UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
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 (I.R.S. Employer
organization) Identification No.)
105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405
(Address of principal executive offices) (Zip code)
717-747-1519
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since the last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 July 25, 2006, 3,318,534
shares of common stock, par value $2.50, were outstanding.
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Codorus Valley Bancorp, Inc.
FORM 10-Q INDEX
Page #
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PART I - FINANCIAL INFORMATION
Item 1. Financial statements:
Consolidated balance sheets 3
Consolidated statements of income 4
Consolidated statements of cash flows 5
Consolidated statements of changes in shareholders' equity 6
Notes to consolidated financial statements 7
Item 2. Management's discussion and analysis of financial condition
and results of operations 13
Item 3. Quantitative and qualitative disclosures about market risk 24
Item 4. Controls and procedures 24
PART II - OTHER INFORMATION
Item 1. Legal proceedings 24
Item 1A. Risk factors 24
Item 2. Unregistered sales of equity securities and use of proceeds 24
Item 3. Defaults upon senior securities 24
Item 4. Submission of matters to a vote of security holders 25
Item 5. Other information 25
Item 6. Exhibits 25
SIGNATURES 28
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
Unaudited
June 30, December 31,
(dollars in thousands, except per share data) 2006 2005
--------------------------------------------- --------- ------------
ASSETS
Interest bearing deposits with banks $ 128 $ 126
Cash and due from banks 13,299 11,959
Federal funds sold 18,785 0
-------- --------
Total cash and cash equivalents 32,212 12,085
Securities available-for-sale 57,582 58,111
Securities held-to-maturity (fair value $9,582 for 2006 and
$9,686 for 2005) 9,099 9,101
Restricted investment in bank stock, at cost 2,187 2,452
Loans held for sale 746 1,522
Loans (net of deferred fees of $460 in 2006 and $537 in 2005) 389,855 368,109
Less-allowance for loan losses (2,925) (2,538)
-------- --------
Net loans 386,930 365,571
Premises and equipment, net 10,889 10,962
Other assets 16,876 16,248
-------- --------
Total assets $516,521 $476,052
======== ========
LIABILITIES
Deposits
Noninterest bearing $ 51,449 $ 49,369
Interest bearing 375,623 335,785
-------- --------
Total deposits 427,072 385,154
Short-term borrowings 0 9,781
Long-term debt 46,142 39,712
Other liabilities 3,112 2,676
-------- --------
Total liabilities 476,326 437,323
SHAREHOLDERS' EQUITY
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; 0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 3,318,534 shares issued and
outstanding on 6/30/06 and 3,160,821 on 12/31/05 8,296 7,902
Additional paid-in capital 25,727 23,035
Retained earnings 7,099 8,204
Accumulated other comprehensive loss (927) (412)
-------- --------
Total shareholders' equity 40,195 38,729
-------- --------
Total liabilities and shareholders' equity $516,521 $476,052
======== ========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
(dollars in thousands, except per share data) 2006 2005 2006 2005
--------------------------------------------- ------ ------ ------- -------
INTEREST INCOME
Loans, including fees $7,115 $5,245 $14,120 $10,389
Investment securities
Taxable 606 615 1,205 1,214
Tax-exempt 161 102 299 203
Dividends 41 17 70 36
Other 26 27 43 29
------ ------ ------- -------
Total interest income 7,949 6,006 15,737 11,871
INTEREST EXPENSE
Deposits 3,010 1,714 5,504 3,179
Federal funds purchased and other short-term borrowings 21 6 133 57
Long-term debt 473 416 959 792
------ ------ ------- -------
Total interest expense 3,504 2,136 6,596 4,028
------ ------ ------- -------
Net interest income 4,445 3,870 9,141 7,843
PROVISION FOR LOAN LOSSES 145 175 355 375
------ ------ ------- -------
Net interest income after provision for loan losses 4,300 3,695 8,786 7,468
NONINTEREST INCOME
Trust and investment services fees 315 315 640 580
Service charges on deposit accounts 486 396 920 769
Mutual fund, annuity and insurance sales 391 363 645 646
Income from bank owned life insurance 64 66 127 131
Other income 160 138 279 251
Gain on sales of mortgages 61 76 149 142
Loss on sales of securities 0 (86) 0 (86)
------ ------ ------- -------
Total noninterest income 1,477 1,268 2,760 2,433
NONINTEREST EXPENSE
Personnel 2,140 1,928 4,279 3,762
Occupancy of premises, net 348 327 732 651
