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CVLY Codorus Valley Bancorp

Filed: 3 May 21, 4:39pm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

_____________________________________________

FORM 10-Q

_____________________________________________

 

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

For the quarterly period ended March 31, 2021

 

or

 

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

For the transition period from____________to______________

 

Commission file number: 0-15536

 

CODORUS VALLEY BANCORP, INC. 

(Exact name of registrant as specified in its charter)

 

Pennsylvania

23-2428543

(State or other jurisdiction of incorporation or organization)

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

 

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

(Address of principal executive offices)(Zip code)

 

717-747-1519

(Registrant’s telephone number, including area code)

 

Not Applicable 

(Former name, former address and former fiscal year, 

if changed since the last report.)

_____________________________________________

 

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $2.50 par value

CVLY

NASDAQ Global Market

 

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

 

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

Yes    No

 

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

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On April 23, 2021, 9,876,692 shares of common stock, par value $2.50, were outstanding.


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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)

2021

2020

Assets

Interest bearing deposits with banks

$

408,884

$

313,469

Cash and due from banks

18,020

22,324

Total cash and cash equivalents

426,904

335,793

Securities, available-for-sale

179,550

185,002

Restricted investment in bank stocks, at cost

2,278

2,593

Loans held for sale

13,324

15,981

Loans (net of deferred fees of $4,248 - 2021 and $6,134 - 2020)

1,579,151

1,544,589

Less-allowance for loan losses

(22,411)

(21,264)

Net loans

1,556,740

1,523,325

Premises and equipment, net

24,816

25,206

Operating leases right-of-use assets

2,198

2,386

Goodwill

2,301

2,301

Other assets

70,393

69,612

Total assets

$

2,278,504

$

2,162,199

Liabilities

Deposits

Noninterest bearing

$

483,004

$

396,947

Interest bearing

1,481,059

1,466,592

Total deposits

1,964,063

1,863,539

Short-term borrowings

7,743

8,540

Long-term debt

46,599

46,606

Subordinated debentures - face amount $31,000 (less unamortized discount and debt

issuance cost of $378 at March 31, 2021 and $398 at December 31, 2020)

30,622

30,602

Operating leases liabilities

2,325

2,515

Other liabilities

28,401

12,437

Total liabilities

2,079,753

1,964,239

Shareholders' equity

Preferred stock, par value $2.50 per share;

1,000,000 shares authorized; shares issued and outstanding:

0 at March 31, 2021 and 0 at December 31, 2020

0

0

Common stock, par value $2.50 per share; 30,000,000 shares authorized; shares issued

and outstanding: 9,876,692 at March 31, 2021 and 9,820,882 at December 31, 2020

24,692

24,552

Additional paid-in capital

141,583

141,461

Retained earnings

31,002

28,380

Accumulated other comprehensive income

1,474

3,567

Total shareholders' equity

198,751

197,960

Total liabilities and shareholders' equity

$

2,278,504

$

2,162,199

 

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)

2021

2020

Interest income

Loans, including fees

$

17,592

$

18,764

Investment securities:

Taxable

582

820

Tax-exempt

94

141

Dividends

26

72

Other

81

392

Total interest income

18,375

20,189

Interest expense

Deposits

2,220

4,276

Federal funds purchased and other short-term borrowings

8

9

Long-term debt

252

537

Subordinated debentures

418

0

Total interest expense

2,898

4,822

Net interest income

15,477

15,367

Provision for loan losses

1,231

9,435

Net interest income after provision for loan losses

14,246

5,932

Noninterest income

Trust and investment services fees

1,052

994

Income from mutual fund, annuity and insurance sales

300

261

Service charges on deposit accounts

1,221

1,130

Income from bank owned life insurance

270

286

Other income

563

439

Gain on sales of loans held for sale

1,050

298

(Loss) gain on sales of securities

(23)

15

Total noninterest income

4,433

3,423

Noninterest expense

Personnel

8,428

7,805

Occupancy of premises, net

973

926

Furniture and equipment

838

853

Professional and legal

351

205

Marketing

265

325

FDIC insurance

226

167

Debit card processing

280

389

Charitable donations

188

872

External data processing

820

704

Loss on foreclosed real estate, including provision for losses

0

20

Impaired loan carrying costs

100

286

Other

1,237

767

Total noninterest expense

13,706

13,319

Income (loss) before income taxes

4,973

(3,964)

Provision (benefit) for income taxes

1,073

(975)

Net income (loss)

$

3,900

$

(2,989)

