Codorus Valley Bancorp, Inc.

Form 10-Q Index

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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) 2020 2019
Assets
Interest bearing deposits with banks $ 169,689 $ 110,742
Cash and due from banks 15,569 20,849
Total cash and cash equivalents 185,258 131,591
Securities, available-for-sale 171,738 159,675
Restricted investment in bank stocks, at cost 3,951 4,551
Loans held for sale 10,858 11,803
Loans (net of deferred fees of $3,266 - 2020 and $3,463 - 2019) 1,476,661 1,505,135
Less-allowance for loan losses (22,838 ) (21,066 )
Net loans 1,453,823 1,484,069
Premises and equipment, net 26,637 25,967
Operating leases right-of-use assets 3,030 3,021
Goodwill 2,301 2,301
Other assets 64,363 63,567
Total assets $ 1,921,959 $ 1,886,545

Liabilities
Deposits
Noninterest bearing $ 274,382 $ 273,968
Interest bearing 1,364,965 1,316,596
Total deposits 1,639,347 1,590,564
Short-term borrowings 6,196 7,925
Long-term debt 71,627 81,632
Operating leases liabilities 3,187 3,184
Other liabilities 12,006 12,072
Total liabilities 1,732,363 1,695,377

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at March 31, 2020 and 0 at December 31, 2019 0 0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
Shares issued: 9,769,150 at March 31, 2020 and 9,755,976 at December 31, 2019; and shares outstanding: 9,763,713 at March 31, 2020 and 9,755,976 at December 31, 2019. 24,423 24,390
Additional paid-in capital 140,686 140,450
Retained earnings 20,469 25,019
Accumulated other comprehensive income 4,107 1,309
Treasury stock, at cost; 5,437 shares at March 31, 2020 (89 ) 0
Total shareholders' equity 189,596 191,168
Total liabilities and shareholders' equity $ 1,921,959 $ 1,886,545

(Unaudited)




	June 30,		December 31,
(dollars in thousands, except per share data)	2020		2019
Assets
Interest bearing deposits with banks	$	197,432	$	110,742
Cash and due from banks		17,929		20,849
Total cash and cash equivalents		215,361		131,591
Securities, available-for-sale		159,715		159,675
Restricted investment in bank stocks, at cost		2,593		4,551
Loans held for sale		17,534		11,803
Loans (net of deferred fees of $8,372 - 2020 and $3,463 - 2019)		1,601,129		1,505,135
Less-allowance for loan losses		(21,038)		(21,066)
Net loans		1,580,091		1,484,069
Premises and equipment, net		26,316		25,967
Operating leases right-of-use assets		2,683		3,021
Goodwill		2,301		2,301
Other assets		64,411		63,567
Total assets	$	2,071,005	$	1,886,545

Liabilities
Deposits
Noninterest bearing	$	397,968	$	273,968
Interest bearing		1,409,674		1,316,596
Total deposits		1,807,642		1,590,564
Short-term borrowings		9,477		7,925
Long-term debt		46,619		81,632
Operating leases liabilities		2,824		3,184
Other liabilities		12,608		12,072
Total liabilities		1,879,170		1,695,377

Shareholders' equity
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; shares issued and outstanding:
0 at June 30, 2020 and 0 at December 31, 2019		0		0
Common stock, par value $2.50 per share; 30,000,000 shares authorized;
Shares issued and outstanding: 9,787,598 at June 30, 2020 and 9,755,976 at
December 31, 2019		24,469		24,390
Additional paid-in capital		140,968		140,450
Retained earnings		21,957		25,019
Accumulated other comprehensive income		4,441		1,309
Total shareholders' equity		191,835		191,168
Total liabilities and shareholders' equity	$	2,071,005	$	1,886,545

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) 2020 2019
Interest income
Loans, including fees $ 18,764 $ 19,510
Investment securities:
Taxable 820 676
Tax-exempt 141 209
Dividends 72 119
Other 392 362
Total interest income 20,189 20,876

Interest expense
Deposits 4,276 4,620
Federal funds purchased and other short-term borrowings 9 9
Long-term debt 537 716
Total interest expense 4,822 5,345
Net interest income 15,367 15,531
Provision for loan losses 9,435 1,050
Net interest income after provision for loan losses 5,932 14,481

Noninterest income
Trust and investment services fees 994 840
Income from mutual fund, annuity and insurance sales 261 235
Service charges on deposit accounts 1,130 1,158
Income from bank owned life insurance 286 367
Other income 439 409
Gain on sales of loans held for sale 298 218
Gain (loss) on sales of securities 15 (4 )
Total noninterest income 3,423 3,223

Noninterest expense
Personnel 7,805 7,706
Occupancy of premises, net 926 963
Furniture and equipment 853 772
Postage, stationery and supplies 217 184
Professional and legal 205 109
Marketing 325 349
FDIC insurance 167 237
Debit card processing 389 323
Charitable donations 872 845
Telecommunications 121 126
External data processing 704 556
Foreclosed real estate including provision for losses 20 87
Other 715 304
Total noninterest expense 13,319 12,561
(Loss) income before income taxes (3,964 ) 5,143
(Benefit) provision for income taxes (975 ) 1,052
Net (loss) income $ (2,989 ) $ 4,091
Net (loss) income per share, basic $ (0.31 ) $ 0.41
Net (loss) income per share, diluted $ (0.31 ) $ 0.41


	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands, except per share data)	2020		2019		2020		2019
Interest income
Loans, including fees	$	17,880	$	19,974	$	36,644	$	39,484
Investment securities:
Taxable		761		744		1,581		1,420
Tax-exempt		126		171		267		380
Dividends		23		88		95		207
Other		48		558		440		920
Total interest income		18,838		21,535		39,027		42,411

Interest expense
Deposits		3,501		4,616		7,777		9,236
Federal funds purchased and other short-term borrowings		11		11		20		20
Long-term debt		426		665		963		1,381
Total interest expense		3,938		5,292		8,760		10,637
Net interest income		14,900		16,243		30,267		31,774
Provision for loan losses		2,550		1,200		11,985		2,250
Net interest income after provision for loan losses		12,350		15,043		18,282		29,524

Noninterest income
Trust and investment services fees		946		881		1,940		1,721
Income from mutual fund, annuity and insurance sales		249		296		510		531
Service charges on deposit accounts		975		1,208		2,105		2,366
Income from bank owned life insurance		279		292		565		659
Other income		482		645		921		1,054
Gain on sales of loans held for sale		554		319		852		537
Gain (loss) on sales of securities		50		1		65		(3)
Total noninterest income		3,535		3,642		6,958		6,865

Noninterest expense
Personnel		7,196		7,391		15,001		15,097
Occupancy of premises, net		865		900		1,791		1,863
Furniture and equipment		841		775		1,694		1,547
Postage, stationery and supplies		205		175		422		359
Professional and legal		245		222		450		331
Marketing		311		374		636		723
FDIC insurance		172		223		339		460
Debit card processing		284		317		673		640
Charitable donations		93		134		965		979
Telecommunications		144		130		265		256
External data processing		704		616		1,408		1,172
(Gain)/loss on foreclosed real estate, including (recovery of) provision for losses		(193)		47		(173)		134
Impaired loan carrying costs		190		80		476		119
Other		1,073		1,120		1,502		1,385
Total noninterest expense		12,130		12,504		25,449		25,065
Income (loss) before income taxes		3,755		6,181		(209)		11,324
Provision (benefit) for income taxes		705		1,322		(270)		2,374
Net income	$	3,050	$	4,859	$	61	$	8,950
Net income per share, basic	$	0.31	$	0.49	$	0.01	$	0.90
Net income per share, diluted	$	0.31	$	0.49	$	0.01	$	0.90

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) 2020 2019
Net (loss) income $ (2,989 ) $ 4,091
Other comprehensive income (loss):
Securities available for sale:
Net unrealized holding gains arising during the period
(net of tax expense of $747 and $370, respectively) 2,810 1,396
Reclassification adjustment for (gains) losses included in net income
(net of tax expense (benefit) of $3 and ($1), respectively) (a) (b) (12 ) 3
Net unrealized gains 2,798 1,399
Comprehensive (loss) income $ (191 ) $ 5,490

~~(a)~~

~~Amounts are included in net gain on sales of securities on the Consolidated Statements of Income within noninterest income.~~

~~(b)~~

~~Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income.~~



	Three months ended
	June 30,
(dollars in thousands)	2020		2019
Net income	$	3,050	$	4,859
Other comprehensive income (loss):
Securities available for sale:
Net unrealized holding gains arising during the period
(net of tax expense of $99 and $457, respectively)		373		1,720
Reclassification adjustment for gains included in net income
(net of tax expense of $11 and $0, respectively) (a) (b)		(39)		(1)
Net unrealized gains		334		1,719
Comprehensive income	$	3,384	$	6,578

	Six months ended
	June 30,
(dollars in thousands)	2020		2019
Net income	$	61	$	8,950
Other comprehensive income (loss):
Securities available for sale:
Net unrealized holding gains arising during the period
(net of tax expense of $846 and $828, respectively)		3,183		3,116
Reclassification adjustment for (gains) losses included in net income
(net of tax expense (benefit) of $14 and ($1), respectively) (a) (b)		(51)		2
Net unrealized gains		3,132		3,118
Comprehensive income	$	3,193	$	12,068

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

(b)Income tax amounts are included in the provision 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) 2020 2019
Cash flows from operating activities
Net (loss) income $ (2,989 ) $ 4,091
Adjustments to reconcile net (loss) income to net cash provided by operations:
Depreciation/amortization 684 651
Net amortization of premiums on securities 151 65
Amortization of deferred loan origination fees and costs (403 ) (229 )
Net amortization of operating lease right of use assets 178 166
Net amortization of finance lease right of use assets 12 0
Repayment of lease obligations (189 ) 0
Provision for loan losses 9,435 1,050
Increase in bank owned life insurance (286 ) (367 )
Originations of mortgage loans held for sale (9,797 ) (7,627 )
Originations of SBA loans held for sale (4,431 ) (1,595 )
Proceeds from sales of mortgage loans held for sale 11,625 7,948
Proceeds from sales of SBA loans held for sale 3,833 791
Net gain on sales of mortgage loans held for sale (290 ) (165 )
Gain on sales of SBA loans held for sale (9 ) (53 )
Gain on disposal of premises and equipment 0 (11 )
(Gain) loss on sales of securities, available-for-sale (15 ) 4
Stock-based compensation 120 135
Decrease in interest receivable 144 370
(Increase) in other assets (1,156 ) (647 )
(Decrease) increase in interest payable (55 ) 142
(Decrease) increase in other liabilities (11 ) 539
Net cash provided by operating activities 6,551 5,258
Cash flows from investing activities
Purchases of securities, available-for-sale (38,070 ) (8,448 )
Maturities, repayments and calls of securities, available-for-sale 9,561 5,561
Sales of securities, available-for-sale 19,852 6,017
Net decrease in restricted investment in bank stock 600 600
Net decrease (increase) in loans made to customers 21,093 (9,166 )
Purchases of premises and equipment (1,352 ) (1,759 )
Investment in bank owned life insurance 0 (6,600 )
Investment in foreclosed real estate (121 ) 0
Net cash provided by (used in) investing activities 11,563 (13,795 )
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits 31,479 (20,669 )
Net increase in time deposits 17,304 28,266
Net (decrease) in short-term borrowings (1,729 ) (192 )
Repayment of long-term debt (10,000 ) 0
Cash dividends paid to shareholders (1,561 ) (1,512 )
Treasury stock purchased (89 ) 0
Issuance of stock 149 147
Net cash provided by financing activities 35,553 6,040
Net increase (decrease) in cash and cash equivalents 53,667 (2,497 )
Cash and cash equivalents at beginning of year 131,591 96,782
Cash and cash equivalents at end of period $ 185,258 $ 94,285



	Six months ended
	June 30,
(dollars in thousands)	2020		2019
Cash flows from operating activities
Net income	$	61	$	8,950
Adjustments to reconcile net income to net cash provided by operations:
Depreciation/amortization		1,386		1,309
Net amortization of premiums on securities		390		132
Amortization of deferred loan origination fees and costs		(1,236)		(630)
Net amortization of operating lease right of use assets		336		334
Net amortization of finance lease right of use assets		24		34
Net change in operating lease liabilities		(345)		(293)
Provision for loan losses		11,985		2,250
Provision for losses on foreclosured real estate		18		0
Increase in bank owned life insurance		(565)		(659)
Originations of mortgage loans held for sale		(28,865)		(16,807)
Originations of SBA loans held for sale		(872)		(5,430)
Proceeds from sales of mortgage loans held for sale		24,663		15,835
Proceeds from sales of SBA loans held for sale		140		2,311
Gain on sales of mortgage loans held for sale		(843)		(355)
Gain on sales of SBA loans held for sale		(9)		(182)
Gain on disposal of premises and equipment		0		(15)
(Gain) loss on sales of securities, available-for-sale		(65)		3
(Gain) loss on sales of foreclosed real estate		(214)		3
Stock-based compensation		250		253
(Increase) decrease in interest receivable		(1,519)		334
(Increase) in other assets		(245)		(476)
(Decrease) increase in interest payable		(225)		47
Increase in other liabilities		98		1,367
Net cash provided by operating activities		4,348		8,315
Cash flows from investing activities
Purchases of securities, available-for-sale		(43,705)		(21,669)
Maturities, repayments and calls of securities, available-for-sale		21,679		11,386
Sales of securities, available-for-sale		26,288		9,777
Net decrease in restricted investment in bank stock		1,958		1,371
Net (increase) decrease in loans made to customers		(106,892)		12,212
Purchases of premises and equipment		(1,758)		(2,270)
Investment in bank owned life insurance		0		(6,600)
Proceeds from sales of foreclosed real estate		1,011		16
Net cash (used in) provided by investing activities		(101,419)		4,223
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits		211,867		(18,729)
Net increase in time deposits		5,211		56,544
Net increase in short-term borrowings		1,551		2,964
Repayment of long-term debt		(35,000)		(20,000)
Net change in finance lease liabilities		(12)		(21)
Cash dividends paid to shareholders		(3,123)		(3,025)
Payment of taxes related to stock withheld		(2)		0
Treasury stock reissued		89		88
Treasury stock purchased		(87)		(762)
Issuance of stock		347		201
Net cash provided by financing activities		180,841		17,260
Net increase in cash and cash equivalents		83,770		29,798
Cash and cash equivalents at beginning of year		131,591		96,782
Cash and cash equivalents at end of period	$	215,361	$	126,580

See accompanying notes.

~~- 6 -~~

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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 Income (Loss) Stock Total

Balance, January 1, 2020 $ 24,390 $ 140,450 $ 25,019 $ 1,309 $ 0 $ 191,168
Net loss (2,989 ) (2,989 )
Other comprehensive income, net of tax 2,798 2,798
Cash dividends ($0.160 per share) (1,561 ) (1,561 )
Stock-based compensation 120 120
Repurchased stock - 5,335 shares (87 ) (87 )
Withheld stock - 102 shares (2 ) (2 )
Issuance and reissuance of stock:
6,706 shares under the dividend reinvestment and stock purchase plan 17 132 149
6,468 shares of stock-based compensation awards 16 (16 ) 0

Balance, March 31, 2020 $ 24,423 $ 140,686 $ 20,469 $ 4,107 $ (89 ) $ 189,596

Balance, January 1, 2019 $ 23,629 $ 134,506 $ 22,837 $ (2,226 ) $ 0 $ 178,746
Adoption of ASC topic 842 (leases) (199 ) (199 )
Net income 4,091 4,091
Other comprehensive income, net of tax 1,399 1,399
Cash dividends ($0.152 per share, adjusted) (1,512 ) (1,512 )
Stock-based compensation 135 135
Forfeiture and withheld shares of restricted stock 2 (4 ) (2 )
Issuance and reissuance of stock:
6,646 shares under the dividend reinvestment and stock purchase plan 17 132 149

Balance, March 31, 2019 $ 23,646 $ 134,775 $ 25,217 $ (827 ) $ (4 ) $ 182,807



							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Treasury
(dollars in thousands, except per share data)	Stock		Capital		Earnings		Income (Loss)		Stock		Total
Balance, January 1, 2020	$	24,390	$	140,450	$	25,019	$	1,309	$	0	$	191,168
Net loss						(2,989)						(2,989)
Other comprehensive income, net of tax								2,798				2,798
Cash dividends ($0.160 per share)						(1,561)						(1,561)
Stock-based compensation				120								120
Repurchased stock - 5,335 shares										(87)		(87)
Withheld stock - 102 shares										(2)		(2)
Issuance and reissuance of stock:
6,706 shares under the dividend reinvestment and stock purchase plan		17		132								149
6,468 shares of stock-based compensation awards		16		(16)								0
Balance, March 31, 2020	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596
Balance, April 1, 2020	$	24,423	$	140,686	$	20,469	$	4,107	$	(89)	$	189,596
Net income						3,050						3,050
Other comprehensive income, net of tax								334				334
Cash dividends ($0.160 per share)						(1,562)						(1,562)
Stock-based compensation				130								130
Issuance and reissuance of stock:
12,536 shares under the dividend reinvestment and stock purchase plan		18		44						89		151
1,000 shares under the stock option plan		2		3								5
(767) shares of stock-based compensation awards		(2)		2								0
11,116 shares under employee stock purchase plan		28		103								131
Balance, June 30, 2020	$	24,469	$	140,968	$	21,957	$	4,441	$	0	$	191,835
Balance, January 1, 2019	$	23,629	$	134,506	$	22,837	$	(2,226)	$	0	$	178,746
Adoption of ASC topic 842 (leases)						(199)						(199)
Net income						4,091						4,091
Other comprehensive income, net of tax								1,399				1,399
Cash dividends ($0.152 per share, adjusted)						(1,512)						(1,512)
Stock-based compensation				135								135
Forfeiture and withheld shares of restricted stock				2						(4)		(2)
Issuance and reissuance of stock:
6,646 shares under the dividend reinvestment and stock purchase plan		17		132								149
Balance, March 31, 2019	$	23,646	$	134,775	$	25,217	$	(827)	$	(4)	$	182,807
Balance, April 1, 2019	$	23,646	$	134,775	$	25,217	$	(827)	$	(4)	$	182,807
Net income						4,859						4,859
Other comprehensive income, net of tax								1,719				1,719
Cash dividends ($0.152 per share, adjusted)						(1,513)						(1,513)
Stock-based compensation				118								118
Forfeiture of restricted stock and withheld shares				5						(5)		0
Repurchased stock - 35,600 shares										(762)		(762)
Issuance and reissuance of stock:
6,605 shares under the dividend reinvestment and stock purchase plan		9		128						9		146
4,221 shares under the stock option plan				(69)						88		19
6,694 shares under employee stock purchase plan				(14)						141		127
Balance, June 30, 2019	$	23,655	$	134,943	$	28,563	$	892	$	(533)	$	187,520

See accompanying notes.

~~- 7 -~~

- 7 -

Note 1—Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2019 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and FASB Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). As of ~~March 31,~~June 30, 2020, PeoplesBank operates ~~one~~1 wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended ~~March 31,~~June 30, 2020. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

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

The results of operations for the three and six months ended ~~March 31,~~June 30, 2020 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,~~June 30, 2020 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

~~On January 30,~~In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization ~~(“WHO”) announced~~declared it a ~~global health~~pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States. On March 13, 2020, President Trump declared the ongoing COVID–19 pandemic of sufficient severity and magnitude to warrant an emergency ~~because of a new strain of coronavirus originating in Wuhan, China~~declaration for all states, territories, and the ~~risks to~~District of Columbia.