Furniture and equipment 337 314 744 631
Postage, stationery and supplies 118 143 239 245
Professional and legal 79 76 110 141
Marketing and advertising 145 177 253 266
Other 675 565 1,406 1,115
------ ------ ------- -------
Total noninterest expense 3,842 3,530 7,763 6,811
------ ------ ------- -------
Income before income taxes 1,935 1,433 3,783 3,090
PROVISION FOR INCOME TAXES 512 348 999 777
------ ------ ------- -------
Net income $1,423 $1,085 $ 2,784 $ 2,313
====== ====== ======= =======
Net income per share, basic $ 0.43 $ 0.33 $ 0.84 $ 0.70
Net income per share, diluted $ 0.42 $ 0.32 $ 0.82 $ 0.69
====== ====== ======= =======
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
Six months ended
June 30,
-------------------
(dollars in thousands) 2006 2005
---------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,784 $ 2,313
Adjustments to reconcile net income to net cash provided
by operations
Depreciation 593 537
Provision for loan losses 355 375
Deferred federal income tax expense 28 0
Amortization of investment in real estate partnership 242 237
Income from bank owned life insurance (127) (131)
Originations of held for sale mortgages (11,376) (10,832)
Proceeds from sales of held for sale mortgages 12,301 11,297
Gain on sales of held for sale mortgages (149) (142)
Loss on sales of securities 0 86
Gain on sales of foreclosed real estate 0 (27)
Stock-based compensation expense 25 0
Increase in accrued interest receivable and other assets (310) (451)
Increase in accrued interest payable and other liabilities 499 324
Other, net 133 155
-------- --------
Net cash provided by operating activities 4,998 3,741
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (6,692) (10,018)
Maturities and calls 6,357 6,703
Sales 0 3,918
Net decrease in restricted investment in bank stock 265 365
Net increase in loans made to customers (21,790) (20,709)
Purchases of premises and equipment (561) (1,484)
Investment in nonconsolidated subsidiary (217) 0
Purchase of insurance agency assets (63) (60)
Proceeds from the sale of premises and equipment 91 0
Proceeds from sales of foreclosed real estate 0 1,559
-------- --------
Net cash used in investing activities (22,610) (19,726)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 28,851 16,731
Net increase in time deposits 13,067 10,889
Net decrease in short-term borrowings (9,781) (12,880)
Proceeds from issuance of long-term debt 7,217 13,500
Repayment of long-term debt (787) (631)
Dividends paid (822) (749)
Issuance of common stock 0 186
Cash paid in lieu of fractional shares (6) (6)
-------- --------
Net cash provided by financing activities 37,739 27,040
-------- --------
Net increase in cash and cash equivalents 20,127 11,055
Cash and cash equivalents at beginning of year 12,085 8,085
-------- --------
Cash and cash equivalents at end of period $ 32,212 $ 19,140
======== ========
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
(dollars in thousands, except per share data) Stock Capital Earnings (Loss) Income Total
--------------------------------------------- ------ ---------- -------- ------------- -------
For the six months ended June 30, 2006
Balance, December 31, 2005 $7,902 $23,035 $ 8,204 $(412) $38,729
Comprehensive income:
Net income 2,784 2,784
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (515) (515)
-------
Total comprehensive income 2,269
Cash dividends ($.248 per share, adjusted) (822) (822)
5% stock dividend - 157,713 shares at fair value 394 2,667 (3,067) (6)
Stock-based compensation 25 25
------ ------- ------- ----- -------
Balance, June 30, 2006 $8,296 $25,727 $ 7,099 $(927) $40,195
====== ======= ======= ===== =======
For the six months ended June 30, 2005
Balance, December 31, 2004 $7,481 $20,293 $ 8,034 $ 174 $35,982
Comprehensive income:
Net income 2,313 2,313
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (89) (89)
-------
Total comprehensive income 2,224
Cash dividends ($.226 per share, adjusted) (749) (749)
5% stock dividend - 149,593 shares at fair value 374 2,513 (2,893) (6)
Issuance of common stock -
12,538 shares under stock option plan 32 154 186
------ ------- ------- ----- -------
Balance, June 30, 2005 $7,887 $22,960 $ 6,705 $ 85 $37,637
====== ======= ======= ===== =======
See accompanying notes.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The interim financial statements are unaudited. However, they reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial condition and results of operations for the reported periods, and
are of a normal and recurring nature.