Net income (loss) per share, basic

$

0.40

$

(0.31)

Net income (loss) per share, diluted

$

0.40

$

(0.31)

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)

2021

2020

Net income (loss)

$

3,900

$

(2,989)

Other comprehensive income (loss):

Securities available for sale:

Net unrealized holding (losses) gains arising during the period

(net of tax (benefit) expense of ($561) and $747, respectively)

(2,111)

2,810

Reclassification adjustment for losses (gains) included in net income

(net of tax (benefit) expense of ($5) and $3, respectively) (a) (b)

18

(12)

Net unrealized (losses) gains

(2,093)

2,798

Comprehensive income (loss)

$

1,807

$

(191)

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

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

See accompanying notes.

 


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Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

Three months ended

March 31,

(dollars in thousands)

2021

2020

Cash flows from operating activities

Net income (loss)

$

3,900

$

(2,989)

Adjustments to reconcile net income to net cash provided by operations:

Depreciation/amortization

664

684

Net amortization of premiums on securities

295

151

Amortization of deferred loan origination fees and costs

(2,200)

(403)

Net amortization of operating lease right of use assets

147

178

Net amortization of finance lease right of use assets

12

12

Amortization of subordinated debentures issuance fees

20

0

Net change in operating lease liabilities

(150)

(189)

Provision for loan losses

1,231

9,435

Increase in bank owned life insurance

(270)

(286)

Originations of mortgage loans held for sale

(27,175)

(9,797)

Originations of SBA loans held for sale

(349)

(4,431)

Proceeds from sales of mortgage loans held for sale

31,216

11,625

Proceeds from sales of SBA loans held for sale

0

3,833

Gain on sales of mortgage loans held for sale

(1,050)

(290)

Gain on sales of SBA loans held for sale

0

(9)

Gain on disposal of premises and equipment

(6)

0

Loss (gain) on sales of securities, available-for-sale

23

(15)

Stock-based compensation

101

120

Decrease in interest receivable

262

144

Increase in other assets

(205)

(1,156)

Increase (decrease) in interest payable

349

(55)

Increase (decrease) in other liabilities

7,957

(11)

Net cash provided by operating activities

14,772

6,551

Cash flows from investing activities

Purchases of securities, available-for-sale

(123,921)

(38,070)

Maturities, repayments and calls of securities, available-for-sale

130,260

9,561

Sales of securities, available-for-sale

3,803

19,852

Net decrease in restricted investment in bank stock

315

600

Net (increase) decrease in loans made to customers

(32,445)

21,093

Purchases of premises and equipment

(276)

(1,352)

Investment in foreclosed real estate

0

(121)

Net cash (used in) provided by investing activities

(22,264)

11,563

Cash flows from financing activities

Net increase in demand and savings deposits

106,330

31,479

Net (decrease) increase in time deposits

(5,806)

17,304

Net decrease in short-term borrowings

(797)

(1,729)

Repayment of long-term debt

0

(10,000)

Net change in finance lease liabilities

(7)

0

Cash dividends paid to shareholders

(1,278)

(1,561)

Proceeds from treasury stock reissuance

5

0

Payment of taxes related to stock withheld

(5)

0

Treasury stock repurchased

0

(89)

Proceeds from issuance of stock

161

149

Net cash provided by financing activities

98,603

35,553

Net increase in cash and cash equivalents

91,111

53,667

Cash and cash equivalents at beginning of year

335,793

131,591

Cash and cash equivalents at end of period

$

426,904

$

185,258

See accompanying notes.

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Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

Accumulated

Additional

Other

Common

Paid-in

Retained

Comprehensive

Treasury

(dollars in thousands, except per share data)

Stock

Capital

Earnings

Income (Loss)

Stock

Total

Balance, January 1, 2021

$

24,552 

$

141,461 

$

28,380 

$

3,567 

$

$

197,960 

Net income

3,900

3,900

Other comprehensive loss, net of tax

(2,093)

(2,093)

Cash dividends ($0.130 per share)

(1,278)

(1,278)

Stock-based compensation

101 

101 

Withheld stock - 279 shares

(5)

(5)

Issuance and reissuance of stock:

7,175 shares under the dividend reinvestment and stock purchase plan

18 

98 

116 

5,702 shares under the employee stock option plan

14 

31 

50 

43,212 shares of stock-based compensation awards

108 

(108)

Balance, March 31, 2021

$

24,692 

$

141,583 

$

31,002 

$

1,474

$

$

198,751

Balance, January 1, 2020

$

24,390 

$

140,450 

$

25,019 

$

1,309 

$

$

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)

Balance, March 31, 2020

$

24,423 

$

140,686 

$

20,469 

$

4,107 

$

(89)

$

189,596 

See accompanying notes. 