In response, many state and local governments, including the ~~international community as~~Commonwealth of Pennsylvania and the ~~virus spreads globally beyond its point~~State of ~~origin. In March 2020,~~Maryland, have instituted emergency restrictions that have substantially limited the ~~WHO classified~~operation of non-essential businesses and the ~~coronavirus as~~activities of individuals. It has been widely reported that these restrictions have resulted in significant adverse effects for many different types of businesses, particularly those in the travel, hospitality and food and beverage industries, among many others, and has resulted in a ~~pandemic, based~~significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the ~~rapid increase in exposure globally.~~

~~The~~local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which has negatively affected interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the coronavirus ~~continues~~outbreak, and there is no guarantee that the Corporation’s efforts to ~~evolve as~~address the adverse impacts of the ~~date~~coronavirus will be effective. The extent of ~~this report. As~~ such ~~it is~~impact will depend on future developments, which are highly uncertain ~~as to~~and cannot be predicted, including new information which may emerge concerning the full magnitude that the pandemic will have on the Corporation’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolutionseverity of the coronavirus and ~~the global responses~~actions taken to ~~curb its spread, the Corporation is not able to estimate the effects of~~contain the coronavirus or its impact, among others.

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on ~~its~~the Corporation's business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation's financial ~~condition, or liquidity~~reporting and internal controls; declines in the demand for ~~fiscal year 2020.~~

~~- 8 -~~loans and other banking services and products;

- 8 -

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

In addition, the adverse economic effects of the coronavirus may lead to an increase in credit risk on the Corporation’s commercial and residential loan portfolios. Likewise, the Corporation is also monitoring the fluctuations in the markets as it pertains to interest rates and fair value of our investments for OTTI. To curtail the spread of the virus, we are currently ~~restricting~~operating with modified branch access ~~to the drive-through window or appointment-only at all locations.~~and taking other precautionary measures.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.

The CARES Act includes a provision for the Corporation to opt out of applying the TDR accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019.

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

Loans

~~Loans~~

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

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

Allowance for Loan Losses

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

~~- 9 -~~

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

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

- 9 -

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

●

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

●

~~Changes in the value of collateral for collateral dependent loans~~

●

~~Changes in the level of concentrations of credit~~

●

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

●

~~Changes in the nature and volume of the portfolio~~

●

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

●

~~Changes in underwriting standards and loan terms~~

●

~~Changes in the quality of the loan review system~~

●

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

●

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

●

~~Other pertinent environmental factors~~

●

~~Impact of imposed tariffs~~

●

~~Impact of COVID-19 pandemic~~

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

Changes in the value of collateral for collateral dependent loans

Changes in the level of concentrations of credit

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

Changes in the nature and volume of the portfolio

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

Changes in underwriting standards and loan terms

Changes in the quality of the loan review system

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

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

Other pertinent environmental factors

Impact of imposed tariffs

Impact of COVID-19 pandemic

As disclosed in Note 4—Loans, the Corporation engages in commercial and consumer lending. Loans are made within the Corporation’s primary market area and surrounding areas, and include the purchase of whole loan or participation interests in loans from other financial institutions. Commercial loans, which pose the greatest risk of loss to the Corporation, whether originated or purchased, are generally secured by real estate. Within the broad commercial loan segment, the builder & developer and commercial real estate investor loan classes generally present a higher level of risk than other commercial loan classifications. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, unstable real estate prices and the dependency upon successful construction and sale or operation of the real estate project. Within the consumer loan segment, junior (i.e., second) liens present a higher risk to the Corporation because economic and housing market conditions can adversely affect the underlying value of the collateral, which could render the Corporation under-secured or unsecured. In addition, economic and housing market conditions can adversely affect the ability of some borrowers to service their debt.

~~- 10 -~~

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

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

- 10 -

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

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a write-down. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At ~~March 31,~~June 30, 2020 there was ~~$918,000~~$103,000 of foreclosed real estate, ~~$121,000~~all of which was residential real estate. Included within loans receivable as of ~~March 31,~~June 30, 2020 was a recorded investment of ~~$348,000~~$172,000 of consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

~~- 11 -~~

Mortgage Servicing Rights

The mortgage servicing rights (MSRs) associated with the sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an estimate of future net servicing income of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At ~~March 31,~~June 30, 2020, the balance of residential mortgage loans serviced for third parties was ~~$114,169,000~~$107,430,000 compared to $115,620,000 at December 31, 2019.



	Three months ended							Three months ended				Six months ended
	March 31,							June 30,				June 30,
(dollars in thousands)	2020			2019				2020		2019		2020		2019
Amortized cost:
Balance at beginning of period	$	965		$	925		$	739	$	922	$	965	$	925
Originations of mortgage servicing rights		13			50			42		74		55		124
Amortization expense		(66	)		(36	)		(122)		(47)		(188)		(83)
Valuation allowance		(173	)		(17	)		(10)		(44)		(183)		(61)
Balance at end of period	$	739		$	922		$	649	$	905	$	649	$	905

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, 2019.

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

- 11 -

At ~~March 31,~~June 30, 2020, the Corporation performed an interim analysis of goodwill due to the deterioration in general economic conditions as a result of the COVID-19 pandemic that represented a triggering event prompting an evaluation of goodwill impairment. Based upon this interim analysis, it does not ~~have any indicators~~appear more likely than not, that the fair value of ~~potential impairment~~the reporting unit is less than the carrying amount. The core operations of ~~either goodwill or core deposit intangibles.~~ the bank continue to function as intended and profitability is expected to return to a level supportive of a stock price over the organization’s book value.

~~- 12 -~~

Revenue from Contracts with Customers

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

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

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

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

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

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

~~- 13 -~~

- 12 -

Per Share Data

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



	Three months ended					Three months ended				Six months ended
	March 31,					June 30,				June 30,
*(in thousands, except per share data)*	2020			2019		2020		2019		2020		2019
Net (loss) income	$	(2,989	)	$	4,091
Net income						$	3,050	$	4,859	$	61	$	8,950

Weighted average shares outstanding (basic)		9,759			9,927		9,770		9,926		9,765		9,927
Effect of dilutive stock options		53			70		24		65		33		67
Weighted average shares outstanding (diluted)		9,812			9,997		9,794		9,991		9,798		9,994

Basic (loss) earnings per share	$	(0.31	)	$	0.41
Diluted (loss)earnings per share	$	(0.31	)	$	0.41
Basic earnings per share						$	0.31	$	0.49	$	0.01	$	0.90
Diluted earnings per share						$	0.31	$	0.49	$	0.01	$	0.90

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

Supplemental cash flow information is provided in the table below.

Three months ended

March 31,

(dollars in thousands)

2020

2019

Cash paid during the period for:

Income taxes

$
0

$
300

Interest

$
4,877

$
5,203

Noncash investing and financing activities:

Transfer of loans to foreclosed real estate

$
121

$
0

Initial recognition of financing lease right-of-use assets

$
0

$
1,358

Initial recognition of financing lease liabilities

$
0

$
1,480

Initial recognition of operating lease right-of-use assets

$
186

$
2,958

Initial recognition of operating lease liabilities

$
186

$
3,035

Increase in other liabilities for purchase of securities settling after quarter end

$
0

$
1,004

~~- 14 -~~



		Six months ended
		June 30,
(dollars in thousands)		2020		2019
Cash paid during the period for:
Income taxes	$	0	$	2,450
Interest	$	8,985	$	10,590

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

Recent Accounting Pronouncements

Pronouncements Adopted in 2020

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed: the amount of and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The following disclosure requirements were modified: for investments in certain entities that calculate net asset value, and entity is required to disclose the timing of liquidation of investee’s assets and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The

- 13 -

following disclosure requirements were added: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The update is effective for fiscal years beginning after December 15, 2019. The adoption of this update did not have a material impact on its consolidated financial statements.

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

Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This standard adds a new Topic 326 which requires companies to measure and record impairment on financial instruments at the time of origination using the expected credit loss (CECL) model. The CECL model calculates impairment based on historical experience, current conditions, and reasonable and supportable forecasts, and reflects the organization’s current estimate of all expected credit losses over the contractual term of its financial assets. The new standard was delayed and is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation expects the provisions of ASU No. 2016-13 to impact the Corporation’s consolidated financial statements, in particular, the level of the reserve for credit losses. The Corporation is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

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

~~- 15 -~~

Note 2 – Securities

A summary of securities available-for-sale at ~~March 31,~~June 30, 2020 and December 31, 2019 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At ~~March 31,~~June 30, 2020, ~~while 90~~87 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania and 11 percent was concentrated in the state of Texas. The portfolio was intentionally distributed to limit exposure with the largest issuer at ~~$2.3~~$2.0 million.

Amortized Gross Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
March 31, 2020
Debt securities:
U.S. Treasury notes $ 4,998 $ 88 $ 0 $ 5,086
U.S. agency mortgage-backed, residential 135,895 4,809 (2 ) 140,702
State and municipal 24,656 256 0 24,912
Corporate debt 990 48 0 1,038
Total debt securities $ 166,539 $ 5,201 $ (2 ) $ 171,738
December 31, 2019
Debt securities:
U.S. Treasury notes $ 9,834 $ 119 $ 0 $ 9,953
U.S. agency 15,000 0 (77 ) 14,923
U.S. agency mortgage-backed, residential 106,799 1,443 (87 ) 108,155
State and municipal 26,385 260 (1 ) 26,644
Total debt securities $ 158,018 $ 1,822 $ (165 ) $ 159,675



	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
June 30, 2020
Debt securities:
U.S. Treasury notes	$	4,999	$	54	$	0	$	5,053
U.S. agency mortgage-backed, residential		126,374		5,132		(3)		131,503
State and municipal		21,730		326		(5)		22,051
Corporate debt		991		117		0		1,108
Total debt securities	$	154,094	$	5,629	$	(8)	$	159,715
December 31, 2019
Debt securities:
U.S. Treasury notes	$	9,834	$	119	$	0	$	9,953
U.S. agency		15,000		0		(77)		14,923
U.S. agency mortgage-backed, residential		106,799		1,443		(87)		108,155
State and municipal		26,385		260		(1)		26,644
Total debt securities	$	158,018	$	1,822	$	(165)	$	159,675

- 14 -

The amortized cost and estimated fair value of debt securities at ~~March 31,~~June 30, 2020 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 $ 6,671 $ 6,761
Due after one year through five years 102,796 105,798
Due after five years through ten years 34,313 35,189
Due after ten years 22,759 23,990
Total debt securities $ 166,539 $ 171,738



	Available-for-sale
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	10,634	$	10,715
Due after one year through five years		101,065		104,618
Due after five years through ten years		30,577		31,697
Due after ten years		11,818		12,685
Total debt securities	$	154,094	$	159,715

Gross realized gains and losses on sales of securities available-for-sale are shown below. Realized gains and losses are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the income statement. Proceeds from the sale of securities were ~~$19,852,000,~~$6,372,000, with a related tax expense of ~~$3,000~~$11,000 for the three months ended ~~March 31,~~June 30, 2020. Proceeds from the sale of securities were ~~$6,017,000,~~$3,760,000, with 0 related tax benefit or expense for the three months ended June 30, 2019. Proceeds from the sale of securities were $26,288,000, with a related tax expense of $14,000 for the six months ended June 30, 2020. Proceeds from the sale securities were $9,777,000, with a related tax benefit of $1,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2019.

~~- 16 -~~



	Three months ended				Six months ended
	June 30,				June 30,
(dollars in thousands)	2020		2019		2020		2019
Realized gains	$	50	$	11	$	124	$	14
Realized losses		0		(10)		(59)		(17)
Net gains (losses)	$	50	$	1	$	65	$	(3)

Three months ended
March 31,
(dollars in thousands) 2020 2019
Realized gains $ 74 $ 3
Realized losses (59 ) (7 )
Net gains (losses) $ 15 $ (4 )

Investment securities having a carrying value of ~~$126,161,000~~$130,662,000 and $128,427,000 on ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

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

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, 2020
Debt securities:
U.S. agency mortgage-backed, residential 2 773 (2 ) 0 0 0 2 773 (2 )
Total temporarily impaired debt
securities, available-for-sale 2 $ 773 $ (2 ) 0 $ 0 $ 0 2 $ 773 $ (2 )
December 31, 2019
Debt securities:
U.S. agency 1 4,983 (17 ) 2 9,940 (60 ) 3 14,923 (77 )
U.S. agency mortgage-backed, residential 12 21,821 (82 ) 2 1,163 (5 ) 14 22,984 (87 )
State and municipal 1 466 (1 ) 0 0 0 1 466 (1 )
Total temporarily impaired debt
securities, available-for-sale 14 $ 27,270 $ (100 ) 4 $ 11,103 $ (65 ) 18 $ 38,373 $ (165 )


	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
June 30, 2020
Debt securities:
U.S. agency mortgage-backed, residential	2		2,128		(3)	0		0		0	2		2,128		(3)
State and municipal	1		1,023		(5)	0		0		0	1		1,023		(5)
Total temporarily impaired debt
securities, available-for-sale	3	$	3,151	$	(8)	0	$	0	$	0	3	$	3,151	$	(8)
December 31, 2019
Debt securities:
U.S. agency	1		4,983		(17)	2		9,940		(60)	3		14,923		(77)
U.S. agency mortgage-backed, residential	12		21,821		(82)	2		1,163		(5)	14		22,984		(87)
State and municipal	1		466		(1)	0		0		0	1		466		(1)
Total temporarily impaired debt
securities, available-for-sale	14	$	27,270	$	(100)	4	$	11,103	$	(65)	18	$	38,373	$	(165)

Securities available-for-sale are analyzed quarterly for possible other-than-temporary impairment. The analysis considers, among other factors: 1) whether the Corporation has the intent to sell its securities prior to market recovery or maturity; 2) whether it is more likely than not that the Corporation will be required to sell its securities prior to market recovery or maturity; 3) default rates/history

- 15 -

by security type; 4) third-party securities ratings; 5) third-party guarantees; 6) subordination; 7) payment delinquencies; 8) nature of the issuer; and 9) current financial news.

The Corporation believes that unrealized losses at ~~March 31,~~June 30, 2020 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through ~~March 31,~~June 30, 2020 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

Note 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,~~June 30, 2020 and December 31, 2019, 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.

~~- 17 -~~

The FHLBP paid dividends during the periods ended ~~March 31,~~June 30, 2020 and 2019. 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~~5 percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic ~~942.~~942. Management’s determination of whether these investments are impaired is based on their ~~assessment~~assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes no0 impairment charge was necessary related to the restricted stock during the periods ended ~~March 31,~~June 30, 2020 and 2019.

Note 4—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at ~~March 31,~~June 30, 2020 and December 31, 2019. The portfolio is comprised of ~~two~~2 segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance. Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries.The consumer related segment is comprised of residential mortgages, home equity and other consumer loans.The Corporation has not engaged in sub-prime residential mortgage originations.

March 31, % Total December 31, % Total
(dollars in thousands) 2020 Loans 2019 Loans
Builder & developer $ 152,432 10.3 $ 159,312 10.6
Commercial real estate investor 207,397 14.0 207,227 13.8
Residential real estate investor 254,817 17.3 247,969 16.5
Hotel/Motel 79,729 5.4 80,260 5.3
Wholesale & retail 99,484 6.7 109,238 7.3
Manufacturing 82,351 5.6 86,511 5.7
Agriculture 78,792 5.3 80,719 5.4
Other 303,120 20.5 313,371 20.7
  Total commercial related loans 1,258,122 85.1 1,284,607 85.3
Residential mortgages 92,624 6.3 94,868 6.3
Home equity 101,547 6.9 100,827 6.7
Other 24,368 1.7 24,833 1.7
  Total consumer related loans 218,539 14.9 220,528 14.7
    Total loans $ 1,476,661 100.0 $ 1,505,135 100.0



	June 30,		% Total		December 31,		% Total
(dollars in thousands)	2020		Loans		2019		Loans
Builder & developer	$	174,312		10.9	$	159,312		10.6
Commercial real estate investor		204,852		12.8		207,227		13.8
Residential real estate investor		253,941		15.9		247,969		16.5
Hotel/Motel		80,748		5.0		80,260		5.3
Wholesale & retail		113,515		7.1		109,238		7.3
Manufacturing		98,722		6.2		86,511		5.7
Agriculture		77,386		4.8		80,719		5.4
Other		384,259		24.0		313,371		20.7
Total commercial related loans		1,387,735		86.7		1,284,607		85.3
Residential mortgages		90,072		5.6		94,868		6.3
Home equity		99,835		6.2		100,827		6.7
Other		23,487		1.5		24,833		1.7
Total consumer related loans		213,394		13.3		220,528		14.7
Total loans	$	1,601,129		100.0	$	1,505,135		100.0

~~- 18 -~~

- 16 -

Loan Risk Ratings

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans and residential mortgages held for investment are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer loans, and commercial loans up to $500,000, the Corporation uses third-party credit scoring software models for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings are generally performed by the Special Asset Committee (the ‘Committee’), which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value. In addition to review by the Committee, existing loans are monitored by the primary loan officer and loan review officer to determine if any changes, upward or downward, in risk ratings are appropriate. An external consultant is also used to review a portion of the existing portfolio and recommend rating changes as appropriate. Primary loan officers and internal loan review officers may downgrade existing loans, except to nonaccrual status. Only the Committee, Executive Chairman or President/CEO may upgrade a loan that is classified.