These statements should be read in conjunction with the notes to the audited
financial statements contained in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2005.
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus
Valley Company (PeoplesBank), and its wholly owned nonbank subsidiary, SYC
Realty Company, Inc., (collectively referred to as Codorus Valley or
Corporation). PeoplesBank has two wholly owned subsidiaries, Codorus Valley
Financial Advisors, Inc. and SYC Settlement Services, Inc. All significant
intercompany account balances and transactions have been eliminated in
consolidation. The combined results of operations of the nonbank subsidiaries
are not material to the consolidated financial statements.
The results of operations for the six-month period ended June 30, 2006 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Stock dividend and per share computations
All per share computations include the effect of stock dividends distributed
through June 30, 2006. The weighted average number of shares of common stock
outstanding used for basic and diluted calculations follows.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2006 2005 2006 2005
-------------- ----- ----- ----- ------
Basic 3,319 3,307 3,319 3,304
Diluted 3,395 3,373 3,395 3,372
Stock-Based Compensation
The Corporation adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payments" (Statement 123R) in the first quarter of 2006, using the
"modified prospective method." Prior to the implementation of FAS 123R, stock
options issued under shareholder approved employee and director stock option
plans were accounted for under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no
compensation expense was recognized related to these plans. Stock options are
granted at exercise prices not less than the fair value of the common stock on
the date of grant. See Note 6 - Stock-Based Compensation.
Comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance
-7-
sheet, such items, along with net income, are components of comprehensive
income. The components of other comprehensive income (loss) and related tax
effects are presented in the following table:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(Dollars in thousands) 2006 2005 2006 2005
---------------------- ----- ----- ----- -----
Unrealized holding gains (losses) arising
during the period $(575) $ 446 $(780) $(221)
Reclassification adjustment for losses
(gains) included in income 0 86 0 86
----- ----- ----- -----
Net unrealized gains (losses) (575) 532 (780) (135)
Tax effect 195 (181) 265 46
----- ----- ----- -----
Net of tax amount $(380) $ 351 $(515) $ (89)
===== ===== ===== =====
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." The
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with Statement of
Financial Accountings Standards No.109, "Accounting for Income Taxes."
Specifically, the pronouncement prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on the related derecognition, classification, interest
and penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions. The interpretation is effective for fiscal years
beginning after December 15, 2006. The Corporation is evaluating the impact of
this new pronouncement on its consolidated financial statements.
NOTE 3--DEPOSITS
The composition of deposits on June 30, 2006 and December 31, 2005, was as
follows:
June 30, December 31,
(Dollars in thousands) 2006 2005
---------------------- -------- ------------
Noninterest bearing demand $ 51,449 $ 49,369
NOW 45,928 50,638
Money market 130,205 97,601
Savings 20,082 21,205
Time CDs less than $100,000 135,329 125,572
Time CDs $100,000 or more 44,079 40,769
-------- --------
Total deposits $427,072 $385,154
======== ========
-8-
NOTE 4--LONG-TERM DEBT
A summary of long-term debt at June 30, 2006 and December 31, 2005 follows:
June 30, December 31,
(Dollars in thousands) 2006 2005
---------------------- -------- ------------
Obligations of PeoplesBank to FHLBP
Due 2007, 4.69%, amortizing 222 439
Due 2007, 4.68% 7,000 7,000
Due 2009, 3.47%, convertible quarterly after
December 2006 5,000 5,000
Due 2010, 4.32% 6,000 6,000
Due 2011, 4.30%, amortizing 4,632 4,757
Due 2012, 4.25%, amortizing 2,160 2,319
Due 2013, 3.46%, amortizing 3,638 3,869
Due 2014, 6.43%, convertible quarterly after
July 2009 5,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2011, floating rate based on 1 month
LIBOR plus 1.50%, amortizing 1,601 1,641
Due 2034, floating rate based on 3 month
LIBOR plus 2.02%, callable quarterly after
December 2009 3,093 3,093
Due 2036, floating rate based on 3 month
LIBOR plus 1.54%, callable quarterly after
July 2011 7,217 0
------- -------
45,563 39,118
Capital lease obligation 579 594
------- -------
Total long-term debt $46,142 $39,712
======= =======
PeoplesBank's obligations to FHLBank Pittsburgh are fixed rate and
fixed/floating (convertible) rate instruments. The FHLBank Pittsburgh has an
option on the convertible borrowings to convert the rate to a floating rate
after the expiration of a specified period. The floating rate is based on the
LIBOR index plus a spread. If the FHLBank Pittsburgh elects to exercise its
conversion option, PeoplesBank may repay the converted loan without a prepayment
penalty.