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Note 1—Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2020 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). As of March 31, 2021, PeoplesBank operates 1 wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended March 31, 2021. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

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

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of March 31, 2021 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

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

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

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

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

In addition, the adverse economic effects of the coronavirus may lead to an increase in credit risk on the Corporation’s commercial and residential loan portfolios. Likewise, the Corporation is also monitoring the fluctuations in the markets as it pertains to interest rates and fair value of our investments for other than temporary impairment (OTTI).

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in Section 4013 of the CARES Act to January 1, 2022.

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 2021. Further, a decrease in results of future operations may place a strain on the Corporation’s capital reserve ratios.

Loans

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

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

Allowance for Loan Losses

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

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

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

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historical losses in the evaluation of loan pools are shown below. Each factor is assigned a value to reflect improving, stable or declining conditions based on the Corporation’s best judgment using relevant information available at the time of the evaluation.

Changes in international, US and local economies and business conditions

Changes in the value of collateral for collateral dependent loans

Changes in the level of concentrations of credit

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

Changes in the nature and volume of the portfolio

Changes in collection, charge-off, and recovery procedures

Changes in underwriting standards and loan terms

Changes in the quality of the loan review system

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

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

Other pertinent environmental factors

Impact of COVID-19 pandemic

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

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

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

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

- 10 -


maturity date. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a reasonable period of time, generally six consecutive months after modification and future payments are reasonably assured.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act provides the option to not apply ASC 310-40 (TDRs) to a loan modification, related specifically to COVID-19 hardships, when the loan was not past due greater than 30 days as of December 31, 2019. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of March 31, 2021, the Corporation has remaining loan modifications totaling approximately $88,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program (PPP), with outstanding PPP loans as of March 31, 2021 of approximately $152,000,000, which includes $64,000,000 new PPP loans originated in 2021.

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, 2021 there was 0 foreclosed real estate. Included within loans receivable as of March 31, 2021 was a recorded investment of $182,000 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.

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, 2021, the balance of residential mortgage loans serviced for third parties was $80,609,000 compared to $87,142,000 at December 31, 2020.

Three months ended

March 31,

(dollars in thousands)

2021

2020

Amortized cost:

Balance at beginning of period

$

511

$

965

Originations of mortgage servicing rights

16

13

Amortization expense

(91)

(66)

Valuation allowance

88

(173)

Balance at end of period

$

524

$

739

Goodwill and Core Deposit Intangible Assets

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

- 11 -


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.

Revenue from Contracts with Customers

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

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

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

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

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

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

- 12 -


Per Share Data

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

Three months ended

March 31,

(in thousands, except per share data)

2021

2020

Net income (loss)

$

3,900

$

(2,989)

Weighted average shares outstanding (basic)

9,842

9,759

Effect of dilutive stock options

25

53

Weighted average shares outstanding (diluted)

9,867

9,812

Basic earnings (loss) per share

$

0.40

$

(0.31)

Diluted earnings (loss) per share

$

0.40

$

(0.31)

Comprehensive Income

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

Cash Flow Information

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

Supplemental cash flow information is provided in the table below.

Three months ended

March 31,

(dollars in thousands)

2021

2020

Cash paid during the period for:

Income taxes

$

0

$

0

Interest

$

2,549

$

4,877

Noncash investing and financing activities:

Transfer of loans to foreclosed real estate

$

0

$

121

Initial recognition of operating lease right-of-use assets

$

0

$

186

Initial recognition of operating lease liabilities

$

0

$

186

Recent Accounting Pronouncements

Pronouncements Adopted in 2021

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. The adoption of this standard 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 its 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.

