percent as of December 31, 2023.

The ACL as a percentage of nonperforming loans was 310.29 percent as of March 31, 2024 and 568.28 percent as of December 31, 2023. The ACL as a percentage of nonperforming assets was 293.13 percent as of March 31, 2024 and 513.72 percent as of December 31, 2023.

The ACL on unfunded commitments was $1,503,000 as of March 31, 2024 and $2,278,000 as of December 31, 2023. The Corporation recorded a recovery of $775,000 for credit losses on unfunded commitments for the three months ended March 31, 2024, compared to a provision of $246,000 in the prior year.

Liquidity Risk Management

Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan clients, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, adequate liquidity provides funds for growth and business opportunities as they arise. Liquidity is generated from transactions relating to both the Corporation's assets and liabilities. The primary sources of asset liquidity are funds received from client loan payments, investment maturities and cash inflows from mortgage-backed securities, and the net proceeds of asset sales. The primary sources of liability liquidity are deposit growth, and funds obtained from short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows, included in this report, present the changes in cash from operating, investing and financing activities. At March 31, 2024, we believe that liquidity was adequate based upon the availability of unpledged available-for-sale securities with a fair value totaling approximately $135,476,000. Available credit from the Federal Home Loan Bank of Pittsburgh totals approximately $736,633,000. The Corporation’s loan-to-deposit ratio was 90.8 percent as of March 31, 2024, 91.0 percent as of December 31, 2023 and 87.2 percent as of March 31, 2023.

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans, unfunded commitments under existing loan facilities, and letters of credit issued under the same standards as on-balance sheet instruments. Unused commitments at March 31, 2024, totaled $622,135,000 and consisted of $556,421,000 in unfunded commitments under existing loan facilities, $49,093,000 to grant new loans and $16,621,000 in letters of credit. Generally these commitments have fixed expiration dates or termination clauses and are for specific purposes. Accordingly, many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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In addition, simulation of net interest income on a look-forward basis is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the impact of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. A "shock" is a simulated immediate upward or downward movement of interest rates. Shock scenarios do not take into account changes in client behavior that could result in changes to mix and/or volumes in the balance sheet, nor do they account for competitive pricing over the forward twelve-month period. The results at March 31, 2024 and December 31, 2023 reflect the impact of the FOMC’s interest rates in effect at the end of each period. To improve comparability across periods, the Bank strives to follow best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; therefore the results may not reflect actions that management may take in the normal course or strategy of business that would impact results. The Corporation simulates the application of these interest rate “shocks” to its financial instruments up and down 100, 200, 300, and 400 basis points.

The following table summarizes the simulated impact of interest rate shocks on net interest income as of March 31, 2024 and December 31, 2023, and the Corporation’s policy limits at each level. All scenarios simulated were within policy limits as of March 31, 2024 and December 31, 2023.

Net Interest Income
	% Change in Net Interest Income
Change in Market Interest Rates (basis points)		March 31, 2024		December 31, 2023		% Change ‎Policy Limit
(400)		(7.8)	%	(8.1)	%	(35.0)	%
(300)		(5.0)	%	(5.2)	%	(25.0)	%
(200)		(2.2)	%	(2.3)	%	(15.0)	%
(100)		(0.5)	%	(0.4)	%	(7.5)	%
100		(1.3)	%	(1.6)	%	(7.5)	%
200		(3.0)	%	(3.6)	%	(15.0)	%
300		(4.0)	%	(4.9)	%	(25.0)	%
400		(5.1)	%	(6.3)	%	(35.0)	%

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Treasurer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Treasurer concluded that, as of March 31, 2024, the Corporation’s disclosure controls and procedures were effective. The Corporation’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. A control system, no matter how well conceived and operated, must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There were no changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed in Item 1A – Risk Factors – in our Annual Report on Form 10-K for the year ended December 31, 2023.

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

The Corporation relies on its subsidiary PeoplesBank, A Codorus Valley Company, for dividend distributions, which are subject to restrictions as reported in Note 9—Regulatory Matters of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

This Item 4 is not applicable to the Corporation.

Item 5. Other Information

During the quarter ended March 31, 2024, no director or officer (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) of Codorus Valley Bancorp, Inc. adopted, modified, or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Exchange Act).

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Item 6. Exhibits

Exhibit Number	Description of Exhibit
3.1	Amended Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for June 30, 2018, filed with the Commission on August 6, 2018)
3.2	Amended and Restated By-laws (Incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K filed with the Commission on March 12, 2024)
4.1	Form of 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 of Codorus Valley Bancorp, Inc. (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Commission on December 10, 2020)
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
101	Financial statements from the Quarterly Report on Form 10-Q of Codorus Valley Bancorp, Inc. for the quarter ended March 31, 2024, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Shareholder’s Equity, and (vi) the Notes to Consolidated Financial Statements – filed herewith.
104	Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101)

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Signatures

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

	Codorus Valley Bancorp, Inc. (Registrant)
May 6, 2024	/s/ Craig L. Kauffman
Date	Craig L. Kauffman,
	President
	and Chief Executive Officer (Principal Executive Officer)
May 6, 2024	/s/ Larry D. Pickett
Date	Larry D. Pickett
	Treasurer
	(Principal Financial and Accounting Officer)

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