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

~~- 19 -~~

- 17 -

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

Special
(dollars in thousands) Pass Mention Substandard Nonaccrual Total
March 31, 2020
Builder & developer $ 145,847 $ 5,063 $ 293 $ 1,229 $ 152,432
Commercial real estate investor 201,223 4,849 1,100 225 207,397
Residential real estate investor 245,249 3,418 194 5,956 254,817
Hotel/Motel 67,219 12,510 0 0 79,729
Wholesale & retail 80,750 9,813 1,821 7,100 99,484
Manufacturing 75,673 988 4,653 1,037 82,351
Agriculture 71,321 3,690 403 3,378 78,792
Other 275,555 6,383 13,777 7,405 303,120
Total commercial related loans 1,162,837 46,714 22,241 26,330 1,258,122
Residential mortgage 92,268 129 74 153 92,624
Home equity 100,820 60 0 667 101,547
Other 24,142 0 7 219 24,368
Total consumer related loans 217,230 189 81 1,039 218,539
Total loans $ 1,380,067 $ 46,903 $ 22,322 $ 27,369 $ 1,476,661

December 31, 2019
Builder & developer $ 151,672 $ 6,503 $ 252 $ 885 $ 159,312
Commercial real estate investor 201,967 3,890 1,145 225 207,227
Residential real estate investor 238,216 3,780 202 5,771 247,969
Hotel/Motel 67,732 12,528 0 0 80,260
Wholesale & retail 89,556 10,513 1,954 7,215 109,238
Manufacturing 76,721 1,058 7,597 1,135 86,511
Agriculture 76,350 1,123 404 2,842 80,719
Other 277,634 16,490 13,748 5,499 313,371
Total commercial related loans 1,179,848 55,885 25,302 23,572 1,284,607
Residential mortgage 94,388 131 74 275 94,868
Home equity 100,089 61 0 677 100,827
Other 24,600 0 7 226 24,833
Total consumer related loans 219,077 192 81 1,178 220,528
Total loans $ 1,398,925 $ 56,077 $ 25,383 $ 24,750 $ 1,505,135



			Special
(dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total
June 30, 2020
Builder & developer	$	162,795	$	10,739	$	250	$	528	$	174,312
Commercial real estate investor		197,112		6,470		1,055		215		204,852
Residential real estate investor		244,589		3,339		142		5,871		253,941
Hotel/Motel		50,033		17,541		13,174		0		80,748
Wholesale & retail		102,769		8,963		1,783		0		113,515
Manufacturing		92,471		521		5,730		0		98,722
Agriculture		69,683		3,720		401		3,582		77,386
Other		358,040		4,714		12,900		8,605		384,259
Total commercial related loans		1,277,492		56,007		35,435		18,801		1,387,735
Residential mortgage		89,763		144		12		153		90,072
Home equity		99,122		59		0		654		99,835
Other		23,271		0		0		216		23,487
Total consumer related loans		212,156		203		12		1,023		213,394
Total loans	$	1,489,648	$	56,210	$	35,447	$	19,824	$	1,601,129

December 31, 2019
Builder & developer	$	151,672	$	6,503	$	252	$	885	$	159,312
Commercial real estate investor		201,967		3,890		1,145		225		207,227
Residential real estate investor		238,216		3,780		202		5,771		247,969
Hotel/Motel		67,732		12,528		0		0		80,260
Wholesale & retail		89,556		10,513		1,954		7,215		109,238
Manufacturing		76,721		1,058		7,597		1,135		86,511
Agriculture		76,350		1,123		404		2,842		80,719
Other		277,634		16,490		13,748		5,499		313,371
Total commercial related loans		1,179,848		55,885		25,302		23,572		1,284,607
Residential mortgage		94,388		131		74		275		94,868
Home equity		100,089		61		0		677		100,827
Other		24,600		0		7		226		24,833
Total consumer related loans		219,077		192		81		1,178		220,528
Total loans	$	1,398,925	$	56,077	$	25,383	$	24,750	$	1,505,135

~~- 20 -~~

- 18 -

Impaired Loans

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

With No Allowance With A Related Allowance Total
Recorded Unpaid Recorded Unpaid Related Recorded Unpaid
(dollars in thousands) Investment Principal Investment Principal Allowance Investment Principal
March 31, 2020
Builder & developer $ 1,293 $ 1,332 $ 142 $ 143 $ 52 $ 1,435 $ 1,475
Commercial real estate investor 1,325 1,325 0 0 0 1,325 1,325
Residential real estate investor 953 975 5,003 5,124 1,906 5,956 6,099
Hotel/Motel 0 0 0 0 0 0 0
Wholesale & retail 271 271 7,069 7,760 3,363 7,340 8,031
Manufacturing 12 12 1,025 1,170 487 1,037 1,182
Agriculture 2,412 2,439 966 966 537 3,378 3,405
Other commercial 3,771 11,413 3,634 3,789 1,506 7,405 15,202
Total impaired commercial related loans 10,037 17,767 17,839 18,952 7,851 27,876 36,719
Residential mortgage 153 153 0 0 0 153 153
Home equity 667 667 0 0 0 667 667
Other consumer 219 225 0 0 0 219 225
Total impaired consumer related loans 1,039 1,045 0 0 0 1,039 1,045
Total impaired loans $ 11,076 $ 18,812 $ 17,839 $ 18,952 $ 7,851 $ 28,915 $ 37,764

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




	With No Allowance				With A Related Allowance						Total
	Recorded		Unpaid		Recorded		Unpaid		Related		Recorded		Unpaid
(dollars in thousands)	Investment		Principal		Investment		Principal		Allowance		Investment		Principal
June 30, 2020
Builder & developer	$	591	$	793	$	140	$	141	$	83	$	731	$	934
Commercial real estate investor		1,270		1,271		0		0		0		1,270		1,271
Residential real estate investor		905		1,020		4,966		5,032		1,796		5,871		6,052
Hotel/Motel		0		0		0		0		0		0		0
Wholesale & retail		240		240		0		0		0		240		240
Manufacturing		0		0		0		0		0		0		0
Agriculture		2,360		2,411		1,222		1,243		534		3,582		3,654
Other commercial		4,981		12,640		3,624		3,888		1,641		8,605		16,528
Total impaired commercial related loans		10,347		18,375		9,952		10,304		4,054		20,299		28,679
Residential mortgage		153		153		0		0		0		153		153
Home equity		654		666		0		0		0		654		666
Other consumer		216		224		0		0		0		216		224
Total impaired consumer related loans		1,023		1,043		0		0		0		1,023		1,043
Total impaired loans	$	11,370	$	19,418	$	9,952	$	10,304	$	4,054	$	21,322	$	29,722

~~- 21 -~~



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

- 19 -

The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and six months ended ~~March 31,~~June 30, 2020 and 2019.

With No Related Allowance With A Related Allowance Total
Average Total Average Total Average Total
Recorded Interest Recorded Interest Recorded Interest
(dollars in thousands) Investment Income Investment Income Investment Income
Three months ended March 31, 2020
Builder & developer $ 957 12 308 0 $ 1,265 $ 12
Commercial real estate investor 1,347 22 0 0 1,347 22
Residential real estate investor 844 6 5,020 0 5,864 6
Hotel/Motel 0 0 0 0 0 0
Wholesale & retail 272 2 7,127 0 7,399 2
Manufacturing 13 3 1,073 0 1,086 3
Agriculture 2,098 19 1,012 0 3,110 19
Other commercial 2,817 31 3,634 0 6,451 31
Total impaired commercial related loans 8,348 95 18,174 0 26,522 95
Residential mortgage 214 3 0 0 214 3
Home equity 672 21 0 0 672 21
Other consumer 223 3 0 0 223 3
Total impaired consumer related loans 1,109 27 0 0 1,109 27
Total impaired loans $ 9,457 $ 122 $ 18,174 $ 0 $ 27,631 $ 122

Three months ended March 31, 2019
Builder & developer $ 1,124 $ 14 $ 69 $ 0 $ 1,193 $ 14
Commercial real estate investor 3,610 34 0 0 3,610 34
Residential real estate investor 615 5 4,346 0 4,961 5
Hotel/Motel 0 0 0 0 0 0
Wholesale & retail 2,723 3 7,402 0 10,125 3
Manufacturing 669 5 1,642 0 2,311 5
Agriculture 658 13 0 0 658 13
Other commercial 7,601 0 4,870 0 12,471 0
Total impaired commercial related loans 17,000 74 18,329 0 35,329 74
Residential mortgage 548 6 0 0 548 6
Home equity 604 6 0 0 604 6
Other consumer 277 4 0 0 277 4
Total impaired consumer related loans 1,429 16 0 0 1,429 16
Total impaired loans $ 18,429 $ 90 $ 18,329 $ 0 $ 36,758 $ 90



	With No Related Allowance				With A Related Allowance				Total
	Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Three months ended June 30, 2020
Builder & developer	$	942		10		141		0	$	1,083	$	10
Commercial real estate investor		1,297		18		0		0		1,297		18
Residential real estate investor		929		16		4,984		0		5,913		16
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		256		1		3,535		0		3,791		1
Manufacturing		6		0		512		0		518		0
Agriculture		2,386		40		1,094		0		3,480		40
Other commercial		4,376		21		3,629		0		8,005		21
Total impaired commercial related loans		10,192		106		13,895		0		24,087		106
Residential mortgage		153		0		0		0		153		0
Home equity		660		16		0		0		660		16
Other consumer		218		4		0		0		218		4
Total impaired consumer related loans		1,031		20		0		0		1,031		20
Total impaired loans	$	11,223	$	126	$	13,895	$	0	$	25,118	$	126

Three months ended June 30, 2019
Builder & developer	$	1,196	$	14	$	0	$	0	$	1,196	$	14
Commercial real estate investor		2,644		34		0		0		2,644		34
Residential real estate investor		362		6		4,283		0		4,645		6
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		245		3		7,204		0		7,449		3
Manufacturing		16		4		1,454		0		1,470		4
Agriculture		652		20		0		0		652		20
Other commercial		1,953		0		6,778		0		8,731		0
Total impaired commercial related loans		7,068		81		19,719		0		26,787		81
Residential mortgage		276		3		0		0		276		3
Home equity		564		5		0		0		564		5
Other consumer		271		5		0		0		271		5
Total impaired consumer related loans		1,111		13		0		0		1,111		13
Total impaired loans	$	8,179	$	94	$	19,719	$	0	$	27,898	$	94

~~- 22 -~~

- 20 -



	With No Related Allowance				With A Related Allowance				Total
	Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Six months ended June 30, 2020
Builder & developer	$	835		22		252		0	$	1,087	$	22
Commercial real estate investor		1,322		40		0		0		1,322		40
Residential real estate investor		864		22		5,002		0		5,866		22
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		261		3		4,751		0		5,012		3
Manufacturing		8		3		716		0		724		3
Agriculture		2,185		59		1,082		0		3,267		59
Other commercial		3,539		52		3,631		0		7,170		52
Total impaired commercial related loans		9,014		201		15,434		0		24,448		201
Residential mortgage		194		3		0		0		194		3
Home equity		666		37		0		0		666		37
Other consumer		220		7		0		0		220		7
Total impaired consumer related loans		1,080		47		0		0		1,080		47
Total impaired loans	$	10,094	$	248	$	15,434	$	0	$	25,528	$	248

Six months ended June 30, 2019
Builder & developer	$	1,147	$	28	$	45	$	0	$	1,192	$	28
Commercial real estate investor		3,280		68		0		0		3,280		68
Residential real estate investor		544		11		4,318		0		4,862		11
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,897		6		7,346		0		9,243		6
Manufacturing		451		9		1,538		0		1,989		9
Agriculture		654		33		0		0		654		33
Other commercial		5,717		0		5,483		0		11,200		0
Total impaired commercial related loans		13,690		155		18,730		0		32,420		155
Residential mortgage		406		9		0		0		406		9
Home equity		579		11		0		0		579		11
Other consumer		271		9		0		0		271		9
Total impaired consumer related loans		1,256		29		0		0		1,256		29
Total impaired loans	$	14,946	$	184	$	18,730	$	0	$	33,676	$	184

Past Due and Nonaccrual

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

≥ 90 Days
30-59 60-89 Past Due Total Past
Days Days and Due and Total
(dollars in thousands) Past Due Past Due Accruing Nonaccrual Nonaccrual Current Loans
March 31, 2020
Builder & developer $ 775 $ 0 $ 40 $ 1,229 $ 2,044 $ 150,388 $ 152,432
Commercial real estate investor 0 0 0 225 225 207,172 207,397
Residential real estate investor 0 0 0 5,956 5,956 248,861 254,817
Hotel/Motel 0 0 0 0 0 79,729 79,729
Wholesale & retail 200 0 0 7,100 7,300 92,184 99,484
Manufacturing 394 0 0 1,037 1,431 80,920 82,351
Agriculture 403 0 0 3,378 3,781 75,011 78,792
Other 123 0 680 7,405 8,208 294,912 303,120
Total commercial related loans 1,895 0 720 26,330 28,945 1,229,177 1,258,122
Residential mortgage 1,494 0 103 153 1,750 90,874 92,624
Home equity 601 10 0 667 1,278 100,269 101,547
Other 1,404 6 7 219 1,636 22,732 24,368
Total consumer related loans 3,499 16 110 1,039 4,664 213,875 218,539
Total loans $ 5,394 $ 16 $ 830 $ 27,369 $ 33,609 $ 1,443,052 $ 1,476,661

December 31, 2019
Builder & developer $ 0 $ 0 $ 43 $ 885 $ 928 $ 158,384 $ 159,312
Commercial real estate investor 0 0 0 225 225 207,002 207,227
Residential real estate investor 295 0 0 5,771 6,066 241,903 247,969
Hotel/Motel 0 0 0 0 0 80,260 80,260
Wholesale & retail 0 0 0 7,215 7,215 102,023 109,238
Manufacturing 409 0 0 1,135 1,544 84,967 86,511
Agriculture 14 0 0 2,842 2,856 77,863 80,719
Other 463 1,865 120 5,499 7,947 305,424 313,371
Total commercial related loans 1,181 1,865 163 23,572 26,781 1,257,826 1,284,607
Residential mortgage 0 70 104 275 449 94,419 94,868
Home equity 249 276 0 677 1,202 99,625 100,827
Other 750 68 13 226 1,057 23,776 24,833
Total consumer related loans 999 414 117 1,178 2,708 217,820 220,528
Total loans $ 2,180 $ 2,279 $ 280 $ 24,750 $ 29,489 $ 1,475,646 $ 1,505,135

~~- 23 -~~

- 21 -



					≥ 90 Days
	30-59		60-89		Past Due				Total Past
	Days		Days		and				Due and				Total
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Loans
June 30, 2020
Builder & developer	$	696	$	0	$	0	$	528	$	1,224	$	173,088	$	174,312
Commercial real estate investor		0		0		0		215		215		204,637		204,852
Residential real estate investor		0		0		0		5,871		5,871		248,070		253,941
Hotel/Motel		0		159		0		0		159		80,589		80,748
Wholesale & retail		32		0		0		0		32		113,483		113,515
Manufacturing		0		0		0		0		0		98,722		98,722
Agriculture		0		0		0		3,582		3,582		73,804		77,386
Other		962		3,788		520		8,605		13,875		370,384		384,259
Total commercial related loans		1,690		3,947		520		18,801		24,958		1,362,777		1,387,735
Residential mortgage		0		107		487		153		747		89,325		90,072
Home equity		185		30		0		654		869		98,966		99,835
Other		0		874		78		216		1,168		22,319		23,487
Total consumer related loans		185		1,011		565		1,023		2,784		210,610		213,394
Total loans	$	1,875	$	4,958	$	1,085	$	19,824	$	27,742	$	1,573,387	$	1,601,129

December 31, 2019
Builder & developer	$	0	$	0	$	43	$	885	$	928	$	158,384	$	159,312
Commercial real estate investor		0		0		0		225		225		207,002		207,227
Residential real estate investor		295		0		0		5,771		6,066		241,903		247,969
Hotel/Motel		0		0		0		0		0		80,260		80,260
Wholesale & retail		0		0		0		7,215		7,215		102,023		109,238
Manufacturing		409		0		0		1,135		1,544		84,967		86,511
Agriculture		14		0		0		2,842		2,856		77,863		80,719
Other		463		1,865		120		5,499		7,947		305,424		313,371
Total commercial related loans		1,181		1,865		163		23,572		26,781		1,257,826		1,284,607
Residential mortgage		0		70		104		275		449		94,419		94,868
Home equity		249		276		0		677		1,202		99,625		100,827
Other		750		68		13		226		1,057		23,776		24,833
Total consumer related loans		999		414		117		1,178		2,708		217,820		220,528
Total loans	$	2,180	$	2,279	$	280	$	24,750	$	29,489	$	1,475,646	$	1,505,135

Troubled Debt Restructurings

Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans generally involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and management believes that future loan payments are reasonably assured under the modified terms. TDRs included as impaired ~~loans~~loan totaled ~~$1,598,000~~$1,548,000, $1,650,000 and ~~$1,650,000~~$3,824,000 as of ~~March~~June 30, 2020, December 31, ~~2020~~2019 and ~~March 31,~~June 30, 2019, respectively. There are no0 commitments to lend additional amounts to these TDRs as of ~~March~~June 30, 2020, December 31, 2019 and June 30, 2019.

As of June 30, 2020, there have been modifications to 25 consumer loans totaling approximately $1,700,000, 23 mortgage loans totaling approximately $8,000,000 and ~~March 31, 2019.~~374 commercial loans totaling approximately $261,000,000 under the CARES Act, which are not considered TDRs.

The table below shows loans whose terms have been modified under TDRs during the three and six months ended ~~March 31,~~June 30, 2020 and 2019. There were no0 impairment losses recognized on these TDRs. There were no0 defaults during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019 for TDRs entered into during the previous 12 month period. As of March 31, 2020, there were no modifications completed under the CARES Act. As of April 30, 2020, there have been modifications to 35 consumer loans totaling approximately $2,000,000 and 13 commercial loans totaling approximately $41,000,000 under the CARES Act, which are not considered TDRs.

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

March 31, 2020
None

March 31, 2019
Commercial related loans accruing 1 $ 63 $ 63 $ 61

~~- 24 -~~

- 22 -



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

June 30, 2020
None

June 30, 2019
None

Six months ended:

June 30, 2020
None
June 30, 2019
Commercial related loans accruing	1	$	63	$	63	$	59

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NOTE 5 – Allowance for Loan Losses

The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three and six months ended ~~March 31,~~June 30, 2020 and 2019.