Codorus Valley has three long-term obligations. The first is due 2011 and is
secured by a mortgage on the Codorus Valley Corporate Center office building at
105 Leader Heights Road, York, Pennsylvania. The second and third obligations
are due 2034 and 2036 and represent the issuance of trust preferred debt
securities. Trust preferred debt securities were issued to support planned
growth and are included in Tier 1 capital for regulatory capital purposes.
NOTE 5--REGULATORY MATTERS
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a material
effect on Codorus Valley's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Codorus
Valley and PeoplesBank must meet specific capital guidelines that
-9-
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classifications are also subject to qualitative judgments by the
regulators.
Quantitative measures established by regulators to ensure capital adequacy
require Codorus Valley and PeoplesBank to maintain minimum ratios, as set forth
below, to total and Tier 1 capital as a percentage of risk-weighted assets, and
of Tier 1 capital to year-to-date average assets (leverage ratio). Management
believes that Codorus Valley and PeoplesBank were well capitalized on June 30,
2006, based on FDIC capital guidelines.
MINIMUM
ACTUAL FOR CAPITAL ADEQUACY WELL CAPITALIZED MINIMUM*
--------------- --------------------------- ----------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------- ------- ----- -------------- ---------- -------------- -----------
CODORUS VALLEY BANCORP, INC. (CONSOLIDATED)
AT JUNE 30, 2006
Capital ratios:
Tier 1 risk based $50,659 12.15% > or = $16,674 > or = 4.0% n/a n/a
Total risk based 53,584 12.85 > or = 33,348 > or = 8.0 n/a n/a
Leverage 50,659 10.25 > or = 19,779 > or = 4.0 n/a n/a
AT DECEMBER 31, 2005
Capital ratios:
Tier 1 risk based $41,658 10.61% > or = $15,699 > or = 4.0% n/a n/a
Total risk based 44,196 11.26 > or = 31,398 > or = 8.0 n/a n/a
Leverage 41,658 9.57 > or = 17,420 > or = 4.0 n/a n/a
PEOPLESBANK, A CODORUS VALLEY COMPANY
AT JUNE 30, 2006
Capital ratios:
Tier 1 risk based $46,332 11.27% > or = $16,444 > or = 4.0% > or = $24,666 > or = 6.0%
Total risk based 49,257 11.98 > or = 32,889 > or = 8.0 > or = 41,111 > or = 10.0
Leverage 46,332 9.48 > or = 19,544 > or = 4.0 > or = 24,430 > or = 5.0
AT DECEMBER 31, 2005
Capital ratios:
Tier 1 risk based $37,201 9.62% > or = $15,463 > or = 4.0% > or = $23,194 > or = 6.0%
Total risk based 39,739 10.28 > or = 30,926 > or = 8.0 > or = 38,657 > or = 10.0
Leverage 37,201 8.66 > or = 17,184 > or = 4.0 > or = 21,480 > or = 5.0
* To be well capitalized under prompt corrective action provisions.