- 13 -


 

Note 2 – Securities

A summary of securities available-for-sale at March 31, 2021 and December 31, 2020 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At March 31, 2021, 81.2 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania and 10.3 percent was concentrated in the state of Texas. The portfolio was intentionally distributed to limit exposure with the largest issuer at $2.6 million. At March 31, 2021 and December 31, 2020, there we no holdings of securities of any one issuer, other than the US Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Amortized

Gross Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

March 31, 2021

Debt securities:

U.S. agency

$

14,000

$

0

$

(73)

$

13,927

U.S. agency mortgage-backed, residential

120,786

3,125

(890)

123,021

State and municipal

30,576

253

(660)

30,169

Corporates

12,323

175

(65)

12,433

Total debt securities

$

177,685

$

3,553

$

(1,688)

$

179,550

December 31, 2020

Debt securities:

U.S. agency

$

40,000

$

0

$

0

$

40,000

U.S. agency mortgage-backed, residential

106,792

4,133

(29)

110,896

State and municipal

24,014

311

(25)

24,300

Corporates

9,681

139

(14)

9,806

Total debt securities

$

180,487

$

4,583

$

(68)

$

185,002

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

Three months ended

March 31,

(dollars in thousands)

2021

2020

Proceeds

$

3,803

$

19,852

Gross gains

24

74

Gross losses

(47)

(59)

The tax (provision) benefit related to these net realized gain and losses were $5 and $(3) respectively.

The amortized cost and estimated fair value of debt securities at March 31, 2021 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.

Available-for-sale

Amortized

Fair

(dollars in thousands)

Cost

Value

Due in one year or less

$

15,432

$

15,468

Due after one year through five years

77,513

79,896

Due after five years through ten years

45,595

45,321

Due after ten years

39,145

38,865

Total debt securities

$

177,685

$

179,550

- 14 -


Investment securities having a carrying value of $149,302,000 and $170,313,000 on March 31, 2021 and December 31, 2020, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

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

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, 2021

Debt securities:

U.S. agency

2

$

13,927

$

(73)

0

$

0

$

0

2

$

13,927

$

(73)

U.S. agency mortgage-backed, residential

20

36,267

(890)

0

0

0

20

36,267

(890)

State and municipal

21

19,369

(660)

0

0

0

21

19,369

(660)

Corporates

5

3,986

(65)

0

0

0

5

3,986

(65)

Total temporarily impaired debt

securities, available-for-sale

48

$

73,549

$

(1,688)

0

$

0

$

0

48

$

73,549

$

(1,688)

December 31, 2020

Debt securities:

U.S. agency

2

$

40,000

$

0

0

$

0

$

0

2

$

40,000

$

0

U.S. agency mortgage-backed, residential

8

8,706

(29)

0

0

0

8

8,706

(29)

State and municipal

4

3,808

(25)

0

0

0

4

3,808

(25)

Corporates

3

4,075

(14)

0

0

0

3

4,075

(14)

Total temporarily impaired debt

securities, available-for-sale

17

$

56,589

$

(68)

0

$

0

$

0

17

$

56,589

$

(68)

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

The Corporation believes that unrealized losses at March 31, 2021 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through March 31, 2021 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

 

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

The FHLBP paid dividends during the periods ended March 31, 2021 and 2020. The FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of 5 percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make

- 15 -


payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes 0 impairment charge was necessary related to the restricted stock during the periods ended March 31, 2021 and 2020.

Note 4—Loans

Loan Portfolio Composition

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. 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 Corporations’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 March 31, 2021, the Corporation has remaining loan modifications totaling approximately $88,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program (PPP), with outstanding PPP loans as of March 31, 2021 of approximately $152,000,000, which includes $64,000,000 new PPP loans originated in 2021.

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


- 16 -


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

March 31,

% Total

December 31,

% Total

(dollars in thousands)

2021

Loans

2020

Loans

Builder & developer

$

144,777

9.2

$

147,609

9.6

Commercial real estate investor

272,919

17.3

236,924

15.3

Residential real estate investor

233,669

14.8

238,458

15.4

Hotel/Motel

81,045

5.1

79,421

5.2

Wholesale & retail

99,216

6.3

108,425

7.0

Manufacturing

84,082

5.3

79,142

5.1

Agriculture

86,008

5.4

80,450

5.2

Service

87,812

5.6

76,838

5.0

Other

276,108

17.5

280,616

18.2

Total commercial related loans

1,365,636

86.5

1,327,883

86.0

Residential mortgages

95,028

6.0

95,751

6.2

Home equity

94,980

6.0

96,711

6.3

Other

23,507

1.5

24,244

1.5

Total consumer related loans

213,515

13.5

216,706

14.0

Total loans

$

1,579,151

100.0

$

1,544,589

100.0

Loan Risk Ratings

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $500,000 may be scored using a third-party credit scoring software model for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Special Asset 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 recommends risk rating changes as appropriate. Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing loans, except to non-accrual status. Only the Committee, Executive Chairman or President/CEO may downgrade a loan to non-accrual status or upgrade a loan that is criticized or classified.