Allowance for Loan Losses
January 1, 2020 March 31, 2020
(dollars in thousands) Balance Charge-offs Recoveries Provision Balance
Builder & developer $ 2,263 $ (170 ) $ 0 $ 133 $ 2,226
Commercial real estate investor 2,565 0 0 117 2,682
Residential real estate investor 4,632 0 3 124 4,759
Hotel/Motel 742 0 0 314 1,056
Wholesale & retail 3,575 0 7 976 4,558
Manufacturing 1,252 0 0 64 1,316
Agriculture 1,304 0 0 (164 ) 1,140
Other commercial 4,204 (7,511 ) 0 7,772 4,465
Total commercial related loans 20,537 (7,681 ) 10 9,336 22,202
Residential mortgage 158 0 0 77 235
Home equity 203 0 0 101 304
Other consumer 167 (5 ) 13 (78 ) 97
Total consumer related loans 528 (5 ) 13 100 636
Unallocated 1 0 0 (1 ) 0
Total $ 21,066 $ (7,686 ) $ 23 $ 9,435 $ 22,838



	Allowance for Loan Losses												Allowance for Loan Losses
		January 1, 2019										March 31, 2019	April 1, 2020								June 30, 2020
(dollars in thousands)		Balance		Charge-offs			Recoveries		Provision			Balance	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,835	$	0		$	0	$	132		$	2,967	$	2,226	$	(674)	$	0	$	824	$	2,376
Commercial real estate investor		2,636		0			0		16			2,652		2,682		0		0		50		2,732
Residential real estate investor		3,945		0			3		62			4,010		4,759		0		3		5		4,767
Hotel/Motel		732		0			0		67			799		1,056		0		0		474		1,530
Wholesale & retail		1,813		0			0		(12	)		1,801		4,558		(3,116)		0		956		2,398
Manufacturing		1,287		0			0		(21	)		1,266		1,316		(392)		0		(23)		901
Agriculture		579		0			0		(1	)		578		1,140		0		0		(28)		1,112
Other commercial		4,063		(46	)		0		1,168			5,185		4,465		(179)		0		324		4,610
Total commercial related loans		17,890		(46	)		3		1,411			19,258		22,202		(4,361)		3		2,582		20,426
Residential mortgage		126		0			0		6			132		235		0		0		(6)		229
Home equity		265		(20	)		1		(51	)		195		304		0		0		(7)		297
Other consumer		144		(60	)		9		106			199		97		(6)		14		(11)		94
Total consumer related loans		535		(80	)		10		61			526		636		(6)		14		(24)		620
Unallocated		719		0			0		(422	)		297		0		0		0		(8)		(8)
Total	$	19,144	$	(126	)	$	13	$	1,050		$	20,081	$	22,838	$	(4,367)	$	17	$	2,550	$	21,038

~~- 25 -~~

- 23 -



	Allowance for Loan Losses
	April 1, 2019								June 30, 2019
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,967	$	0	$	0	$	(259)	$	2,708
Commercial real estate investor		2,652		0		0		(84)		2,568
Residential real estate investor		4,010		0		3		(125)		3,888
Hotel/Motel		799		0		0		(53)		746
Wholesale & retail		1,801		0		0		1,681		3,482
Manufacturing		1,266		0		0		89		1,355
Agriculture		578		0		0		(22)		556
Other commercial		5,185		0		0		(40)		5,145
Total commercial related loans		19,258		0		3		1,187		20,448
Residential mortgage		132		0		0		5		137
Home equity		195		(97)		1		173		272
Other consumer		199		(30)		16		(25)		160
Total consumer related loans		526		(127)		17		153		569
Unallocated		297		0		0		(140)		157
Total	$	20,081	$	(127)	$	20	$	1,200	$	21,174



	Allowance for Loan Losses
	January 1, 2020								June 30, 2020
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,263	$	(844)	$	0	$	957	$	2,376
Commercial real estate investor		2,565		0		0		167		2,732
Residential real estate investor		4,632		0		6		129		4,767
Hotel/Motel		742		0		0		788		1,530
Wholesale & retail		3,575		(3,116)		7		1,932		2,398
Manufacturing		1,252		(392)		0		41		901
Agriculture		1,304		0		0		(192)		1,112
Other commercial		4,204		(7,690)		0		8,096		4,610
Total commercial related loans		20,537		(12,042)		13		11,918		20,426
Residential mortgage		158		0		0		71		229
Home equity		203		0		0		94		297
Other consumer		167		(11)		27		(89)		94
Total consumer related loans		528		(11)		27		76		620
Unallocated		1		0		0		(9)		(8)
Total	$	21,066	$	(12,053)	$	40	$	11,985	$	21,038



	Allowance for Loan Losses
	January 1, 2019								June 30, 2019
(dollars in thousands)	Balance		Charge-offs		Recoveries		Provision		Balance
Builder & developer	$	2,835	$	0	$	0	$	(127)	$	2,708
Commercial real estate investor		2,636		0		0		(68)		2,568
Residential real estate investor		3,945		0		6		(63)		3,888
Hotel/Motel		732		0		0		14		746
Wholesale & retail		1,813		0		0		1,669		3,482
Manufacturing		1,287		0		0		68		1,355
Agriculture		579		0		0		(23)		556
Other commercial		4,063		(46)		0		1,128		5,145
Total commercial related loans		17,890		(46)		6		2,598		20,448
Residential mortgage		126		0		0		11		137
Home equity		265		(117)		2		122		272
Other consumer		144		(90)		25		81		160
Total consumer related loans		535		(207)		27		214		569
Unallocated		719		0		0		(562)		157
Total	$	19,144	$	(253)	$	33	$	2,250	$	21,174

- 24 -

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

Allowance for Loan Losses Loans
Individually Collectively Individually Collectively
Evaluated For Evaluated For Evaluated For Evaluated For
(dollars in thousands) Impairment Impairment Balance Impairment Impairment Balance
March 31, 2020
Builder & developer $ 52 $ 2,174 $ 2,226 $ 1,435 $ 150,997 $ 152,432
Commercial real estate investor 0 2,682 2,682 1,325 206,072 207,397
Residential real estate investor 1,906 2,853 4,759 5,956 248,861 254,817
Hotel/Motel 0 1,056 1,056 0 79,729 79,729
Wholesale & retail 3,363 1,195 4,558 7,340 92,144 99,484
Manufacturing 487 829 1,316 1,037 81,314 82,351
Agriculture 537 603 1,140 3,378 75,414 78,792
Other commercial 1,506 2,959 4,465 7,405 295,715 303,120
Total commercial related 7,851 14,351 22,202 27,876 1,230,246 1,258,122
Residential mortgage 0 235 235 153 92,471 92,624
Home equity 0 304 304 667 100,880 101,547
Other consumer 0 97 97 219 24,149 24,368
Total consumer related 0 636 636 1,039 217,500 218,539
Unallocated 0 0 0 0 0 0
Total $ 7,851 $ 14,987 $ 22,838 $ 28,915 $ 1,447,746 $ 1,476,661

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

~~- 26 -~~



	Allowance for Loan Losses						Loans
	Individually		Collectively				Individually		Collectively
	Evaluated For		Evaluated For				Evaluated For		Evaluated For
(dollars in thousands)	Impairment		Impairment		Balance		Impairment		Impairment		Balance
June 30, 2020
Builder & developer	$	83	$	2,293	$	2,376	$	731	$	173,581	$	174,312
Commercial real estate investor		0		2,732		2,732		1,270		203,582		204,852
Residential real estate investor		1,796		2,971		4,767		5,871		248,070		253,941
Hotel/Motel		0		1,530		1,530		0		80,748		80,748
Wholesale & retail		0		2,398		2,398		240		113,275		113,515
Manufacturing		0		901		901		0		98,722		98,722
Agriculture		534		578		1,112		3,582		73,804		77,386
Other commercial		1,641		2,969		4,610		8,605		375,654		384,259
Total commercial related		4,054		16,372		20,426		20,299		1,367,436		1,387,735
Residential mortgage		0		229		229		153		89,919		90,072
Home equity		0		297		297		654		99,181		99,835
Other consumer		0		94		94		216		23,271		23,487
Total consumer related		0		620		620		1,023		212,371		213,394
Unallocated		0		(8)		(8)		0		0		0
Total	$	4,054	$	16,984	$	21,038	$	21,322	$	1,579,807	$	1,601,129



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

Note 6—Deposits

The composition of deposits as of ~~March 31,~~June 30, 2020 and December 31, 2019 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is ~~$68,000~~$52,000 at ~~March 31,~~June 30, 2020, compared to $86,000 at December 31, 2019.

March 31, December 31,
(dollars in thousands) 2020 2019
Noninterest bearing demand $ 274,382 $ 273,968
Interest bearing demand 182,414 174,248
Money market 531,925 513,948
Savings 90,411 85,489
Time deposits less than $100 309,597 303,527
Time deposits $100 to $250 183,820 175,477
Time deposits $250 or more 66,798 63,907
Total deposits $ 1,639,347 $ 1,590,564



	June 30,		December 31,
(dollars in thousands)	2020		2019
Noninterest bearing demand	$	397,968	$	273,968
Interest bearing demand		201,746		174,248
Money market		558,220		513,948
Savings		101,586		85,489
Time deposits less than $100		296,808		303,527
Time deposits $100 to $250		184,971		175,477
Time deposits $250 or more		66,343		63,907
Total deposits	$	1,807,642	$	1,590,564

- 25 -

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

Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At ~~March 31,~~June 30, 2020, the balance of securities sold under agreements to repurchase was ~~$6,196,000~~$9,477,000 compared to $7,925,000 at December 31, 2019. At ~~March 31,~~June 30, 2020 and December 31, 2019, there were no0 other short-term borrowings.

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

March 31, December 31,
(dollars in thousands) 2020 2019
PeoplesBank’s obligations:
  Federal Home Loan Bank of Pittsburgh (FHLBP)
Due March 2020, 1.86% 0 10,000
Due June 2020, 1.87% 15,000 15,000
Due June 2020, 2.70% 10,000 10,000
Due June 2021, 2.81% 10,000 10,000
Due June 2021, 2.14% 15,000 15,000
Due May 2022, 2.93% 10,000 10,000
  Total FHLBP 60,000 70,000
Codorus Valley Bancorp, Inc. obligations:
  Junior subordinated debt
Due 2034, 2.76%, floating rate based on 3 month
   LIBOR plus 2.02%, callable quarterly 3,093 3,093
Due 2036, 3.37% floating rate based on 3 month
   LIBOR plus 1.54%, callable quarterly 7,217 7,217
  Total junior subordinated debt 10,310 10,310
Lease obligations included in long-term debt:
Finance lease liabilities 1,317 1,322
Total long-term debt $ 71,627 $ 81,632

~~- 27 -~~



	June 30,		December 31,
(dollars in thousands)	2020		2019
PeoplesBank’s obligations:
Federal Home Loan Bank of Pittsburgh (FHLBP)
Due March 2020, 1.86%	$	0	$	10,000
Due June 2020, 1.87%		0		15,000
Due June 2020, 2.70%		0		10,000
Due June 2021, 2.81%		10,000		10,000
Due June 2021, 2.14%		15,000		15,000
Due May 2022, 2.93%		10,000		10,000
Total FHLBP	$	35,000	$	70,000
Codorus Valley Bancorp, Inc. obligations:
Junior subordinated debt
Due 2034, 2.33%, floating rate based on 3 month
LIBOR plus 2.02%, callable quarterly		3,093		3,093
Due 2036, 2.76% floating rate based on 3 month
LIBOR plus 1.54%, callable quarterly		7,217		7,217
Total junior subordinated debt	$	10,310	$	10,310
Lease obligations included in long-term debt:
Finance lease liabilities		1,309		1,322
Total long-term debt	$	46,619	$	81,632

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

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

Note 8—Leases

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

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

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

- 26 -

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

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

~~- 28 -~~

The components of lease expense were as follows:

Three Months Ended
March 31,
(dollars in thousands) 2020 2019
Operating lease cost $ 203 $ 188

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

Total lease cost $ 227 $ 218



	Three months ended
	June 30,
(dollars in thousands)	2020		2019
Operating lease cost	$	192	$	188

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

Total lease cost	$	216	$	218



	Six months ended
	June 30,
(dollars in thousands)	2020		2019
Operating lease cost	$	395	$	376

Finance lease cost:
Amortization of right-of-use assets	$	24	$	34
Interest on lease liability		24		26
Total finance lease cost	$	48	$	60

Total lease cost	$	443	$	436

Supplemental cash flow information related to leases was as follows:

Three Months Ended
March 31,
2020 2019
Operating cash flows from operating leases $ 208 $ 193
Operating cash flows from financing leases 12 13
Financing cash flows from financing leases 6 11

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



	Six months ended
	June 30,
	2020		2019
Operating cash flows from operating leases	$	404	$	387
Operating cash flows from financing leases		24		26
Financing cash flows from financing leases		13		22

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

- 27 -

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,
2020 2019
Assets:
Operating leases right-of-use assets $ 3,030 $ 3,021
Finance leases assets 1,123 1,134
Total lease assets $ 4,153 $ 4,155

Liabilities:
Operating $ 3,187 $ 3,184
Financing 1,317 1,322
Total lease liabilities $ 4,504 $ 4,506

Weighted Average Remaining Lease Term (years)
Operating leases 5.5 5.6
Finance leases 23.9 24.2

Weighted Average Discount Rate
Operating leases 2.71 % 2.72 %
Finance leases 3.69 % 3.69 %

~~- 29 -~~



	June 30,		December 31,
	2020		2019
Assets:
Operating leases right-of-use assets	$	2,683	$	3,021
Finance leases assets		1,111		1,134
Total lease assets	$	3,794	$	4,155

Liabilities:
Operating	$	2,824	$	3,184
Financing		1,309		1,322
Total lease liabilities	$	4,133	$	4,506

Weighted Average Remaining Lease Term (years)
Operating leases		5.6		5.6
Finance leases		23.7		24.2

Weighted Average Discount Rate
Operating leases		2.70%		2.72%
Finance leases		3.69%		3.69%

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

(dollars in thousands:)

March 31, 2020

Year Ending December 31,

Operating Leases

Finance Leases

2020

$
622

$
56

2021

768

75

2022

609

75

2023

491

75

2024

413

75

Thereafter

508

1,669

Total lease payments

3,411

2,025

Less imputed interest

(224
)

(708
)
Total

$
3,187

$
1,317

(dollars in thousands:)

December 31, 2019

Year Ending December 31,

Operating Leases

Finance Leases

2020

$
767

$
74

2021

706

75

2022

545

75

2023

491

75

2024

413

75

Thereafter

507

1,668

Total lease payments

3,429

2,042

Less imputed interest

(245
)

(720
)
Total

$
3,184

$
1,322



(dollars in thousands:)	June 30, 2020
Year Ending December 31,	Operating Leases		Finance Leases
2020	$	343	$	38
2021		667		75
2022		604		75
2023		489		75
2024		413		75
Thereafter		508		1,666
Total lease payments		3,024		2,004
Less imputed interest		(200)		(695)
Total	$	2,824	$	1,309



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

Note 9—Regulatory Matters

The Corporation and PeoplesBank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action that, if imposed, could have a material adverse effect on the Corporation’s financial statements. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of ~~March 31,~~June 30, 2020, the Corporation and PeoplesBank meet all capital adequacy requirements to which they are subject.

- 28 -

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of ~~March 31,~~June 30, 2020 and December 31, 2019, 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.

~~- 30 -~~

The table below provides a comparison of the Corporation’s and PeoplesBank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirement for the periods indicated. Minimum amounts and ratios include the full phase in of the capital conservation buffer of 2.5 percent required by the Basel III framework.

Minimum for Basel III

Well Capitalized

Actual

Capital Adequacy

Minimum (1)
(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio
Codorus Valley Bancorp, Inc. (consolidated)
at March 31, 2020

Capital ratios:

Common equity Tier 1
$
182,956

12.24
%

$
104,598

7.00
%

n/a

n/a

Tier 1 risk based

192,956

12.91

127,012

8.50

n/a

n/a

Total risk based

211,686

14.17

156,867

10.50

n/a

n/a

Leverage

192,956

10.18

75,787

4.00

n/a

n/a

at December 31, 2019

Capital ratios:

Common equity Tier 1
$
187,312

12.45
%

$
105,359

7.00
%

n/a

n/a

Tier 1 risk based

197,312

13.11

127,936

8.50

n/a

n/a

Total risk based

216,154

14.36

158,039

10.50

n/a

n/a

Leverage

197,312

10.55

74,820

4.00

n/a

n/a

PeoplesBank, A Codorus Valley Company
at March 31, 2020

Capital ratios:

Common equity Tier 1
$
189,263

12.70
%

$
104,356

7.00
%

$
96,974

6.50
%
Tier 1 risk based

189,263

12.70

126,717

8.50

119,352

8.00

Total risk based

207,950

13.95

156,533

10.50

149,191

10.00

Leverage

189,263

10.01

75,648

4.00

94,561

5.00

at December 31, 2019

Capital ratios:

Common equity Tier 1
$
193,421

12.88
%

$
105,118

7.00
%

$
97,610

6.50
%
Tier 1 risk based

193,421

12.88

127,643

8.50

120,135

8.00

Total risk based

212,220

14.13

157,677

10.50

150,169

10.00

Leverage

193,421

10.36

74,673

4.00

93,341

5.00



					Minimum for Basel III				Well Capitalized
	Actual				Capital Adequacy				Minimum (1)
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Codorus Valley Bancorp, Inc. (consolidated)
at June 30, 2020
Capital ratios:
Common equity Tier 1	$	184,862	12.85	%	$	100,688	7.00	%		n/a	n/a
Tier 1 risk based		194,862	13.55			122,264	8.50			n/a	n/a
Total risk based		212,880	14.80			151,032	10.50			n/a	n/a
Leverage		194,862	9.50			82,048	4.00			n/a	n/a

at December 31, 2019
Capital ratios:
Common equity Tier 1	$	187,312	12.45	%	$	105,359	7.00	%		n/a	n/a
Tier 1 risk based		197,312	13.11			127,936	8.50			n/a	n/a
Total risk based		216,154	14.36			158,039	10.50			n/a	n/a
Leverage		197,312	10.55			74,820	4.00			n/a	n/a

PeoplesBank, A Codorus Valley Company
at June 30, 2020
Capital ratios:
Common equity Tier 1	$	191,102	13.32	%	$	100,452	7.00	%	$	93,276	6.50	%
Tier 1 risk based		191,102	13.32			121,977	8.50			114,802	8.00
Total risk based		209,078	14.57			150,677	10.50			143,502	10
Leverage		191,102	9.33			81,909	4.00			102,386	5.00

at December 31, 2019
Capital ratios:
Common equity Tier 1	$	193,421	12.88	%	$	105,118	7.00	%	$	97,610	6.50	%
Tier 1 risk based		193,421	12.88			127,643	8.50			120,135	8.00
Total risk based		212,220	14.13			157,677	10.50			150,169	10
Leverage		193,421	10.36			74,673	4.00			93,341	5.00

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

Note 10—Shareholders’ Equity

Stock Dividend

Periodically, the Corporation distributes stock dividends on its common stock. The Corporation distributed 5 percent stock dividends on December 10, 2019 and December 11, 2018, which resulted in the issuance of 463,193 and 447,092 additional shares, respectively.

Share Repurchase

- 29 -

stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. During the first quarter of 2020 the Corporation repurchased 5,335 shares at an average price of $16.37. Shortly after the Program began, and in response to COVID-19, the Corporation suspended the Program. There was 0 activity under the program for the quarter ended June 30, 2020.

~~- 31 -~~

Note 11—Contingent Liabilities

There are no0 legal proceedings pending against Codorus Valley Bancorp, Inc. or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation, other than routine litigation incidental to the business. Management is not aware of any proceedings known or contemplated by government authorities.

Note 12—Guarantees

Codorus Valley does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by PeoplesBank to guarantee the performance of a client to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to clients. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had ~~$20,059,000~~$17,866,000 of standby letters of credit outstanding on ~~March 31,~~June 30, 2020, compared to $17,253,000 on December 31, 2019. 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,~~June 30, 2020 and December 31, 2019, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

Note 13—Fair Value of Assets and Liabilities

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

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

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

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

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

~~- 32 -~~

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.

- 30 -

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’~~securities�� relationship to other benchmark quoted prices.

Fair Value Measurements

(Level 1)

(Level 2)

(Level 3)

Quoted Prices in

Significant Other

Significant Other

Active Markets for

Observable

Unobservable
(dollars in thousands)

Total

Identical Assets

Inputs

Inputs
March 31, 2020

Securities available-for-sale:

U.S. Treasury notes

$
5,086

$
5,086

$
0

$
0
U.S. agency mortgage-backed, residential

140,702

0

140,702

0
State and municipal

24,912

0

24,912

0
Corporate debt

1,038

0

1,038

0

December 31, 2019

Securities available-for-sale:

U.S. Treasury notes

$
9,953

$
9,953

$
0

$
0
U.S. agency

14,923

0

14,923

0
U.S. agency mortgage-backed, residential

108,155

0

108,155

0
State and municipal

26,644

0

26,644

0



			Fair Value Measurements
(dollars in thousands)	Total		(Level 1) ‎Quoted Prices in ‎Active Markets for ‎Identical Assets		(Level 2) ‎Significant Other ‎Observable Inputs		(Level 3) ‎Significant Other ‎Unobservable Inputs
June 30, 2020
Securities available-for-sale:
U.S. Treasury notes	$	5,053	$	5,053	$	0	$	0
U.S. agency mortgage-backed, residential		131,503		0		131,503		0
State and municipal		22,051		0		22,051		0
Corporate debt		1,108		0		1,108		0

December 31, 2019
Securities available-for-sale:
U.S. Treasury notes	$	9,953	$	9,953	$	0	$	0
U.S. agency		14,923		0		14,923		0
U.S. agency mortgage-backed, residential		108,155		0		108,155		0
State and municipal		26,644		0		26,644		0

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At ~~March 31,~~June 30, 2020, the fair value of impaired loans with a valuation allowance or partial charge-off was ~~$10,672,000,~~$6,560,000, net of valuation allowances of ~~$7,851,000~~$4,054,000 and partial charge-offs of $7,634,000. At December 31, 2019 the fair value of impaired loans with a valuation allowance or charge-off was $11,297,000, net of valuation allowances of $7,420,000 and charge-offs of $134,000.