NOTE 6--STOCK-BASED COMPENSATION
The Corporation adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payments" (Statement 123R) in the first quarter of 2006, using the
"modified prospective method." Statement 123R requires that the fair value of
equity awards to employees be recognized as compensation expense over the period
during which an employee is required to provide service in exchange for such
award. Compensation expense of $13,000 net of $0 tax effect for the three months
ended June 30, 2006 and $25,000 net of $0 tax effect for the six months ended
June 30, 2006 was included in net income and earnings per share. Comparatively,
the impact on net income and earnings per share during 2005 that would have
occurred if compensation expense would have been recognized based on the
estimated fair value of the options on the date of grant is as follows:
-10-
Three Six
months ended months ended
(Dollars in thousands, except per share data) June 30, 2005 June 30, 2005
--------------------------------------------- ------------- -------------
Reported net income $1,085 $2,313
Total stock-based employee compensation expense
determined under fair value based method for
all awards, net of related tax effects of $0
and $0 (24) (38)
------ ------
Pro forma net income $1,061 $2,275
Reported basic earnings per share $ .33 $ .70
Reported diluted earnings per share $ .32 $ .69
Pro forma basic earnings per share $ .32 $ .69
Pro forma diluted earnings per share $ .31 $ .67
The Corporation's equity awards consist of stock options granted under three
stock option plans as follows: a 2000 Stock Incentive Plan (2000 Plan), a 1998
Independent Directors Stock Option Plan (1998 Plan) and a 1996 Stock Incentive
Plan (1996 Plan). All options available for grant under the 1998 and 1996 Plans
have been granted. The 2000 Plan also allows for the granting of stock
appreciation rights and restricted stock, none of which have been granted to
date at June 30, 2006.
Shares reserved and available for issuance as of June 30, 2006 were 127,975 for
the 2000 Plan, 131,908 for the 1998 Plan, and 94,647 for the 1996 Plan. Shares
reserved for future issuance under each plan are subject to adjustment in the
event of specified changes in the Corporation's capital structure. Options
awarded under these plans to date have been granted with an exercise price equal
to the fair value of the stock on the grant date, a minimum vesting period of
six months and an expiration period of ten years. Upon exercise, the Corporation
has historically issued from its authorized, but unissued, common stock to
satisfy the options.
The grant-date fair value of options granted in June 2006 was $7.30 and in June
2005, adjusted for stock dividends, was $6.86. The fair value of the options
awarded under the Option Plans is estimated on the date of grant using the
Black-Scholes valuation model, which is dependent upon certain assumptions as
presented below.
2006 2005
---- ----
Expected life (in years) 5.25 6.12
Risk-free interest rate 5.19% 3.89%
Expected volatility 46.4% 48.3%
Expected dividend yield 2.7% 2.6%
The expected life of the options was estimated using one half of the exercise
period plus the vesting period and represents the period of time that options
granted are expected to be outstanding. The risk-free interest rate is the U.S.
Treasury rate commensurate with the expected life of the options on the grant
date. Volatility of the Corporation's stock price was based on historical
volatility. Dividend yield was based on dividends for the most current year
divided by the average market price for the most current year.
-11-
A summary of stock options activity from all Plans, adjusted for stock dividends
declared, is shown below.
WEIGHTED AVERAGE WEIGHTED AVERAGE AGGREGATE
EXERCISE PRICE REMAINING INTRINSIC VALUE
OPTIONS PER SHARE CONTRACTUAL TERM ($000)
------- ---------------- ---------------- ---------------
Outstanding at January 1, 2006 275,164 $13.68 4.7 years $1,566
Granted 500 18.90
------- ------ --------- ------
Outstanding at June 30, 2006 275,664 $13.69 4.2 years $1,567
======= ====== ========= ======
Exerciseable at June 30, 2006 251,256 $13.29 3.8 years $1,528
======= ====== ========= ======
Intrinsic value represents the amount by which the market price of the stock on
the measurement date exceeded the exercise price of the option. No options were
exercised to date during 2006. The intrinsic value of options exercised during
the first six months of 2005 was $78,000. Cash received from such exercises was
$159,000 and the tax benefit recognized was $26,000.
As of June 30, 2006, total unrecognized compensation cost related to nonvested
options was $105,000. The cost is expected to be recognized over a weighted
average period of 1.6 years.
NOTE 7--CONTINGENT LIABILITIES
Management is not aware of any material contingent liabilities on June 30, 2006.
NOTE 8--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 written are conditional commitments issued by the PeoplesBank
to guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The credit
risk involved in issuing letters of credit is essentially the same as those that
are involved in extending loan facilities to customers. The Corporation
generally holds collateral and/or personal guarantees supporting these
commitments. The Corporation had $4,975,000 of standby letters of credit on June
30, 2006, compared to $2,777,000 on December 31, 2005. 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 payment
required under the corresponding guarantees. The current amount of the liability
as of June 30, 2006 and December 31, 2005, for guarantees under standby letters
of credit issued, is not material.