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


- 17 -


The table below presents a summary of loan risk ratings by loan class at March 31, 2021 and December 31, 2020.

Special

(dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total

March 31, 2021

Builder & developer

$

131,672

$

9,318

$

2,965

$

822

$

144,777

Commercial real estate investor

266,920

4,759

1,047

193

272,919

Residential real estate investor

229,636

474

686

2,873

233,669

Hotel/Motel

49,967

537

18,090

12,451

81,045

Wholesale & retail

90,772

6,987

1,457

0

99,216

Manufacturing

72,735

0

3,608

7,739

84,082

Agriculture

78,712

421

3,774

3,101

86,008

Service

81,832

249

4,760

971

87,812

Other

251,358

1,452

13,597

9,701

276,108

Total commercial related loans

1,253,604

24,197

49,984

37,851

1,365,636

Residential mortgage

95,017

0

11

0

95,028

Home equity

94,276

49

0

655

94,980

Other

23,250

0

0

257

23,507

Total consumer related loans

212,543

49

11

912

213,515

Total loans

$

1,466,147

$

24,246

$

49,995

$

38,763

$

1,579,151

December 31, 2020

Builder & developer

$

133,804

$

11,305

$

2,121

$

379

$

147,609

Commercial real estate investor

230,113

6,379

231

201

236,924

Residential real estate investor

234,316

1,215

130

2,797

238,458

Hotel/Motel

48,264

542

18,143

12,472

79,421

Wholesale & retail

99,821

8,591

13

0

108,425

Manufacturing

67,968

0

3,610

7,564

79,142

Agriculture

72,829

416

3,776

3,429

80,450

Service

75,618

249

0

971

76,838

Other

256,040

1,481

13,804

9,291

280,616

Total commercial related loans

1,218,773

30,178

41,828

37,104

1,327,883

Residential mortgage

95,466

123

11

151

95,751

Home equity

96,026

55

0

630

96,711

Other

23,954

0

0

290

24,244

Total consumer related loans

215,446

178

11

1,071

216,706

Total loans

$

1,434,219

$

30,356

$

41,839

$

38,175

$

1,544,589


- 18 -


Impaired Loans

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

With No Allowance

With A Related Allowance

Total

Recorded

Unpaid

Recorded

Unpaid

Related

Recorded

Unpaid

(dollars in thousands)

Investment

Principal

Investment

Principal

Allowance

Investment

Principal

March 31, 2021

Builder & developer

$

1,016

$

1,084

$

0

$

0

$

0

$

1,016

$

1,084

Commercial real estate investor

1,108

1,118

0

0

0

1,108

1,118

Residential real estate investor

657

944

2,216

2,216

416

2,873

3,160

Hotel/Motel

12,451

12,453

0

0

0

12,451

12,453

Wholesale & retail

236

236

0

0

0

236

236

Manufacturing

7,739

7,858

0

0

0

7,739

7,858

Agriculture

2,025

2,172

1,078

1,154

570

3,103

3,326

Service

971

1,061

0

0

0

971

1,061

Other commercial

5,550

5,935

4,151

4,523

3,442

9,701

10,458

Total impaired commercial related loans

31,753

32,861

7,445

7,893

4,428

39,198

40,754

Residential mortgage

0

0

0

0

0

0

0

Home equity

655

686

0

0

0

655

686

Other consumer

257

271

0

0

0

257

271

Total impaired consumer related loans

912

957

0

0

0

912

957

Total impaired loans

$

32,665

$

33,818

$

7,445

$

7,893

$

4,428

$

40,110

$

41,711

December 31, 2020

Builder & developer

$

575

$

790

$

0

$

0

$

0

$

575

$

790

Commercial real estate investor

1,163

1,170

0

0

0

1,163

1,170

Residential real estate investor

581

862

2,216

2,216

216

2,797

3,078

Hotel/Motel

12,472

12,472

0

0

0

12,472

12,472

Wholesale & retail

237

237

0

0

0

237

237

Manufacturing

7,564

7,564

0

0

0

7,564

7,564

Agriculture

2,270

2,382

1,159

1,217

615

3,429

3,599

Service

971

1,061

0

0

0

971

1,061

Other commercial

5,739

5,954

3,552

3,888

2,481

9,291

9,842

Total impaired commercial related loans

31,572

32,492

6,927

7,321

3,312

38,499

39,813

Residential mortgage

151

151

0

0

0

151

151

Home equity

630

653

0

0

0

630

653

Other consumer

290

301

0

0

0

290

301

Total impaired consumer related loans

1,071

1,105

0

0

0

1,071

1,105

Total impaired loans

$

32,643

$

33,597

$

6,927

$

7,321

$

3,312

$

39,570

$

40,918


- 19 -


The table below presents a summary of average impaired loans and related interest income that was included in net income for the three months ended March 31, 2021 and 2020. Interest income on loans with no related allowance is the result of interest collected on a cash basis, except accruing TDRs.