~~- 33 -~~

Foreclosed Real Estate

Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based on an independent third-party appraisal of the property or occasionally on a recent sales offer. At ~~March 31,~~June 30, 2020 with a valuation allowance or write-down was $103,000 which is net of write-downs of $18,000, and at December 31, 2019, the fair value of foreclosed real estate with a valuation allowance or write-down was $797,000 which is net of write-downs of $617,000.

- 31 -

Mortgage Servicing Rights

Mortgage servicing rights are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and original time to maturity. Mortgage servicing rights are subsequently evaluated for impairment on a quarterly basis. Significant inputs to the valuation include expected cash flow, expected net servicing income, a cash flow discount rate and the expected life of the underlying loans. At ~~March 31,~~June 30, 2020, the fair value of the mortgage servicing rights asset was ~~$740,000.~~$649,000. At December 31, 2019, the fair value of the mortgage servicing rights asset was $1,047,000.

			Fair Value Measurements
			(Level 1)				(Level 3)
			Quoted Prices in		(Level 2)		Significant Other
			Active Markets for		Significant Other		Unobservable				Fair Value Measurements
(dollars in thousands)	Total		Identical Assets		Observable Inputs		Inputs			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, 2020
June 30, 2020
Impaired loans	$	10,672	$	0	$	0	$	10,672	$	6,560	$	0	$	0	$	6,560
Foreclosed real estate		797		0		0		797		103		0		0		103
Mortgage servicing rights		740		0		0		740		649		0		0		649

December 31, 2019
Impaired loans	$	11,297	$	0	$	0	$	11,297	$	11,297	$	0	$	0	$	11,297
Foreclosed real estate		797		0		0		797		797		0		0		797
Mortgage Servicing rights		1,047		0		0		1,047
Mortgage servicing rights										1,047		0		0		1,047

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									Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation	Unobservable			Weighted			Fair Value		Valuation	Unobservable		Weighted
(dollars in thousands)	Estimate		Techniques	Input	Range		Average			Estimate		Techniques	Input	Range	Average
March 31, 2020
June 30, 2020
Impaired loans	$	6,428	Appraisal⁽¹⁾	Appraisal adjustments⁽²⁾		15% -50%		41	%	$	6,560	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% -50%	41%

Impaired loans		4,244	Business asset valuation⁽³⁾	Business asset valuation adjustments⁽⁴⁾		10% -68%		64	%
Foreclosed real estate		797	Appraisal⁽¹⁾	Appraisal adjustments⁽²⁾		22% - 22%		22	%		103	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 15%	15%
Mortgage servicing rights		740	Multiple of annual service fee	Estimated prepayment speed based on rate and term		12.9% - 17.7%		16.7	%
Mortgage Servicing Rights											649	Multiple of annual service fee	Estimated prepayment speed based on rate and term	15.6% - 19.2%	18.4%

December 31, 2019
Impaired loans	$	5,991	Appraisal⁽¹⁾	Appraisal adjustments⁽²⁾		15% - 55%		44	%	$	5,991	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	15% - 55%	44%

Impaired loans		5,306	Business asset valuation⁽³⁾	Business asset valuation adjustments⁽⁴⁾		10% - 73%		70	%		5,306	Business asset valuation ⁽³⁾	Business asset valuation adjustments ⁽⁴⁾	10% - 73%	70%
Foreclosed real estate		797	Appraisal⁽¹⁾	Appraisal adjustments⁽²⁾		22% - 22%		22	%		797	Appraisal ⁽¹⁾	Appraisal adjustments ⁽²⁾	22% - 22%	22%
Mortgage servicing rights		1,047	Multiple of annual service fee	Estimated prepayment speed based on rate and term		7.9% - 8.9%		8.7	%
Mortgage Servicing Rights											1,047	Multiple of annual service fee	Estimated prepayment speed based on rate and term	7.9% - 8.9%	8.7%

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

~~(1)~~

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

~~(2)~~

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

~~(3)~~

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

~~(4)~~

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

~~- 34 -~~

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

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

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

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

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, 2020
Financial assets
Cash and cash equivalents $ 185,258 $ 185,258 $ 185,258 $ 0 $ 0
Securities available-for-sale 171,738 171,738 5,086 166,652 0
Loans held for sale 10,858 11,366 0 11,366 0
Loans, net 1,453,823 1,469,994 0 0 1,469,994
Interest receivable 4,872 4,872 0 4,872 0

Financial liabilities
Deposits $ 1,639,347 $ 1,636,607 $ 0 $ 1,636,607 $ 0
Short-term borrowings 6,196 6,196 0 6,196 0
Long-term debt (1) 70,310 70,494 0 61,026 9,468
Interest payable 787 787 0 787 0

Off-balance sheet instruments 0 0 0 0 0

December 31, 2019
Financial assets
Cash and cash equivalents $ 131,591 $ 131,591 $ 131,591 $ 0 $ 0
Securities available-for-sale 159,675 159,675 9,953 149,722 0
Restricted investment in bank stocks 4,551 4,551 0 4,551 0
Loans held for sale 11,803 12,460 0 12,460 0
Loans, net 1,484,069 1,472,772 0 0 1,472,772
Interest receivable 5,016 5,016 0 5,016 0

Financial liabilities
Deposits $ 1,590,564 $ 1,582,179 $ 0 $ 1,582,179 $ 0
Short-term borrowings 7,925 7,925 0 7,925 0
Long-term debt (1) 80,310 79,579 0 70,486 9,093
Interest payable 842 842 0 842 0

Off-balance sheet instruments 0 0 0 0 0

~~(1)~~

~~Exclude leases included in Long-term debt~~

- 32 -

~~- 35 -~~

						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
June 30, 2020
Financial assets
Cash and cash equivalents	$	215,361	$	215,361	$	215,361	$	0	$	0
Securities available-for-sale		159,715		159,715		5,053		154,662		0
Loans held for sale		17,534		18,274		0		18,274		0
Loans, net		1,580,091		1,587,083		0		0		1,587,083
Interest receivable		6,534		6,534		0		6,534		0

Financial liabilities
Deposits	$	1,807,642	$	1,814,706	$	0	$	1,814,706	$	0
Short-term borrowings		9,477		9,477		0		9,477		0
Long-term debt (1)		45,310		44,427		0		35,899		8,528
Interest payable		617		617		0		617		0

Off-balance sheet instruments		0		0		0		0		0

December 31, 2019
Financial assets
Cash and cash equivalents	$	131,591	$	131,591	$	131,591	$	0	$	0
Securities available-for-sale		159,675		159,675		9,953		149,722		0
Restricted investment in bank stocks		4,551		4,551		0		4,551		0
Loans held for sale		11,803		12,460		0		12,460		0
Loans, net		1,484,069		1,472,772		0		0		1,472,772
Interest receivable		5,016		5,016		0		5,016		0

Financial liabilities
Deposits	$	1,590,564	$	1,582,179	$	0	$	1,582,179	$	0
Short-term borrowings		7,925		7,925		0		7,925		0
Long-term debt (1)		80,310		79,579		0		70,486		9,093
Interest payable		842		842		0		842		0

Off-balance sheet instruments		0		0		0		0		0

(1) Exclude leases included in Long-term debt

- 33 -

Note 14—Assets and Liabilities Subject to Offsetting

Securities Sold Under Agreements to Repurchase

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

Gross amounts Not Offset in
Gross Net Amounts the Statements of Condition
Gross Amounts of Liabilities Financial Instruments
Amounts of Offset in the Presented in U.S. agency Cash
Recognized Statements the Statements mortgage-backed, Collateral Net
(dollars in thousands) Liabilities of Condition of Condition residential U.S. agency Pledged Amount
March 31, 2020
Repurchase Agreements $ 6,196 $ 0 $6,196 $(9,479) $ 0 $ 0 $ (3,283 )

December 31, 2019
Repurchase Agreements $ 7,925 $ 0 $7,925 $(9,601) $ 0 $ 0 $ (1,676 )



							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
June 30, 2020
Repurchase Agreements	$	9,477	$	0	$	9,477	$	(10,114)	$	0	$	0	$	(637)

December 31, 2019
Repurchase Agreements	$	7,925	$	0	$	7,925	$	(9,601)	$	0	$	0	$	(1,676)

~~- 36 -~~

‎

- 34 -

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

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

Forward-looking Statements

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

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

●

~~Operating, legal and regulatory risks;~~

●

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

●

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

●

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

●

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

●

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

●

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

●

~~A prolonged economic downturn or excessive inflation;~~

●

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

●

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

●

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

●

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

●

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

●

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

●

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

Operating, legal and regulatory risks;

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

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

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

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

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

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

A prolonged economic downturn or excessive inflation;

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

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

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

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

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

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

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

COVID – 19 Pandemic

~~Community-based financial~~The coronavirus has affected nearly every aspect of personal and business life over the last quarter. The Company has needed to react quickly to changing guidelines from the CDC and at the state levels. The changes in how the Company must conduct its essential services ~~companies like Codorus Valley Bancorp, Inc.~~to the community are continuing to evolve. Thru the second quarter, efforts to mitigate the spread of this virus have been successful in both Pennsylvania and Maryland, allowing a path for re-opening businesses.

In recent weeks, the nation has seen a resurgence of hot spots resulting in some states tightening up guidelines and issuing lockdowns. The impact on the Company’s market area from the number of growing cases in other parts of the country is still unknown, but is starting

- 35 -

to show signs of potential impact. Governor Wolf has recently announced a need to create stricter guidelines and travel restrictions in Pennsylvania in order to slow the spread of COVID-19 due to higher infection rates in other states.

The PeoplesBank Crisis Management Team has been monitoring the situation closely and is meeting weekly to manage the changing dynamics of COVID-19.

Associates

Approximately 40 percent of the Company’s associates are continuing to work off-premise. A phased approach and a comprehensive plan to safely return associates working remotely has been developed, and will be implemented as the number of COVID-19 cases decline and as permitted by state municipal authorities. On-going associate communication and training related to staying healthy and safe during a pandemic has been a priority. At the time of this release, one associate has tested positive for COVID-19.

Re-Opening

A phased plan to re-open the majority of Financial Centers was also implemented in the ~~risk business. We carefully analyze those~~second quarter. This involved developing and training associates on new lobby protocols, installing new signage, removing upholstered furniture, and adding plastic shields on the teller line.

The first eight financial ~~opportunities~~centers re-opened with lobby service on June 15th. The locations identified to ~~which we are presented~~open in the first phase were based on transaction volumes, higher staffing levels and determine what level of risk the balance sheet can accept. When we accept a balance sheet risk, we also determine pricing of that risk for both known and unknown events. COVID-19 is an unknown event that no community-based financial institution had the ability to ~~decline, and financial institutions have not risk-priced the effects of COVID-19 on their companies.~~

~~- 37 -~~

During the initial public awareness of the coronavirus, the Corporation’s Pandemic Preparedness and Response Planning Committee (the Committee) convened and began preparing for the health impact of the coronavirus. The Committee, chartered in 2006 in response to the avian flu epidemic, determined its first concern was the well-being of our associates and clients. Prior to the CDC declaring the coronavirusserve clients across a ~~pandemic, the Corporation’s Crisis Management Team (the Team) convened on March 2~~^nd ~~and have since conducted numerous meetings.~~

~~Associates~~

The Team, in tandem with Executive Management, drafted and implemented plans to relocate and disperse approximately 50 percent of the Corporation’s staff off-premise, as well as, eliminate lobby service hours at 90 percent of our retail locations. Conversely, for those locations with drive-up facilities, extended service hours were provided. In addition, all of the Corporation’s limited services facilities, located in retirement homes, were closed.

Providing additional support for our associates, enhancements made to the PeoplesBank Medical Plan include: waiving copayments for telemedicine visits, as well as waiving cost sharing for in-network, inpatient hospital care for COVID-19 treatment to include deductibles, co-insurance and co-pays for any inpatient care related to COVID-19. For those associates at home due to potential exposure to the virus or who are at a higher health risk, the Corporation continues to provide their regular pay.

Finally, the Committee instituted a regimented process whereby every Corporate facility housing its associates undergoes electrostatic disinfection by a third-party vendor, as appropriate and necessary. To date, those associates who have exhibited symptoms of the coronavirus, have all tested negative.

~~Clients~~

The vast majority of our financial centers remain open (for drive-up service) and all or our ATMs remain accessible and in service. We continue to waive all PeoplesBank foreign ATM fees, overdraft fees on personal and business accounts, transfer fees for overdraft protection and early withdrawal on CDs opened greater than seven days for those clients specifically experiencing financial hardship due to the coronavirus pandemic.

~~Clients may request to defer interest only or full loan payments, with payments added to~~geographic region. By the end of June, nineteen financial centers and three Retirement Community Office lobbies were open with several modifications to ensure the ~~loan. We~~safety of clients and associates. These include shorter lobby hours, designated hours for seniors and clients at high risk, a designated lobby manager to screen and limit the number of clients in a lobby at a time, and additional cleaning protocols. Five Financial Centers continue to offer drive-thru and by appointment only hours, and four Retirement Community Offices and three Loan Production Offices (Young Manor, Centerville, Bel Air) remain closed.
‎
‎The Company purchased electrostatic machines to reduce third-party expenses and internally manage the sanitizing of all facilities.

Client Hardship

In addition to higher volume of calls to our Client Care Center, financial hardship telephone lines were set-up to assist clients with loan deferments, SBA loans, and fee waivers. The Company continued to waive ATM foreign fees throughout the entire second quarter for all clients.

PeoplesBank continues to responsibly and prudently extend credit to qualified borrowers. In addition, we were active participants in the SBA Paycheck Protection ~~Program.~~Program (PPP). As of ~~April 15~~^th ~~when the first round of the Program ended,~~July 15th, PeoplesBank ~~had~~has processed ~~670 applications for~~ approximately ~~$133~~1,300 PPP loans totaling $180 million with ~~about $4.2 million~~projected fees exceeding $6 million. The majority of these loans (83 percent) were supporting small businesses with loan amounts below $150,000.

Digital Adoption

In mid-June, PeoplesBank began promoting video call appointments to clients as another option for connecting with a financial mentor. Associates who serve as financial mentors participated in ~~fee income expected for the Corporation.~~extensive training on how to conduct professional and effective video calls with clients.

~~Operations~~

During the past two years, the Corporation implemented an aggressive schedule of equipment/system enhancements and personnel additions to its Information Technology Division. As a result, the Corporation’s associates were able to quickly and efficiently move to an off-premise working environment with little client or associate disruption. During this ~~unusual period, deposit balances~~quarter, digital adoption continued to ~~grow and the active users on~~rise as record numbers of clients utilized online banking ~~have increased about 60 percent over December 2019. While not optimum, the Corporation is prepared to operate in the foregoing fashion unless~~ and ~~until we feel it is safe for our associates and clients to once again conduct face-to-face financial services transactions.~~mobile deposit features.

~~- 38 -~~

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

Critical Accounting Policies

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

~~- 39 -~~

- 36 -

Three Months Ended ~~March 31,~~June 30, 2020 vs. Three Months Ended ~~March 31,~~June 30, 2019

~~Financial Highlights~~FINANCIAL HIGHLIGHTS

The Corporation’s net ~~loss~~income (earnings) was ~~$(2,989,000)~~$3,050,000 for the quarter ended ~~March 31,~~June 30, 2020, as compared to ~~net income of $4,091,000~~$4,859,000 for the quarter ended ~~March 31,~~June 30, 2019, a decrease of ~~$7,080,000~~$1,809,000 or ~~173~~37 percent.

●

Net interest income for the first quarter of 2020 decreased $164,000 or 1 percent below the same period in 2019, primarily due to lower rates of interest on loans and by higher volume and rates of interest on time deposits, partially offset by lower rates on interest bearing demand deposits in the first quarter of 2020 as compared to the first quarter of 2019.

●

The Corporation’s net interest margin (tax-equivalent basis) for the first quarter of 2020 was 3.44 percent, compared to 3.69 percent for the first quarter 2019. The net interest margin contraction was a result of lower rates on interest bearing deposits with banks, lower rates on loans and higher volume and rates on time deposits, partially offset by higher volume and rates on interest bearing deposits.

●

The provision for loan losses for the first quarter of 2020 was $9,435,000, as compared to a provision of $1,050,000 for the first quarter of 2019. The increased provision expense in the first quarter of 2020 was attributed primarily to a partial charge off arising from a single, large commercial lending relationship. Total outstanding credit exposure to this borrower was approximately $8 million, which was reduced by the expected loss of $7.5 million recognized during the quarter after an evaluation of COVID-19’s negative impact to both the creditor’s net asset valuation and the timing of potential distributions. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in an additional $1.5 million in provision for loan losses in the quarter. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.55 percent at March 31, 2020 as compared to 1.40 percent at December 31, 2019 and 1.34 percent at March 31, 2019.

●

Noninterest income for the first quarter of 2020 increased $200,000 or 6 percent compared to the first quarter of 2019. Trust and investment service fees and gain on sales from loans held for sale increased in 2020. The increase was offset by a decrease in income from bank owned life insurance.

●

Noninterest expense in the first quarter of 2020 was $758,000 or 6 percent higher than the first quarter of 2019. Higher personnel costs, professional and legal, external data processing and other expense accounted for a majority of the increase. The increase was partially offset by a decrease in FDIC insurance attributable to a lower assessment factor.

●

The provision for income taxes for the first quarter of 2020 decreased by $2,027,000 or 193 percent as compared to the first quarter of 2019 as a result of the lower income before taxes in the first quarter of 2020 as compared to the first quarter of 2019.

Net interest income for the second quarter of 2020 decreased $1,343,000 or 8 percent below the same period in 2019, primarily due to lower rates of interest on loans and lower rates on interest bearing deposits with banks, partially offset by lower rates on interest bearing demand deposits in the second quarter 2020 as compared to the second quarter 2019.

~~- 40 -~~The Corporation’s net interest margin (tax-equivalent basis) for the second quarter 2020 was 3.07 percent, compared to 3.75 percent for the second quarter 2019. The net interest margin contraction was a result of lower rates on interest bearing deposits with banks and lower rates on loans, partially offset by lower rates on interest bearing demand deposits.

The provision for loan losses for the second quarter 2020 was $2,550,000, as compared to a provision of $1,200,000 for the second quarter 2019. The increased provision expense in the second quarter 2020 was attributed primarily to a partial charge off arising from a single commercial lending relationship. The partial charge off did not exceed the specific reserve allocation for the relationship, however, it did increase the historical loss factor in the allowance for loan loss analysis. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in additional provision for loan losses in the quarter. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.31 percent at June 30, 2020 as compared to 1.40 percent at December 31, 2019 and 1.44 percent at June 30, 2019.

Noninterest income for the second quarter 2020 decreased $107,000 or 3 percent compared to the second quarter 2019. Service charges on deposit accounts decreased. The decrease was offset by trust and investment service fees and gain on sales from loans held for sale increased in 2020.

Noninterest expense in the second quarter 2020 was $374,000 or 3 percent lower than the second quarter 2019. Lower personnel costs, marketing and foreclosed real estate accounted for a majority of the decrease. The decrease was partially offset by an increase in external data processing and impaired loan carrying cost.

The provision for income taxes for the second quarter 2020 decreased by $617,000 or 47 percent as compared to the second quarter 2019 as a result of the lower income before taxes in the second quarter 2020 as compared to the second quarter 2019.