-12-
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 Corporation), a bank holding company, and its wholly owned subsidiary,
PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided below. Codorus
Valley's consolidated financial condition and results of operations consist
almost entirely of PeoplesBank's financial condition and results of operations.
Current performance does not guarantee and may not be indicative of similar
performance in the future.
FORWARD-LOOKING STATEMENTS:
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the Corporation and its subsidiaries. When words
such as "believes," "expects," "anticipates" or similar expressions occur in the
Form 10-Q, management is making forward-looking statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that management incorporates 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:
- operating, legal and regulatory risks;
- economic, political and competitive forces affecting banking, securities,
asset management and credit services businesses; and
- the risk that management's analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that Codorus Valley files periodically with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING ESTIMATES:
Disclosure of Codorus Valley's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2005 Annual Report on
Form 10-K for the period ended December 31, 2005. Some of these policies are
particularly sensitive, requiring management to make significant judgments,
estimates and assumptions. Additional information is contained in Management's
Discussion and Analysis for the most sensitive of these issues, including the
provision and allowance for loan losses, located on pages 15 and 17 of this Form
10-Q.
Management makes significant estimates in determining the allowance for loan
losses. Management considers a variety of factors in establishing this estimate
such as current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, financial and
managerial strengths of borrowers, adequacy of collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Estimates related to the value of collateral also have a
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significant impact on whether or not management continues to accrue income on
delinquent loans and on the amounts at which foreclosed real estate is recorded
on the statement of financial condition.
The Corporation changed its method of accounting for stock-based compensation in
2006, in accordance with Financial Accounting Statement No. 123(R), which is
described in Note 6 - Stock-Based Compensation of this report. Based on stock
options outstanding on June 30, 2006, approximately $105,000 will be expensed
over the weighted average period of 1.6 years.
Management discussed the development and selection of critical accounting
estimates and related Management Discussion and Analysis disclosure with the
Audit Committee. There were no material changes made to the critical accounting
estimates during the periods presented within this report.
THREE MONTHS ENDED JUNE 30, 2006,
COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
OVERVIEW
Net income for the three-month period ended June 30, 2006, was $1,423,000 or
$.43 per share ($.42 diluted), compared to $1,085,000 or $.33 per share ($.32
diluted), for the same period of 2005. The $338,000 or 31 percent increase in
net income was the result of increases in net interest income and noninterest
income, which more than offset an increase in noninterest expense. The $575,000
or 15 percent increase in net interest income was primarily the result of
increases in the volume of business and consumer loans. An increase in yield on
floating rate business loans, the result of rising short-term market interest
rates, also contributed. The $209,000 or 16.5 percent increase in noninterest
income was primarily attributable to an increase in service charges on deposit
accounts and a nonrecurring gain of $45,000 from the sale of land. Prior period
noninterest income included an infrequent $86,000 loss on the sale of
available-for-sale securities. The $312,000 or 9 percent increase in noninterest
expense was primarily attributable to increases in personnel and other expense.
Current period personnel expense reflected the planned addition of key sales and
support staff, increased health insurance premiums and normal merit increases.
The increase in other expense reflected increases in various expenses including
real estate appraisal fees, problem loan carrying costs and employee training.
NET INTEREST INCOME
Net interest income for the three-month period ended June 30, 2006, was
$4,445,000, an increase of $575,000 or 15 percent above the same period in 2005.
The increase in net interest income was primarily the result of increases in the
volume of business and consumer loans. An increase in yield on floating rate
business loans, the result of rising short-term market interest rates, also
contributed. Earning assets averaged $456 million and yielded 7.09 percent (tax
equivalent basis) for the second quarter of 2006, compared to $389 million and
6.05 percent, respectively, for the second quarter of 2005.
Rising short-term market interest rates and competitive pricing pressures
increased funding costs during the current period. Interest bearing liabilities
averaged $405 million at an average rate of 3.47 percent for the second quarter
of 2006, compared to $342 million and 2.50 percent, respectively, for the second
quarter of 2005. The $63 million or 18 percent increase in the average volume of
interest bearing liabilities occurred primarily in money market deposits and
floating rate CDs. In June 2006, the corporation issued $7.2 million in trust
preferred debt to raise capital to support future corporate growth. This
transaction is described within the short-term borrowings and long-term debt
section of this report.