With No Related Allowance

With A Related Allowance

Total

Average

Total

Average

Total

Average

Total

Recorded

Interest

Recorded

Interest

Recorded

Interest

(dollars in thousands)

Investment

Income

Investment

Income

Investment

Income

Three months ended March 31, 2021

Builder & developer

$

796

$

0

$

0

$

0

$

796

$

0

Commercial real estate investor

1,136

11

0

0

1,136

11

Residential real estate investor

618

0

2,216

0

2,834

0

Hotel/Motel

12,461

0

0

0

12,461

0

Wholesale & retail

236

1

0

0

236

1

Manufacturing

7,651

0

0

0

7,651

0

Agriculture

2,147

37

1,119

0

3,266

37

Service

971

0

0

0

971

0

Other commercial

6,130

0

3,851

0

9,981

0

Total impaired commercial related loans

32,146

49

7,186

0

39,332

49

Residential mortgage

76

0

0

0

76

0

Home equity

643

0

0

0

643

0

Other consumer

274

3

0

0

274

3

Total impaired consumer related loans

993

3

0

0

993

3

Total impaired loans

$

33,139

$

52

$

7,186

$

0

$

40,325

$

52

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

Service

704

1

0

0

704

1

Other commercial

2,113

30

3,634

0

5,747

30

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


- 20 -


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, 2021 and December 31, 2020.

≥ 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, 2021

Builder & developer

$

0

$

282

$

363

$

822

$

1,467

$

143,310

$

144,777

Commercial real estate investor

819

0

0

193

1,012

271,907

272,919

Residential real estate investor

0

0

0

2,873

2,873

230,796

233,669

Hotel/Motel

0

0

0

12,451

12,451

68,594

81,045

Wholesale & retail

198

38

0

0

236

98,980

99,216

Manufacturing

0

0

0

7,739

7,739

76,343

84,082

Agriculture

0

3,379

0

3,101

6,480

79,528

86,008

Service

0

0

0

971

971

86,841

87,812

Other

64

0

1,035

9,701

10,800

265,308

276,108

Total commercial related loans

1,081

3,699

1,398

37,851

44,029

1,321,607

1,365,636

Residential mortgage

67

153

0

0

220

94,808

95,028

Home equity

0

0

109

655

764

94,216

94,980

Other

1,423

373

0

257

2,053

21,454

23,507

Total consumer related loans

1,490

526

109

912

3,037

210,478

213,515

Total loans

$

2,571

$

4,225

$

1,507

$

38,763

$

47,066

$

1,532,085

$

1,579,151

December 31, 2020

Builder & developer

$

427

$

489

$

322

$

379

$

1,617

$

145,992

$

147,609

Commercial real estate investor

0

0

0

201

201

236,723

236,924

Residential real estate investor

136

0

0

2,797

2,933

235,525

238,458

Hotel/Motel

0

0

0

12,472

12,472

66,949

79,421

Wholesale & retail

29

0

0

0

29

108,396

108,425

Manufacturing

0

0

0

7,564

7,564

71,578

79,142

Agriculture

0

0

0

3,429

3,429

77,021

80,450

Service

0

709

0

971

1,680

75,158

76,838

Other

679

887

0

9,291

10,857

269,759

280,616

Total commercial related loans

1,271

2,085

322

37,104

40,782

1,287,101

1,327,883

Residential mortgage

0

0

937

151

1,088

94,663

95,751

Home equity

206

177

36

630

1,049

95,662

96,711

Other

717

321

0

290

1,328

22,916

24,244

Total consumer related loans

923

498

973

1,071

3,465

213,241

216,706

Total loans

$

2,194

$

2,583

$

1,295

$

38,175

$

44,247

$

1,500,342

$

1,544,589

Troubled Debt Restructurings

Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. The principal balance of outstanding TDRs was $1,344,000 at March 31, 2021 and $1,395,000 at December 31, 2020. There were 0 allowances allocated to any TDRs at March 31, 2021 or December 31, 2020. There are no commitments to lend to existing TDRs. A TDR is considered to be in payment default once it is contractually past due pursuant to the terms of the loan documents. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if

- 21 -


principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and with respect to which management believes that future loan payments are reasonably assured under the modified terms.