‎

- 37 -

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

	Three months ended
	March 31,
	2020			2019			Three months ended
Basic (loss) earnings per share	$	(0.31	)	$	0.41
Diluted (loss) earnings per share	$	(0.31	)	$	0.41
							June 30,
							2020			2019
Basic earnings per share							$	0.31		$	0.49
Diluted earnings per share							$	0.31		$	0.49
Cash dividend payout ratio		(52.30	)%		36.96	%		51.22	%		31.14	%
(Loss) return on average assets		(0.63	)%		0.91	%
(Loss) return on average equity		(6.15	)%		9.04	%
Return on average assets								0.59	%		1.06	%
Return on average equity								6.37	%		10.45	%
Net interest margin (tax equivalent basis)		3.44	%		3.69	%		3.07	%		3.75	%
Net overhead ratio		2.09	%		2.07	%		1.68	%		1.93	%
Efficiency ratio		70.42	%		66.35	%		65.52	%		62.42	%
Average equity to average assets		10.23	%		10.02	%		9.30	%		10.13	%

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

~~Income Statement Analysis~~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,~~June 30, 2020 was ~~$15,367,000,~~$14,900,000, a decrease of ~~$164,000~~$1,343,000 or 18 percent compared to net interest income of ~~$15,531,000~~$16,243,000 for the ~~first~~second quarter of 2019. The decrease was primarily attributable to lower rates of interest on loans, lower rates on interest bearing deposits with banks and ~~higher volume and rates of interest on time deposits,~~was partially offset by lower rates ofon interest bearing demand deposits in the ~~first~~second quarter of 2020 as compared to the ~~first~~second quarter of 2019.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was ~~3.44~~3.07 percent for the ~~first~~second quarter of 2020 compared to the ~~3.69~~3.75 percent for the ~~first~~second quarter of 2019. The net interest margin contraction was a result of lower interest rates on interest bearing deposits with banks and lower interest rates on loans, partially offset by ~~a higher volume and higher~~lower rates ofon interest ~~on time~~bearing demand deposits.

Total interest income for the ~~first~~second quarter of 2020 totaled ~~$20,189,000,~~$18,838,000, a decrease of ~~$687,000~~$2,697,000 or 313 percent below the amount of total interest income for the ~~first~~second quarter of 2019. The change was primarily a result of lower rates ~~of interest~~ on interest bearing deposits with banks and lower rates on commercial loans.

Interest and dividend income on investments ~~increased $29,000~~decreased $93,000 or 39 percent in the ~~first~~second quarter of 2020 compared to the same period in 2019. The average balance of the investment securities portfolio increased ~~$8,045,000~~$7,469,000 or 5 percent when comparing the ~~first~~second quarter of 2020 to the same period in 2019. The tax-equivalent yield on investments for the ~~first~~second quarter of 2020 was ~~2.63~~2.29 percent or 1237 basis points lower than the ~~2.75~~2.66 percent experienced in the ~~first~~second quarter of 2019.

Interest income on loans decreased ~~$746,000~~$2,094,000 or 410 percent in the ~~first~~second quarter of 2020 compared to the same period in 2019. The average balance of outstanding loans, primarily commercial loans, increased approximately ~~$4,455,000~~$109,221,000 or ~~less than 1~~7 percent comparing the ~~first~~second quarter of 2020 to the same period in 2019. Lower rates on the loan portfolio were the primary driver of the decrease in interest income on loans. The tax-equivalent yield on loans for the ~~first~~second quarter 2020 was ~~5.02~~4.50 percent or 2688 basis points less than the ~~5.28~~5.38 percent experienced in the ~~first~~second quarter of 2019.

~~- 41 -~~

Total interest expense for the ~~first~~second quarter of 2020 was ~~$4,822,000,~~$3,938,000, a decrease of ~~$523,000~~$1,354,000 or 1026 percent as compared to total interest expense of ~~$5,345,000~~$5,292,000 for the ~~first~~second quarter of 2019. The change was primarily the result of a decrease in the cost of interest bearing demand deposits.

Interest expense on deposits decreased ~~$344,000~~$1,115,000 or 724 percent in the ~~first~~second quarter of 2020 compared to the same period in 2019. The average rate paid on interest bearing deposits was ~~1.29~~1.01 percent in the ~~first~~second quarter of 2020 or 2245 basis points lower than the average rate paid of ~~1.51~~1.46 percent in the ~~first~~second quarter of 2019. The average balance of interest bearing deposits for the ~~first~~second quarter of 2020 increased by ~~$90,462,000~~$134,873,000 or 711 percent compared to the ~~first~~second quarter of 2019. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the ~~first~~second quarter of 2020 increasing 947 percent to ~~$267,366,000~~$378,549,000 as compared to ~~$244,847,000~~$257,451,000 for the ~~first~~second quarter of 2019.

- 38 -

For the ~~first~~second quarter of 2020 interest expense on borrowings decreased ~~$179,000~~$239,000 or 2535 percent compared to the ~~first~~second quarter of 2019. Short-term borrowings consisting of repurchase agreements and other short-term borrowings averaged ~~$7,040,000~~$8,234,000 for the ~~first~~second quarter of 2020, compared to an average balance of ~~$6,434,000~~$8,066,000 for the ~~first~~second quarter of 2019. The rate on average short-term borrowings for the ~~first~~second quarter of 2020 was ~~0.51~~0.54 percent, a decrease as compared to a rate of ~~0.57~~0.55 percent for the ~~first~~second quarter of 2019. Long-term debt, primarily from the Federal Home Loan Bank of Pittsburgh (FHLBP), averaged ~~$84,669,000~~$66,406,000 for the ~~first~~second quarter of 2020 and ~~$119,759,000~~$106,495,000 for the ~~first~~second quarter of 2019. For the ~~first~~second quarter of 2020, the rate on average long-term borrowings was ~~2.55~~2.58 percent, an increase as compared to a rate of ~~2.42~~2.50 percent for the ~~first~~second quarter 2019.



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

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

Assets
Interest bearing deposits with banks	$	194,820	$	48		0.10	%	$	93,302	$	558		2.40	%
Investment securities:
Taxable		143,861		784		2.19			128,243		832		2.60
Tax-exempt		21,304		157		2.96			29,453		212		2.89
Total investment securities		165,165		941		2.29			157,696		1,044		2.66

Loans:
Taxable (1)		1,590,244		17,800		4.50			1,480,696		19,890		5.39
Tax-exempt		10,103		100		3.98			10,430		104		4.00
Total loans		1,600,347		17,900		4.50			1,491,126		19,994		5.38
Total earning assets		1,960,332		18,889		3.88			1,742,124		21,596		4.97
Other assets (2)		97,777							94,278
Total assets	$	2,058,109						$	1,836,402
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	747,550	$	654		0.35	%	$	674,048	$	2,035		1.21	%
Savings		97,506		15		0.06			86,832		21		0.10
Time		555,683		2,832		2.05			504,986		2,560		2.03
Total interest bearing deposits		1,400,739		3,501		1.01			1,265,866		4,616		1.46
Short-term borrowings		8,234		11		0.54			8,066		11		0.55
Long-term debt		66,406		426		2.58			106,495		665		2.50
Total interest bearing liabilities		1,475,379		3,938		1.07			1,380,427		5,292		1.54


Noninterest bearing deposits		378,549							257,451
Other liabilities		12,684							12,526
Shareholders' equity		191,497							185,998

Total liabilities and
shareholders' equity	$	2,058,109						$	1,836,402
Net interest income (tax equivalent basis)			$	14,951						$	16,304
Net interest margin (3)						3.07	%						3.75	%
Tax equivalent adjustment				(51)							(61)
Net interest income			$	14,900						$	16,243

(1)Average balance includes average nonaccrual loans of $25,749,000 for 2020 and $24,987,000 for 2019.

~~- 42 -~~

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

Three months ended March 31,

2020

2019

Average

Yield/

Average

Yield/

(dollars in thousands)

Balance

Interest
Rate

Balance

Interest
Rate

Assets

Interest bearing deposits with banks

$
132,346

$
392

1.19
%

$
60,397

$
362

2.43
%
Investment securities:

Taxable

139,897

892

2.56

118,751

795

2.72

Tax-exempt

23,572

175

2.99

36,673

259

2.86

    Total investment securities

163,469

1,067

2.63

155,424

1,054

2.75

Loans:

Taxable (1)

1,493,590

18,668

5.03

1,490,231

19,425

5.29

Tax-exempt

11,826

120

4.09

10,730

106

4.01

    Total loans

1,505,416

18,788

5.02

1,500,961

19,531

5.28

    Total earning assets

1,801,231

20,247

4.52

1,716,782

20,947

4.95

Other assets (2)

98,372

89,249

    Total assets

$
1,899,603

$
1,806,031

Liabilities and Shareholders’ Equity

Deposits:

Interest bearing demand

$
694,589

$
1,297

0.75
%

$
682,155

$
2,384

1.42
%
Savings

87,549

20

0.09

86,644

21

0.10

Time

550,335

2,959

2.16

473,212

2,215

1.90

    Total interest bearing deposits

1,332,473

4,276

1.29

1,242,011

4,620

1.51

Short-term borrowings

7,040

9

0.51

6,434

9

0.57

Long-term debt

84,669

537

2.55

119,759

716

2.42

    Total interest bearing liabilities

1,424,182

4,822

1.36

1,368,204

5,345

1.58

Noninterest bearing deposits

267,366

244,847

Other liabilities

13,688

11,960

Shareholders’ equity

194,367

181,020

    Total liabilities and shareholders’ equity

$
1,899,603

$
1,806,031

Net interest income (tax equivalent basis)

$
15,425

$
15,602

Net interest margin (3)

3.44
%

3.69
%
Tax equivalent adjustment

(58)

(71)

Net interest income

$
15,367

$
15,531

~~(1)~~

~~Average balance includes average nonaccrual loans of $26,630,000 for 2020 and $21,237,000 for 2019.~~

Interest includes net loan fees of ~~$819,000~~$1,190,000 for 2020 and ~~$512,000~~$759,000 for 2019.

~~(2)~~

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

~~(3)~~

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

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

~~- 43 -~~

~~Table 2-Rate/Volume Analysis of Changes in Net Interest Income~~ (tax equivalent basis) annualized as a percentage of average earning assets.

Three months ended

March 31,

2020 vs. 2019

Increase (decrease) due to change in*
(dollars in thousands)
Volume

Rate

Net

Interest Income

Interest bearing deposits with banks
$
432

$
(402)

$
30
Investment securities:

Taxable

125

(28)

97
Tax-exempt

(93)

9

(84)
Loans:

Taxable

272

(1,029)

(757)
Tax-exempt

11

3

14
Total interest income

747

(1,447)

(700)
Interest Expense

Deposits:

Interest bearing demand

(24)

(1,063)

(1,087)
Savings

0

(1)

(1)
Time

361

383

744
Short-term borrowings

0

0

0
Long-term debt

(192)

13

(179)
Total interest expense

145

(668)

(523)
Net interest income (tax equivalent basis)
$
602

$
(779)

$
(177)

- 39 -



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

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

Interest Income
Interest bearing deposits with banks	$	607	$	(1,117)	$	(510)
Investment securities:
Taxable		102		(150)		(48)
Tax-exempt		(59)		4		(55)
Loans:
Taxable		1,794		(3,884)		(2,090)
Tax-exempt		(4)		0		(4)
Total interest income		2,440		(5,147)		(2,707)
Interest Expense
Deposits:
Interest bearing demand		216		(1,597)		(1,381)
Savings		3		(9)		(6)
Time		257		15		272
Short-term borrowings		0		0		0
Long-term debt		(230)		(9)		(239)
Total interest expense		246		(1,600)		(1,354)
Net interest income (tax equivalent basis)	$	2,194	$	(3,547)	$	(1,353)

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

Provision for Loan Losses

The provision for loan losses is an expense charged to earnings to cover the estimated losses attributable to uncollected loans. The provision reflects management’s judgment of an appropriate level for the allowance for loan losses. Provision for loan losses for the ~~first~~second quarter of 2020 was ~~$9,435,000, an $8,385,000~~$2,550,000, a $1,350,000 increase as compared to a provision of ~~$1,050,000~~$1,200,000 for the ~~first~~second quarter of 2019. The increased provision expense in the ~~first~~second quarter of 2020 was attributed primarily to a partial charge off arising from a single ~~large~~ commercial lending relationship. ~~Total outstanding credit exposure to this borrower was approximately $8 million, which was reduced by~~The partial charge off did not exceed the ~~expected~~specific reserve allocation for the relationship, however, it did increase the historical loss ~~of $7.5 million recognized during~~factor in the ~~quarter after an evaluation of COVID-19’s negative impact to both the creditor’s net asset valuation and the timing of potential distributions.~~allowance for loan loss analysis. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in an additional ~~$1.5 million in~~ provision for loan losses in the quarter. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was ~~1.55~~1.31 percent at ~~March 31,~~June 30, 2020, as compared to 1.40 percent at December 31, 2019 and ~~1.34~~1.44 percent at ~~March 31,~~June 30, 2019.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 52.

~~- 44 -~~

- 40 -

Noninterest Income

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

~~Table 3 - Noninterest income~~



Table 3 - Noninterest income

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

Trust and investment services fees	$	946	$	881	$	65	7	%
Income from mutual fund, annuity and insurance sales		249		296		(47)	(16)
Service charges on deposit accounts		975		1,208		(233)	(19)
Income from bank owned life insurance		279		292		(13)	(4)
Other income		482		645		(163)	(25)
Gain on sales of loans held for sale		554		319		235	74
Gain on sales of securities		50		1		49	*nm
Total noninterest income	$	3,535	$	3,642	$	(107)	(3)	%

Three months ended Change
March 31, Increase (Decrease)
(dollars in thousands) 2020 2019 $ %

Trust and investment services fees $ 994 $ 840 $ 154 18 %
Income from mutual fund, annuity and insurance sales 261 235 26 11
Service charges on deposit accounts 1,130 1,158 (28 ) (2 )
Income from bank owned life insurance 286 367 (81 ) (22 )
Other income 439 409 30 7
Gain on sales of loans held for sale 298 218 80 37
Gain (loss) on sales of securities 15 (4 ) 19 475
Total noninterest income $ 3,423 $ 3,223 $ 200 6 %

*nm – not meaningful

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

~~Trust and investment services fees—~~~~The $154,000 or 18 percent increase in trust and investment services fees is due to growth of new business.~~

Income from ~~bank owned life insurance—~~mutual fund, annuity and insurance sales—The ~~$81,000~~$47,000 or 2216 percent decrease in income from ~~bank owned life~~mutual fund, annuity and insurance sales is due to a slow down in new business impacted by the ~~prior year $6.6 million purchase~~changing rate environment.

Service charges on deposit accounts—The $233,000 or 19 percent decrease in service charges on deposit accounts is attributed to a lower assessment of ~~bank owned life insurance which increased~~overdraft fees in the second quarter 2020 compared to the second quarter 2019. The lower assessment is partially due to the waiver of fees associated with the COVID-19 pandemic followed by an overall reduction in overdraft fees once fee assessment resumed. In addition foreign ATM fees were waived during the second quarter 2020.

Other income ~~for~~—The $163,000 or 25 percent decrease in other income is due to lower swap fee referrals during the ~~first~~second quarter ~~2019 with a one-time front loaded interest payment.~~2020 compared to the second quarter 2019.

Gain on sales of loans held for sale—The ~~$80,000~~$235,000 or 3774 percent increase in gain on sales of loans was due to the sale of a larger volume of the mortgage loans to the secondary market during the ~~first~~second quarter 2020 compared to the ~~first~~second quarter 2019.

~~- 45 -~~

- 41 -

Noninterest Expense

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



Table 4 - Noninterest expense

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

Personnel	$	7,196	$	7,391	$	(195)	(3)	%
Occupancy of premises, net		865		900		(35)	(4)
Furniture and equipment		841		775		66	9
Postage, stationery and supplies		205		175		30	17
Professional and legal		245		222		23	10
Marketing		311		374		(63)	(17)
FDIC insurance		172		223		(51)	(23)
Debit card processing		284		317		(33)	(10)
Charitable donations		93		134		(41)	(31)
Telecommunications		144		130		14	11
External data processing		704		616		88	14
(Gain)/loss on foreclosed real estate, including (recovery of) provision for losses		(193)		47		(240)	(511)
Impaired loan carrying costs		190		80		110	138
Other		1,073		1,120		(47)	(4)
Total noninterest expense	$	12,130	$	12,504	$	(374)	(3)	%

~~Table 4 - Noninterest expense~~

Three months ended Change
March 31, Increase (Decrease)
(dollars in thousands) 2020 2019 $ %

Personnel $ 7,805 $ 7,706 $ 99 1 %
Occupancy of premises, net 926 963 (37 ) (4 )
Furniture and equipment 853 772 81 10
Postage, stationery and supplies 217 184 33 18
Professional and legal 205 109 96 88
Marketing 325 349 (24 ) (7 )
FDIC insurance 167 237 (70 ) (30 )
Debit card processing 389 323 66 20
Charitable donations 872 845 27 3
Telecommunications 121 126 (5 ) (4 )
External data processing 704 556 148 27
Foreclosed real estate including provision for losses 20 87 (67 ) (77 )
Other 715 304 411 135
Total noninterest expense $ 13,319 $ 12,561 $ 758 6 %

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

Personnel—The ~~$99,000~~$195,000 or 13 percent ~~increase~~decrease in personnel expense is primarily the result of a ~~slightly higher~~lower number of full time equivalent employees.

~~Professional~~Postage, stationery and ~~legal~~supplies—The ~~$96,000~~$30,000 or 8817 percent increase in ~~professional~~postage, stationery and ~~legal~~supplies expense is attributed to an increase in ~~consulting and legal fees.~~customer mailings during the second quarter 2020.

Marketing—The $63,000 or 17 percent decrease in marketing expense is attributed to marketing campaigns delayed in 2020 due to the COVID-19 pandemic.

FDIC insurance—The ~~$70,000~~$51,000 or 3023 percent decrease in FDIC insurance expense is attributed to a lower assessment factor.

~~External data processing~~Charitable donations—The ~~$148,000~~$41,000 or 2731 percent ~~increase~~decrease in ~~external data processing~~charitable donations expense is attributed to ~~increased reliance~~a delay in charitable donations due to the COVID-19 pandemic.

(Gain)/loss on ~~outsourcing transaction processing to specialized vendors as well as expansion~~foreclosed real estate, including (recovery of) provision for losses—The $240,000 or 511 percent decrease in ~~the electronic banking services offered to our client base and charges for higher transaction volume from normal business growth.~~

~~Other~~—~~The $411,000 or 135 percent increase in other~~foreclosed real estate expense is primarily attributed to ~~higher~~the recovery of a provision for losses on foreclosed real estate that was sold during the second quarter 2020.

Impaired loan carrying costs—The $110,000 or 138 percent increase in impaired loan carrying ~~costs.~~costs expense is primarily attributed to increased expenses associated with impaired loans.

Provision for Income Taxes

The provision for income taxes for the ~~first~~second quarter of 2020 was ~~$ (975,000),~~$705,000, a decrease of ~~$2,027,000~~$617,000 or~~193~~ 47 percent as compared to the ~~first~~second quarter of 2019. The decrease was attributed to ~~the pre-tax net loss for the first quarter of 2020 compared to the~~lower pre-tax net income for the ~~first~~second quarter of2020 compared to the second quarter 2019. The effective tax ~~benefit~~rate for the three months ended ~~March 31,~~June 30, 2020 was ~~24.6~~18.8 percent and the effective tax rate for the three months ended ~~March 31,~~June 30, 2019 was ~~20.5~~21.4 percent. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.

~~- 46 -~~

- 42 -

~~Balance Sheet Review~~Six Months Ended June 30, 2020 vs. Six Months Ended June 30, 2019

financial highlights

The Corporation’s net income (earnings) was $61,000 for the first six months of 2020 compared to $8,950,000 for the first six months of 2019, a decrease of $8,889,000 or 99 percent.

Net interest income for the first six months of 2020 decreased $1,507,000 or 5 percent below the first six months of 2019, primarily due to lower rates on interest bearing deposits with banks and lower rates on loans, partially offset by lower rates on interest bearing demand deposits over the previous period.

The Corporation’s net interest margin (tax-equivalent basis) for the six months ended June 30, 2020 was 3.25 percent, compared to 3.72 percent for the first six months of 2019. The net interest margin contraction was a result of lower rates on interest bearing deposits with banks, lower rates on loans, partially offset by lower rates on interest bearing demand deposits.

The provision for loan losses for the first six months of 2020 was $11,985,000 a $9,735,000 increase as compared to a provision of $2,250,000 for the first six months of 2019. The increased provision expense in 2020 was primarily due to partial charge offs on two commercial lending relationships. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in additional provision for loan losses during the year. The provision for both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.31 percent at June 30, 2020, as compared to 1.40 percent at December 31, 2019, and 1.44 percent at June 30, 2019.

Noninterest income for the first six months of 2020 increased $93,000 1 percent compared to the first six months of 2019. Contributing to the rise in noninterest income were trust and investment services fees and gain on sale of loans held for sale. A decline in service charges on deposit accounts offset some of the increase.

Noninterest expense for the first six months of 2020 were $25,449,000 2 percent higher than the first six months of 2019. The increase was primarily attributable to higher furniture and equipment, professional and legal, external data processing and impaired loans carrying costs. Offsetting some of the increase were declines in marketing and FDIC insurance.

The provision for income taxes for the first six months of 2020 decreased $2,644,000 or 111 percent as compared to the first six months of 2019 as a result of lower income before taxes in the first six months of 2020 compared to the first six months of 2019.

On June 30, 2020, the Corporation’s total assets were $2.07 billion, an increase of 10 percent since December 31, 2019. The increase was primarily attributed to loan growth.

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

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



	Six months ended
	June 30,
	2020			2019
Basic earnings per share	$	0.01		$	0.90
Diluted earnings per share	$	0.01		$	0.90
Cash dividend payout ratio		5,119.67	%		33.80	%
Return on average assets		0.01	%		0.98	%
Return on average equity		0.06	%		9.75	%
Net interest margin (tax equivalent basis)		3.25	%		3.72	%
Net overhead ratio		1.88	%		2.00	%
Efficiency ratio		68.00	%		64.33	%
Average equity to average assets		9.75	%		10.08	%

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

- 43 -

INCOME STATEMENT ANALYSIS

Net Interest Income

Net interest income for the six months ended June 30, 2020 was $30,267,000, a decrease of $1,507,000 or 5 percent compared to net interest income of $31,774,000 for the first six months of 2019. The decrease was primarily attributable to lower rates on interest bearing deposits with banks and lower rates on loans, partially offset by lower rates on interest bearing demand deposits over the previous period.

The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 3.25 percent for the first six months of 2020, representing an decrease compared to the 3.72 percent net interest margin for the first six months of 2019. The net interest margin contraction was a result of lower rates on interest bearing deposits with banks, lower rates on loans, partially offset by lower rates on interest bearing demand deposits.

Total interest income for the first six months of 2020 totaled $39,027,000, a decrease of $3,384,000 or 8 percent below the amount of total interest income for the first six months of 2019. The change was primarily a result of a decrease in loan interest income due to lower rates on commercial loans and lower rates on interest bearing deposits with banks.

Interest income on loans decreased $2,840,000 or 7 percent in the first six months of 2020 compared to the same period in 2019. The average balance of outstanding loans increased approximately $56,828,000 or 4 percent in the first six months of 2020 compared to the first six months of 2019, reflecting commercial loan growth between the two periods.

Investment income for the first six months of 2020 decreased $64,000 or 3 percent compared to the first six months of 2019. The tax-equivalent yield on investments for the first six months of 2020 was 2.46 percent or 24 basis points lower than the 2.70 percent experienced during the first six months of 2019.

Total interest expense for the first six months of 2020 was $8,760,000, a decrease of $1,877,000 or 18 percent as compared to total interest expense of $10,637,000 for the first six months of 2019. The change in interest expense was primarily a result of a decrease in the cost of interest bearing demand deposits and lower volume of long-term debt between the two periods.

Interest expense on deposits decreased $1,459,000 or 16 percent in the first six months of 2020 compared to the same period in 2019. The change was due primarily to a decrease in the cost of interest bearing demand deposits. The average balance of interest-bearing deposits for the first six months of 2020, primarily in lower cost core deposits, increased by $112,602,000 or 9 percent compared to the average for the first six months of 2019. The average rate paid on interest-bearing deposits in the first six months of 2020 was 1.14 percent, a decrease from the average rate of 1.49 percent paid on interest-bearing deposits during the first six months of 2019. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the first six months of 2020 increasing to $322,962,000, as compared to $251,188,000 for the first six months of 2019.

Interest expense on borrowings for the first six months of 2020 decreased $30 percent compared to the first six months of 2019, due to a lower volume of long-term debt. Outstanding long-term debt, consisting primarily of Federal Home Loan Bank of Pittsburgh (FHLBP) advances, averaged $75,538,000 for the first six months of 2020, compared to an average balance of approximately $113,090,000 for the same period of 2019. The rate on average long-term debt for the first six months of 2020 was 2.56 percent, an increase as compared to the rate of 2.46 percent for the same period of 2019.

- 44 -



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

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

Assets
Interest bearing deposits with banks	$	163,666	$	440		0.54	%	$	76,941	$	920		2.41	%
Investment securities:
Taxable		141,878		1,676		2.38			123,524		1,627		2.66
Tax-exempt		22,442		332		2.97			33,043		471		2.87
Total investment securities		164,320		2,008		2.46			156,567		2,098		2.70

Loans:
Taxable (1)		1,541,876		36,468		4.76			1,485,434		39,315		5.34
Tax-exempt		10,965		221		4.05			10,579		210		4.00
Total loans		1,552,841		36,689		4.75			1,496,013		39,525		5.33
Total earning assets		1,880,827		39,137		4.18			1,729,521		42,543		4.96
Other assets (2)		97,972							91,767
Total assets	$	1,978,799						$	1,821,288
Liabilities and Shareholders' Equity
Deposits:
Interest bearing demand	$	721,070	$	1,951		0.54	%	$	678,079	$	4,417		1.31	%
Savings		92,527		35		0.08			86,738		43		0.10
Time		553,009		5,791		2.11			489,187		4,776		1.97
Total interest bearing deposits		1,366,606		7,777		1.14			1,254,004		9,236		1.49
Short-term borrowings		7,637		20		0.53			7,255		20		0.56
Long-term debt		75,538		963		2.56			113,090		1,381		2.46
Total interest bearing liabilities		1,449,781		8,760		1.22			1,374,349		10,637		1.56

Noninterest bearing deposits		322,962							251,188
Other liabilities		13,172							12,239
Shareholders' equity		192,884							183,512

Total liabilities and
shareholders' equity	$	1,978,799						$	1,821,288
Net interest income (tax equivalent basis)			$	30,377						$	31,906
Net interest margin (3)						3.25	%						3.72	%
Tax equivalent adjustment				(110)							(132)
Net interest income			$	30,267						$	31,774

(1)Average balance includes average nonaccrual loans of $26,148,000 for 2020 and $21,561,000 for 2019.

Interest includes net loan fees of $2,009,000 for 2020 and $1,271,000 for 2019.

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

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

- 45 -



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

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

Interest Income
Interest bearing deposits with banks	$	1,037	$	(1,517)	$	(480)
Investment securities:
Taxable		216		(167)		49
Tax-exempt		(151)		12		(139)
Loans:
Taxable		2,049		(4,896)		(2,847)
Tax-exempt		8		3		11
Total interest income		3,159		(6,565)		(3,406)
Interest Expense
Deposits:
Interest bearing demand		204		(2,670)		(2,466)
Savings		3		(11)		(8)
Time		623		392		1,015
Short-term borrowings		0		0		0
Long-term debt		(421)		3		(418)
Total interest expense		409		(2,286)		(1,877)
Net interest income (tax equivalent basis)	$	2,750	$	(4,279)	$	(1,529)

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

Provision for Loan Losses

For the first six months of 2020, the provision for loan losses was $11,985,000, as compared to a provision of $2,250,000 for the first six months of 2019, an increase of $9,735,000. The increased provision expense in 2020 was primarily due to partial charge offs on two commercial lending relationships. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in additional provision for loan losses during the year. The provision for both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.31 percent at June 30, 2020, as compared to 1.40 percent at December 31, 2019, and 1.44 percent at June 30, 2019.

More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 52.

- 46 -

Noninterest Income

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



Table 7 - Noninterest income

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

Trust and investment services fees	$	1,940	$	1,721	$	219		13	%
Income from mutual fund, annuity and insurance sales		510		531		(21)		(4)
Service charges on deposit accounts		2,105		2,366		(261)		(11)
Income from bank owned life insurance		565		659		(94)		(14)
Other income		921		1,054		(133)		(13)
Gain on sales of loans held for sale		852		537		315		59
Gain (loss) on sales of securities		65		(3)		68		*nm
Total noninterest income	$	6,958	$	6,865	$	93		1	%

*nm – not meaningful

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

Trust and investment services fees—The $219,000 or 13 percent increase in trust and investment services fees is due to growth of new business.

Service charges on deposit accounts—The $261,000 or 11 percent decrease in service charges on deposit accounts is due to a lower assessment of overdraft fees in 2020 compared to 2019. The lower assessment is partially due to the waiver of fees associated with the COVID-19 pandemic followed by an overall reduction in overdraft fees once fee assessment resumed. In addition foreign ATM fees were waived during the second quarter 2020.

Gain on sales of loans held for sale—The $315,000 or 59 percent increase in gain on sales of loans is due to the sale of a larger volume of mortgage loans to the secondary market.

- 47 -

Noninterest Expense

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



Table 8 - Noninterest expense

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

Personnel	$	15,001	$	15,097	$	(96)		(1)	%
Occupancy of premises, net		1,791		1,863		(72)		(4)
Furniture and equipment		1,694		1,547		147		10
Postage, stationery and supplies		422		359		63		18
Professional and legal		450		331		119		36
Marketing		636		723		(87)		(12)
FDIC insurance		339		460		(121)		(26)
Debit card processing		673		640		33		5
Charitable donations		965		979		(14)		(1)
Telecommunications		265		256		9		4
External data processing		1,408		1,172		236		20
(Gain)/loss on roreclosed real estate, including (recovery of) provision for losses		(173)		134		(307)		(229)
Impaired loan carrying costs		476		119		357		300
Other		1,502		1,385		117		8
Total noninterest expense	$	25,449	$	25,065	$	384		2	%

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

Personnel—The $96,000 or 1 percent decrease in personnel is primarily the result of fewer full-time equivalent employees in 2020 compared to the prior period.

Professional and legal—The $119,000 or 36 percent increase in professional and legal is primarily due to an increase in CPA and consulting fees.

FDIC insurance—The $121,000 or 26 percent decrease in FDIC insurance is due to a lower assessment rate.

External data processing—The $236,000 or 20 percent increase in external data processing expenses reflects increased reliance on outsourcing transaction processing to specialized vendors, which is typically performed on such vendors’ hosted and secure websites. In addition, increased volumes in both accounts and transactions year over year due to business expansion resulted in higher costs. The Corporation continues to expand and enhance electronic banking services provided to our clients which contributed to the increase in the expense.

(Gain)/loss on foreclosed real estate including, (recovery of) provision for losses—The $307,000 or 229 percent decrease in foreclosed real estate including provision for losses is attributed to the recovery of provision for loss associated with the sale of foreclosed real estate.

Impaired loan carrying costs—The $357,000 or 300 percent increase in impaired loan carrying costs is attributed to the volume of impaired loans and the associated costs to maintain these loans.

Provision for Income Taxes

The income tax benefit for the first six months of 2020 was $ (270,000), a decrease of $2,644,000 or 111 percent as compared to the first six months of 2019. The effective tax benefit for the six months ended June 30, 2020 was 129.2 percent and the effective tax rate for the six months ended June 30, 2019 was 21.0 percent. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.

- 48 -

BALANCE SHEET REVIEW

Interest Bearing Deposits with Banks

On ~~March 31,~~June 30, 2020, interest bearing deposits with banks totaled ~~$169,689,000,~~$197,432,000, an increase of ~~$58,947,000~~$86,690,000 or 5378 percent, compared to the level at year-end 2019. The increase is primarily the result of the growth in client deposits, ~~and a decrease in loans,~~ offset by loan growth and a decrease in long-term debt.

Investment Securities (Available-for-Sale)

The Corporation’s entire investment securities portfolio is classified available-for-sale, and is comprised primarily of interest-earning debt securities. The overall composition of the Corporation’s investment securities portfolio is provided in Note 2—Securities. On ~~March 31,~~June 30, 2020, the fair value of investment securities available-for-sale totaled ~~$171,738,000,~~$159,715,000, which represented an increase of ~~$12,063,000~~$40,000 as compared to the fair value of investment securities at year-end 2019. New investments during the first ~~three~~six months of 2020 ~~exceeded~~replaced principal reductions from investment maturities, mortgage-backed security payments, and sales.

Loans

On ~~March 31,~~June 30, 2020, total loans, net of deferred fees, were ~~$1.48~~$1.58 billion, which was ~~$28,474,000~~$96,022,000 or 26 percent ~~lower~~higher than the level at year-end 2019. ~~This~~The change in volume was due primarily to ~~a decrease~~an increase in ~~commercial~~PPP loans, ~~particularly within the builder and developer and wholesale & retail sectors, partially offset by increases in commercial real estate investor and residential real estate investor sectors.~~which totaled approximately $177 million at June 30, 2020. Commercial loans within the builder and developer, commercial real estate investor and residential real estate investor sectors each represented more than 10 percent of the total portfolio. The composition of the Corporation’s loan portfolio is provided in Note 4—Loans.

Deposits

Deposits are the Corporation’s principal source of funding for earning assets. On ~~March 31,~~June 30, 2020, deposits totaled ~~$1.64~~$1.81 billion, which reflected a ~~$48,783,000~~$217,078,000 or 314 percent increase compared to the level at year-end 2019. Of the increase in total deposits, ~~$414,000~~$124,000,000 is attributable to noninterest bearing deposits and ~~$48,369,000~~$93,078,000 is related to growth in interest bearing deposits. The composition of the Corporation’s total deposit portfolio is provided in Note 6—Deposits.

Short-term Borrowings

Short-term borrowings, which consist of securities sold under agreements to repurchase (repurchase agreements), federal funds purchased, and other short-term borrowings, totaled ~~$6,196,000~~$9,477,000 at ~~March 31,~~June 30, 2020, which reflected a ~~$1,729,000~~$1,552,000 or 2220 percent ~~decrease~~increase compared to the level at year-end 2019.

Long-term Debt

The Corporation uses long-term borrowings as a secondary funding source for asset growth and to manage interest rate risk. On ~~March 31,~~June 30, 2020, long-term debt totaled ~~$71,627,000~~$46,619,000 compared to $81,632,000 at year-end 2019. The ~~$10,005,000~~$35,013,000 decrease is primarily the result of $10,000,000 in FHLBP borrowings that were repaid at maturity during the first ~~quarter.~~quarter 2020 and $25,000,000 in FHLBP borrowings that were repaid at maturity during the second quarter 2020. A listing of outstanding long-term debt obligations is provided in Note 7—Short-Term Borrowings and Long-Term Debt. The composition of the Corporation’s leases is provided in Note 8—Leases.

~~- 47 -~~

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 ~~$189,596,000~~$191,835,000 on ~~March 31,~~June 30, 2020, ~~a decrease~~an increase of approximately ~~$1,572,000~~$667,000 or less than 1 percent, compared to the level at year-end 2019.

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 ~~$0.16~~$0.10 per share on ~~April~~July 14, 2020, payable on ~~May 12,~~August 11, 2020, to shareholders of record at the close of business on ~~April~~July 28, 2020. This cash dividend follows the $0.16 cash dividend distributed in February 2020 and May 2020.

- 49 -

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,~~June 30, 2020 and the minimum capital ratios established by regulators are set forth in Note 8—Regulatory Matters to the financial statements. We believe that both Codorus Valley and PeoplesBank were well capitalized on ~~March 31,~~June 30, 2020 and had no regulatory dividend restrictions (see Note 9—Regulatory Matters to the financial statements).

~~- 48 -~~

RISK MANAGEMENT

~~Risk Management~~

Credit Risk Management

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

Nonperforming Assets

Nonperforming assets, as shown in the table below, are asset categories that pose the greatest risk of loss. The level of nonperforming assets at ~~March 31,~~June 30, 2020 has ~~increased~~decreased by approximately ~~$3,290,000~~$4,815,000 or 1319 percent when compared to year-end 2019. The ~~increase~~decrease was primarily the result of a net ~~increase~~decrease in ~~nonaccrual loans.~~nonaccrual loans.

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

~~- 49 -~~

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

~~Table 5~~

- ~~Nonperforming Assets~~50 -



Table 5 - Nonperforming Assets

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

Nonaccrual loans	$	19,773		$	24,696
Nonaccrual loans, troubled debt restructurings		51			54
Accruing loans 90 days or more past due		1,085			280
Total nonperforming loans		20,909			25,030
Foreclosed real estate, net of allowance		103			797
Total nonperforming assets	$	21,012		$	25,827
Accruing troubled debt restructurings	$	1,497		$	1,596

Total period-end loans, net of deferred fees	$	1,601,129		$	1,505,135
Allowance for loan losses (ALL)	$	21,038		$	21,066
ALL as a % of total period-end loans		1.31	%		1.40	%
Net charge-offs year-to-date, annualized as a % of average total loans		1.55	%		0.04	%
ALL as a % of nonperforming loans		100.62	%		84.16	%
Nonperforming loans as a % of total period-end loans		1.31	%		1.66	%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate		1.31	%		1.72	%
Nonperforming assets as a % of total period-end assets		1.01	%		1.37	%
Nonperforming assets as a % of total period-end
shareholders' equity		10.95	%		13.51	%

March 31, December 31,
(dollars in thousands) 2020 2019

Nonaccrual loans $ 27,317 $ 24,696
Nonaccrual loans, troubled debt restructurings 52 54
Accruing loans 90 days or more past due 830 280
Total nonperforming loans 28,199 25,030
Foreclosed real estate, net of allowance 918 797
Total nonperforming assets $ 29,117 $ 25,827
Accruing troubled debt restructurings $ 1,546 $ 1,596

Total period-end loans, net of deferred fees $ 1,476,661 $ 1,505,135
Allowance for loan losses (ALL) $ 22,838 $ 21,066
ALL as a % of total period-end loans 1.55 % 1.40 %
Net charge-offs year-to-date, annualized as a % of average total loans 2.04 % 0.04 %
ALL as a % of nonperforming loans 80.99 % 84.16 %
Nonperforming loans as a % of total period-end loans 1.91 % 1.66 %
Nonperforming assets as a % of total period-end loans and net foreclosed real estate 1.97 % 1.72 %
Nonperforming assets as a % of total period-end assets 1.51 % 1.37 %
Nonperforming assets as a % of total period-end shareholders' equity 15.36 % 13.51 %

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,~~June 30, 2020, the nonperforming loan portfolio balance totaled ~~$28,199,000,~~$20,909,000, compared to $25,030,000 at year-end 2019. During the first ~~three~~six months of 2020, loans totaling ~~$11,237,000~~$12,709,000 were transferred to nonaccrual status, offset by the transfer of loans out of nonaccrual status and payments to loans in nonaccrual status totaling approximately ~~$932,000~~$5,694,000 and charge offs totaling ~~$7,686,000.~~$11,941,000. There was ~~a $550,000~~an $805,000 increase in 90 day past due loans, resulting in the net ~~increase~~decrease of ~~$3,169,000.~~$4,121,000. For both periods, the nonperforming portfolio balance was comprised primarily of collateralized commercial loans.