As of March 31, 2021, there are 0 modifications for consumer loans, 5 mortgage loans totaling approximately $2,060,000 and 38 commercial loans totaling approximately $86,091,000 under the CARES Act, which are not considered TDRs.

The table below shows loans whose terms have been modified under TDRs during the three months ended March 31, 2021 and 2020. There were 0 defaults during the three months ended March 31, 2021 and March 31, 2020 for TDRs entered into during the previous 12 month period.

Modifications

Pre-Modification

Post-Modification

Number

Outstanding

Outstanding

Recorded

of

Recorded

Recorded

Investment

(dollars in thousands)

Contracts

Investments

Investments

at Period End

Three months ended:

March 31, 2021

 

 

 

 

None

March 31, 2020

 

 

 

 

None

 

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 months ended March 31, 2021 and 2020.

Allowance for Loan Losses

January 1, 2021

March 31, 2021

(dollars in thousands)

Balance

Charge-offs

Recoveries

Provision

Balance

Builder & developer

$

2,034

$

0

$

0

$

32

$

2,066

Commercial real estate investor

3,177

0

0

233

3,410

Residential real estate investor

3,944

(50)

4

111

4,009

Hotel/Motel

1,440

0

0

208

1,648

Wholesale & retail

2,416

0

0

(305)

2,111

Manufacturing

840

0

0

(65)

775

Agriculture

1,288

0

0

163

1,451

Service

457

0

0

281

738

Other commercial

5,002

(42)

1

603

5,564

Total commercial related loans

20,598

(92)

5

1,261

21,772

Residential mortgage

256

0

0

0

256

Home equity

287

(5)

2

(2)

282

Other consumer

101

(7)

13

(9)

98

Total consumer related loans

644

(12)

15

(11)

636

Unallocated

22

0

0

(19)

3

Total

$

21,264

$

(104)

$

20

$

1,231

$

22,411

- 22 -


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

Service

367

0

0

6

373

Other commercial

3,837

(7,511)

0

7,766

4,092

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

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, 2021 and December 31, 2020.

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, 2021

Builder & developer

$

0

$

2,066

$

2,066

$

1,016

$

143,761

$

144,777

Commercial real estate investor

0

3,410

3,410

1,108

271,811

272,919

Residential real estate investor

416

3,593

4,009

2,873

230,796

233,669

Hotel/Motel

0

1,648

1,648

12,451

68,594

81,045

Wholesale & retail

0

2,111

2,111

236

98,980

99,216

Manufacturing

0

775

775

7,739

76,343

84,082

Agriculture

570

881

1,451

3,103

82,905

86,008

Service

0

738

738

971

86,841

87,812

Other commercial

3,442

2,122

5,564

9,701

266,407

276,108

Total commercial related

4,428

17,344

21,772

39,198

1,326,438

1,365,636

Residential mortgage

0

256

256

0

95,028

95,028

Home equity

0

282

282

655

94,325

94,980

Other consumer

0

98

98

257

23,250

23,507

Total consumer related

0

636

636

912

212,603

213,515

Unallocated

0

3

3

0

0

0

Total

$

4,428

$

17,983

$

22,411

$

40,110

$

1,539,041

$

1,579,151

- 23 -


December 31, 2020

Builder & developer

$

0

$

2,034

$

2,034

$

575

$

147,034

$

147,609

Commercial real estate investor

0

3,177

3,177

1,163

235,761

236,924

Residential real estate investor

216

3,728

3,944

2,797

235,661

238,458

Hotel/Motel

0

1,440

1,440

12,472

66,949

79,421

Wholesale & retail

0

2,416

2,416

237

108,188

108,425

Manufacturing

0

840

840

7,564

71,578

79,142

Agriculture

615

673

1,288

3,429

77,021

80,450

Service

0

457

457

971

75,867

76,838

Other commercial

2,481

2,521

5,002

9,291

271,325

280,616

Total commercial related

3,312

17,286

20,598

38,499

1,289,384

1,327,883

Residential mortgage

0

256

256

151

95,600

95,751

Home equity

0

287

287

630

96,081

96,711

Other consumer

0

101

101

290

23,954

24,244

Total consumer related

0

644

644

1,071

215,635

216,706

Unallocated

0

22

22

0

0

0

Total

$

3,312

$

17,952

$

21,264

$

39,570

$

1,505,019

$

1,544,589

Note 6—Deposits

The composition of deposits as of March 31, 2021 and December 31, 2020 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $24,000 at March 31, 2021, compared to $55,000 at December 31, 2020.