Foreclosed Real Estate

Foreclosed real estate represents real estate acquired to satisfy debts owed to PeoplesBank and is included in the Other Assets category on the Corporation’s balance sheet. The carrying amount of foreclosed real estate as of ~~March 31,~~June 30, 2020, net of allowance, totaled ~~$918,000~~$103,000 compared to $797,000 at year-end 2019. The ~~$121,000 increase~~$694,000 decrease was the result of the disposition of one property totaling $797,000, offset by the addition of one property totaling ~~$121,000.~~$103,000, net of a $18,000 writedown.

~~- 50 -~~

Troubled Debt Restructurings

Troubled debt restructurings pertain to loans whose terms have been modified to include a concession that we would not ordinarily consider due to the debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a reduction of interest rate lower than the current market rate for new debt with similar risk, the deferral of payments or extension of the stated maturity date. Troubled debt restructurings are evaluated for impairment if they have been restructured during the most recent calendar year, or if they cease to perform in accordance with the modified terms. As of ~~March 31,~~June 30, 2020, the accruing troubled debt restructuring portfolio balance totaled ~~$1,546,000,~~$1,497,000, compared to $1,596,000 at year-end 2019. The ~~$50,000~~$99,000 decrease was the result of principal repayments of ~~$50,000.~~$99,000.

As of June 30, 2020, there have been modifications to 25 consumer loans totaling approximately $1,700,000, 23 mortgage loans totaling approximately $8,000,000 and 374 commercial loans totaling approximately $261,000,000 under the CARES Act, which are not considered TDRs.

- 51 -

Allowance for Loan Losses

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

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

~~- 51 -~~

The following table presents an analysis of the activity in the allowance for loan losses for the three and six months ended ~~March 31,~~June 30, 2020 and 2019:



Table 6 - Analysis of Allowance for Loan Losses

(dollars in thousands)	2020			2019
Balance-January 1,	$	21,066		$	19,144

Provision charged to operating expense		11,985			2,250

Loans charged off:
Commercial, financial and agricultural		11,945			46
Real estate - construction and land development		97			0
Consumer and home equity		11			207
Total loans charged off		12,053			253
Recoveries:
Commercial, financial and agricultural		13			6
Consumer and home equity		27			27
Total recoveries		40			33
Net charge-offs		12,013			220
Balance-June 30,	$	21,038		$	21,174

Ratios:
Annualized net charge-offs as a % of average total loans		1.55	%		0.03	%
Allowance for loan losses as a % of total period-end loans		1.31	%		1.44	%
Allowance for loan losses as a % of nonperforming loans		100.62	%		84.13	%

~~Table 6 - Analysis of Allowance for Loan Losses~~

(dollars in thousands) 2020 2019
Balance-January 1, $ 21,066 $ 19,144

Provision charged to operating expense 9,435 1,050

Loans charged off:
Commercial, financial and agricultural 7,585 46
Real estate - construction and land development 97 0
Consumer and home equity 4 80
Total loans charged off 7,686 126
Recoveries:
Commercial, financial and agricultural 10 3
Consumer and home equity 13 10
Total recoveries 23 13
Net charge-offs 7,663 113
Balance-March 31, $ 22,838 $ 20,081

Ratios:
Annualized net charge-offs as a % of average total loans 2.04 % 0.03 %
Allowance for loan losses as a % of total period-end loans 1.55 % 1.34 %
Allowance for loan losses as a % of nonperforming loans 80.99 % 73.36 %

The provision for loan losses increased ~~$8,385,000~~$9,735,000 from ~~March 31,~~June 30, 2019 to ~~March 31,~~June 30, 2020. The increased provision expense in ~~the first quarter of~~ 2020 was ~~attributed~~ primarily due to a partial charge ~~off arising from a single, large~~offs on two commercial lending relationship. Total outstanding credit exposure to this borrower was approximately $8 million, which was reduced by the expected loss of $7.5 million recognized during the quarter after an evaluation of COVID-19’s negative impact to both the creditor’s net asset valuation and the timing of potential distributions.relationships. In addition, changes in the external environment created by COVID-19 caused management to increase the qualitative factors for certain loan segments in the allowance for loan loss analysis, which resulted in an additional ~~$1.5 million in~~ provision for loan losses induring the ~~quarter.~~year. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments.

Net charge-offs for the first ~~three~~six months of 2020 were ~~$7,663,000~~$12,013,000 compared to ~~$113,000~~$220,000 for the same period in 2019. During the first ~~three~~six months of 2020, there were ~~$7,686,000~~$12,053,000 of charge-offs as compared to ~~$126,000~~$253,000 during the same period in 2019. Although the provision expense increased, a portion of the charge-off was part of the specific reserve allocation in the previous quarter; therefore, the overall allowance as a percentage of total loans decrased in the current period. The risks and uncertainties associated with the COVID-19 pandemic, weak economic and business conditions, or the erosion of real estate values may adversely affect our borrowers’ ability to service their loans, causing significant fluctuations in the level of charge-offs and provision expense from one period to another. The allowance as a percentage of total loans was ~~1.55~~1.31 percent at ~~March 31,~~June 30, 2020, as compared to 1.40 percent at December 31, 2019 and ~~1.34~~1.44 percent at ~~March 31,~~June 30, 2019. There was no unallocated portion of the allowance as of ~~March 31,~~June 30, 2020, as compared to ~~$297,000~~$157,000 or 1 percent of the total allowance as of ~~March 31,~~June 30, 2019.

~~- 52 -~~

- 52 -

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,~~June 30, 2020, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately ~~$45,577,000~~$29,053,000 and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately ~~$460,023,000.~~$549,804,000. The Corporation’s loan-to-deposit ratio was approximately 9089 percent as of ~~March 31,~~June 30, 2020, 95 percent as of December 31, 2019 and 9896 percent as of ~~March 31,~~June 30, 2019.

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans, unfunded commitments under existing loan facilities, and letters of credit issued under the same standards as on-balance sheet instruments. Unused commitments on ~~March 31,~~June 30, 2020, totaled ~~$561,983,000~~$551,310,000 and consisted of ~~$450,181,000~~$479,450,000 in unfunded commitments under existing loan facilities, ~~$91,743,000~~$53,994,000 to grant new loans and ~~$20,059,000~~$17,866,000 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.

Recent Legislative Developments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act provides the option to not apply ASC 310-40 (TDRs) to a loan modification, related specifically to COVID-19 hardships, including the flexibility to not classify the loan as impaired for accounting purposes. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of ~~April 20,~~June 30, 2020, the Corporation has processed requests for loan modifications totaling approximately ~~$36~~$270 million. The Corporation has been an active participant in the SBA Paycheck Protection ~~Program. As~~Program, with outstanding PPP loans as of ~~April 15th when the first round~~June 30, 2020 of ~~the Program ended, PeoplesBank had processed 670 applications for~~ approximately ~~$133 million with about $4.2 million in fee income expected for the Corporation.~~$177 million.

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

~~- 53 -~~

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”), amended certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as certain other statutes administered by the federal banking agencies Some of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holding companies include: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which requires higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.

- 53 -

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The most significant market risk to which the Corporation is exposed is interest rate risk. The primary business of the Corporation and the composition of its balance sheet consist of investments in interest earning assets (primarily loans and securities), which are funded by interest bearing liabilities (deposits and borrowings), all of which have varying levels of sensitivity to changes in market interest rates. Changes in

~~- 54 -~~

rates also have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow.

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

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

- 54 -

The following table summarizes the expected impact of interest rate shocks on net interest income as well as the Corporation’s policy limits at each level. All scenarios with the exception of a decrease of 100 basis points were within policy limits at ~~March 31,~~June 30, 2020. The -100 scenario is expected to return within policy limits during 2020.

Change in Interest Rates Annual Change in Net % Change in Net % Change
(basis points) Interest Income (in thousands) Interest Income Policy Limit
+100 $ 3,011 5.33 % (5.00 )%
-100 $ (3,153 ) (5.58 )% (5.00 )%

+200 $ 7,046 12.47 % (15.00 )%
-200 $ (5,537 ) (9.80 )% (15.00 )%

+300 $ 10,966 19.41 % (25.00 )%

+400 $ 14,770 26.14 % (35.00 )%



Change in Interest Rates	Annual Change in Net		% Change in Net		% Change
(basis points)	Interest Income (in thousands)		Interest Income		Policy Limit
+100	$	3,682	6.11	%	(5.00)	%
-100	$	(3,164)	(5.25)	%	(5.00)	%

+200	$	8,463	14.05	%	(15.00)	%
-200	$	(6,142)	(10.19)	%	(15.00)	%

+300	$	13,083	21.71	%	(25.00)	%

+400	$	17,721	29.41	%	(35.00)	%

~~- 55 -~~

‎

- 55 -

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Treasurer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive and Chief Financial Officers concluded that, as of ~~March 31,~~June 30, 2020, the Corporation’s disclosure controls and procedures were effective. The Corporation’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. A control system, no matter how well conceived and operated, must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There has been no change in the Corporation’s internal control over financial reporting that occurred during the three and six months ended ~~March 31,~~June 30, 2020, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation's business prospects, financial condition and

~~- 56 -~~

results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation's financial reporting and internal controls; declines in the demand for loans and other banking services and products; declines in demand resulting from adverse impacts of the disease on businesses deemed to be "non-essential" by governments; and branch or office closures and business interruptions.

- 56 -

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

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

Total Number of Approximate Dollar
Shares Purchased as Value of Shares that
Total Number Part of Publicly May Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid per Share or Programs Programs
March 1 - 31, 2020 5,335 $ 16.37 5,335 $ 4,912,660



				Total Number of		Approximate Dollar
				Shares Purchased as		Value of Shares that
	Total Number			Part of Publicly		May Yet Be Purchased
	of Shares	Average Price		Announced Plans		Under the Plans or
Period	Purchased	Paid per Share		or Programs		Programs
March 1 - 31, 2020	5,335	$	16.37		5,335	$	4,912,660

The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in March 2020. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. During the first quarter of 2020 the Corporation repurchased 5,335 shares at an average price of $16.37. Shortly after the Program began, and in response to COVID-19, the Corporation suspended the Program. There was no activity under the Program for the quarter ended June 30, 2020.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

This Item 4 is not applicable to the Corporation.

Item 5. Other Information

None

~~- 57 -~~
‎

- 57 -

Item 6. Exhibits

~~Exhibit~~ ~~Number~~
Exhibit Number		Description of Exhibit

3.1

~~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

~~3.2~~

Amended By-laws ~~– filed herewith.~~(Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q/A for March 31, 2020, file with the Commission on May 15, 2020)

31.1

~~31.1~~

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.

31.2

~~31.2~~

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – filed herewith.

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101	~~101~~	Financial statements from the Quarterly Report on Form 10-Q of Codorus Valley Bancorp, Inc. for the quarter ended ~~March 31,~~June 30, 2020, 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)

~~- 58 -~~
‎

- 58 -

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)
		~~(Registrant)~~

~~May 8,~~August 3, 2020		/s/ Larry J. Miller
Date		Larry J. Miller,
		Chairman,President
		and Chief Executive Officer (Principal Executive Officer)
		~~(Principal Executive Officer)~~

~~May 8,~~August 3, 2020		/s/ Larry D. Pickett
Date		Larry D. Pickett, CPA
		Treasurer
		(Principal Financial and Accounting Officer)

- 59 -


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


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


PART I – FINANCIAL INFORMATION		Page #

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

Item 2.	Management’s discussion and analysis of financial condition and results of operations	37 35

Item 3.	Quantitative and qualitative disclosures about market risk	54

Item 4.	Controls and procedures	56

PART II – OTHER INFORMATION

Item 1.	Legal proceedings	56

Item 1A.	Risk factors	56

Item 2.	Unregistered sales of equity securities and use of proceeds	57

Item 3.	Defaults upon senior securities	57

Item 4.	Mine safety disclosures	57

Item 5.	Other information	57

Item 6.	Exhibits	58

SIGNATURES		59


*(dollars in thousands:)*	March 31, 2020
Year Ending December 31,	Operating Leases			Finance Leases
2020	$	622		$	56
2021		768			75
2022		609			75
2023		491			75
2024		413			75
Thereafter		508			1,669
Total lease payments		3,411			2,025
Less imputed interest		(224	)		(708	)
Total	$	3,187		$	1,317

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


						Minimum for Basel III				Well Capitalized
		Actual				Capital Adequacy				Minimum (1)
*(dollars in thousands)*		Amount	Ratio			Amount	Ratio			Amount	Ratio
*Codorus Valley Bancorp, Inc. (consolidated)*
at March 31, 2020
Capital ratios:
Common equity Tier 1	$	182,956	12.24	%	$	104,598	7.00	%		n/a	n/a
Tier 1 risk based		192,956	12.91			127,012	8.50			n/a	n/a
Total risk based		211,686	14.17			156,867	10.50			n/a	n/a
Leverage		192,956	10.18			75,787	4.00			n/a	n/a

at December 31, 2019
Capital ratios:
Common equity Tier 1	$	187,312	12.45	%	$	105,359	7.00	%		n/a	n/a
Tier 1 risk based		197,312	13.11			127,936	8.50			n/a	n/a
Total risk based		216,154	14.36			158,039	10.50			n/a	n/a
Leverage		197,312	10.55			74,820	4.00			n/a	n/a

PeoplesBank, A Codorus Valley Company
at March 31, 2020
Capital ratios:
Common equity Tier 1	$	189,263	12.70	%	$	104,356	7.00	%	$	96,974	6.50	%
Tier 1 risk based		189,263	12.70			126,717	8.50			119,352	8.00
Total risk based		207,950	13.95			156,533	10.50			149,191	10.00
Leverage		189,263	10.01			75,648	4.00			94,561	5.00

at December 31, 2019
Capital ratios:
Common equity Tier 1	$	193,421	12.88	%	$	105,118	7.00	%	$	97,610	6.50	%
Tier 1 risk based		193,421	12.88			127,643	8.50			120,135	8.00
Total risk based		212,220	14.13			157,677	10.50			150,169	10.00
Leverage		193,421	10.36			74,673	4.00			93,341	5.00

				Fair Value Measurements
			(Level 1)			(Level 2)	(Level 3)
			Quoted Prices in		Significant Other		Significant Other
			Active Markets for		Observable		Unobservable
*(dollars in thousands)*	Total		Identical Assets		Inputs		Inputs
March 31, 2020
Securities available-for-sale:
U.S. Treasury notes	$	5,086	$	5,086	$	0	$	0
U.S. agency mortgage-backed, residential		140,702		0		140,702		0
State and municipal		24,912		0		24,912		0
Corporate debt		1,038		0		1,038		0

December 31, 2019
Securities available-for-sale:
U.S. Treasury notes	$	9,953	$	9,953	$	0	$	0
U.S. agency		14,923		0		14,923		0
U.S. agency mortgage-backed, residential		108,155		0		108,155		0
State and municipal		26,644		0		26,644		0

						Gross amounts Not Offset in
			Gross		Net Amounts	the Statements of Condition
	Gross		Amounts		of Liabilities	Financial Instruments
	Amounts of		Offset in the		Presented in	U.S. agency			Cash
	Recognized		Statements		the Statements	mortgage-backed,			Collateral		Net
(dollars in thousands)	Liabilities		of Condition		of Condition	residential	U.S. agency		Pledged		Amount
March 31, 2020
Repurchase Agreements	$	6,196	$	0	$6,196	$(9,479)	$	0	$	0	$	(3,283	)

December 31, 2019
Repurchase Agreements	$	7,925	$	0	$7,925	$(9,601)	$	0	$	0	$	(1,676	)


		Three months ended March 31,
				2020							2019
	Average				Yield/			Average				Yield/
*(dollars in thousands)*	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest bearing deposits with banks	$	132,346	$	392		1.19	%	$	60,397	$	362		2.43	%
Investment securities:
Taxable		139,897		892		2.56			118,751		795		2.72
Tax-exempt		23,572		175		2.99			36,673		259		2.86
Total investment securities		163,469		1,067		2.63			155,424		1,054		2.75

Loans:
Taxable (1)		1,493,590		18,668		5.03			1,490,231		19,425		5.29
Tax-exempt		11,826		120		4.09			10,730		106		4.01
Total loans		1,505,416		18,788		5.02			1,500,961		19,531		5.28
Total earning assets		1,801,231		20,247		4.52			1,716,782		20,947		4.95
Other assets (2)		98,372							89,249
Total assets	$	1,899,603						$	1,806,031
Liabilities and Shareholders’ Equity
Deposits:
Interest bearing demand	$	694,589	$	1,297		0.75	%	$	682,155	$	2,384		1.42	%
Savings		87,549		20		0.09			86,644		21		0.10
Time		550,335		2,959		2.16			473,212		2,215		1.90
Total interest bearing deposits		1,332,473		4,276		1.29			1,242,011		4,620		1.51
Short-term borrowings		7,040		9		0.51			6,434		9		0.57
Long-term debt		84,669		537		2.55			119,759		716		2.42
Total interest bearing liabilities		1,424,182		4,822		1.36			1,368,204		5,345		1.58


Noninterest bearing deposits		267,366							244,847
Other liabilities		13,688							11,960
Shareholders’ equity		194,367							181,020

Total liabilities and shareholders’ equity	$	1,899,603						$	1,806,031
Net interest income (tax equivalent basis)			$	15,425						$	15,602
Net interest margin (3)						3.44	%						3.69	%
Tax equivalent adjustment				(58)							(71)
Net interest income			$	15,367						$	15,531


	Three months ended
	March 31,
	2020 vs. 2019
		Increase (decrease) due to change in*
*(dollars in thousands)*	Volume		Rate			Net

Interest Income
Interest bearing deposits with banks	$	432	$	(402)	$	30
Investment securities:
Taxable		125		(28)		97
Tax-exempt		(93)		9		(84)
Loans:
Taxable		272		(1,029)		(757)
Tax-exempt		11		3		14
Total interest income		747		(1,447)		(700)
Interest Expense
Deposits:
Interest bearing demand		(24)		(1,063)		(1,087)
Savings		0		(1)		(1)
Time		361		383		744
Short-term borrowings		0		0		0
Long-term debt		(192)		13		(179)
Total interest expense		145		(668)		(523)
Net interest income (tax equivalent basis)	$	602	$	(779)	$	(177)