March 31,

December 31,

(dollars in thousands)

2021

2020

Noninterest bearing demand

$

483,004

$

396,947

Interest bearing demand

245,690

224,764

Money market

581,995

598,398

Savings

126,893

111,143

Time deposits less than $100

280,076

283,910

Time deposits $100 to $250

177,307

180,674

Time deposits $250 or more

69,098

67,703

Total deposits

$

1,964,063

$

1,863,539

 

- 24 -


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, 2021, the balance of securities sold under agreements to repurchase was $7,743,000 compared to $8,540,000 at December 31, 2020. At March 31, 2021 and December 31, 2020, there were 0 other short-term borrowings.

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

March 31,

December 31,

(dollars in thousands)

2021

2020

PeoplesBank’s obligations:

Federal Home Loan Bank of Pittsburgh (FHLBP)

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

$

35,000

Codorus Valley Bancorp, Inc. obligations:

Junior subordinated debt

Due 2034, 2.20%, floating rate based on 3 month

LIBOR plus 2.02%, callable quarterly

3,093

3,093

Due 2036, 1.78% floating rate based on 3 month

LIBOR plus 1.54%, callable quarterly

7,217

7,217

Due 2030, 4.50% fixed rate, callable on or after December 2025

30,622

30,602

Total junior subordinated debt

$

40,932

$

40,912

Lease obligations included in long-term debt:

Finance lease liabilities

1,289

1,296

Total long-term debt

$

77,221

$

77,208

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

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

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

 

Note 8—Leases

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

- 25 -


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

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

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

The components of lease expense were as follows:

Three months ended

March 31,

(dollars in thousands)

2021

2020

Operating lease cost

$

169

$

203

Finance lease cost:

Amortization of right-of-use assets

$

12

$

12

Interest on lease liability

12

12

Total finance lease cost

$

24

$

24

Total lease cost

$

193

$

227

Supplemental cash flow information related to leases was as follows:

Three months ended

March 31,

2021

2020

Operating cash flows from operating leases

$

173

$

208

Operating cash flows from financing leases

12

12

Financing cash flows from financing leases

7

6

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

0

186

Finance leases

0

0

- 26 -


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

March 31,

December 31,

2021

2020

Assets:

Operating leases right-of-use assets

$

2,198

$

2,386

Finance leases assets

1,076

1,087

Total lease assets

$

3,274

$

3,473

Liabilities:

Operating

$

2,325

$

2,515

Financing

1,289

1,296

Total lease liabilities

$

3,614

$

3,811

Weighted Average Remaining Lease Term (years)

Operating leases

4.5

5.2

Finance leases

22.9

23.2

Weighted Average Discount Rate

Operating leases

2.63%

2.68%

Finance leases

3.69%

3.69%

Future minimum payments for financing leases and operating leases as of March 31, 2021 and December 31, 2020 were as follows:

(dollars in thousands:)

March 31, 2021

Year Ending December 31,

Operating Leases

Finance Leases

2021

$

500

$

56

2022

611

75

2023

484

75

2024

397

75

2025

176

79

Thereafter

304

1,588

Total lease payments

2,472

1,948

Less imputed interest

(147)

(659)

Total

$

2,325

$

1,289

(dollars in thousands:)

December 31, 2020

Year Ending December 31,

Operating Leases

Finance Leases

2021

$

667

$

75

2022

604

75

2023

489

75

2024

413

75

2025

192

79

Thereafter

317

1,588

Total lease payments

2,682

1,967

Less imputed interest

(167)

(671)

Total

$

2,515

$

1,296

 

Note 9—Regulatory Matters

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

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Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet 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.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes as of March 31, 2021, the Corporation and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31,2021 and December 31, 2020, the most recent regulatory notifications categorized PeoplesBank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that man32

agement believes have changed the institution’s category.

Actual and required capital amounts (in thousands) and ratios are presented below.

Minimum for Basel III

Well Capitalized

Actual (1)

Capital Adequacy

Minimum (2)

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Codorus Valley Bancorp, Inc. (consolidated)

at March 31, 2021

Capital ratios:

Common equity Tier 1

$

194,747

13.13

%

$

103,788

7.00

%

n/a

n/a

Tier 1 risk based

204,747

13.81

126,029

8.50

n/a

n/a

Total risk based

253,951

17.13

155,683

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