-14-
The net interest margin, on a tax equivalent basis, was 4.01 percent for the
second quarter of 2006, compared to 4.05 percent for the same period in 2005.
PROVISION FOR LOAN LOSSES
A $145,000 provision expense for loan losses was recorded for the three-month
period ended June 30, 2006, compared to $175,000 for the same period in 2005.
The current period provision was based on management's assessment of overall
credit quality and macro-economic factors such as rising energy costs and
interest rates, which might portend debt service problems for some of our
borrowers.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $1,477,000, an
increase of $209,000 or 16.5 percent above the second quarter of 2005. The
increase was primarily attributable to a $90,000 increase in service charges on
deposit accounts, which resulted from an increase in transaction volumes and
business growth. A nonrecurring gain of $45,000 from the sale of two small
parcels of land to the local township for a road throughway also contributed to
the increase in noninterest income for the second quarter of 2006. The prior
period included an infrequent $86,000 loss on the sale of available-for-sale
securities as part of an "investment swap". The swap entailed selling low
yielding investments at a loss and replacing them with higher yielding
investments, which increased portfolio yield and interest income.
NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $3,842,000, an
increase of $312,000 or 9 percent above the second quarter of 2005. The increase
was attributable primarily to a $212,000 or 11 percent increase in personnel
expense, which reflected the planned addition of key sales and support staff,
increased health insurance premiums and normal merit increases. Other expense
increased $110,000 or 19.5 percent due in part to increases in real estate
appraisal fees, problem loan carrying costs, employee training, work related
seminars and normal business growth.
INCOME TAXES
The provision for federal income tax was $512,000 for the second quarter of
2006, compared to $348,000 for 2005. The $164,000 or 47 percent increase in the
tax provision was primarily the result of a 35 percent increase in pretax
income. Codorus Valley's effective federal income tax rate was approximately 26
percent, compared to a marginal tax rate of 34 percent.
SIX MONTHS ENDED JUNE 30, 2006,
COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the six-month period ended June 30, 2006, was $2,784,000 or $.84
per share ($.82 diluted), compared to $2,313,000 or $.70 per share ($.69
diluted), for the same period of 2005. The $471,000 or 20 percent increase in
net income was the result of increases in net interest income and noninterest
income, which more than offset an increase in noninterest expense. The
$1,298,000 or 16.5 percent increase in net interest income was attributable to
an increase in interest income and fees from a
-15-
larger volume of business and consumer loans, and higher yields on floating rate
business loans. The net interest margin was approximately 4.17 percent for both
periods. The $327,000 or 13 percent increase in noninterest income was
attributable primarily to increases in service charges on deposit accounts and
trust fees. The $952,000 or 14 percent increase in noninterest expense was
attributable to increases in personnel, furniture and equipment, and occupancy
expenses associated in part with corporate expansion in the prior year, and
normal business growth.
Net income as a percentage of average shareholder's equity (return on equity or
ROE), was 13.98 percent for the first six months (annualized) of 2006, compared
to 12.54 percent for the same period of 2005. Net income as a percentage of
average total assets (return on assets or ROA), was 1.14 percent for 2006,
compared to 1.10 percent for the same period of 2005. The efficiency ratio
(noninterest expense as a percentage of net operating revenue) for the current
period was 63.8 percent, compared to 64.6 percent for the first six months of
2005.
Total assets of the Corporation on June 30, 2006, were approximately $517
million, an increase of $41 million or 8.5 percent above December 31, 2005.
Asset growth occurred primarily in business and consumer loans, which were
funded primarily by growth in money market and CD deposits.
On June 30, 2006, nonperforming assets as a percentage of total loans and net
foreclosed real estate were 1.44 percent, compared to 0.18 percent for June 30,
2005. Information regarding nonperforming assets is provided in the Risk
Management section of this report, including Table 3--Nonperforming Assets.
Based on a recent evaluation of probable loan losses and the current loan
portfolio, management believes that the allowance is adequate to support losses
inherent in the loan portfolio on June 30, 2006. An analysis of the allowance is
provided in Table 4--Analysis of Allowance for Loan Losses.
Throughout the current period Codorus Valley maintained a capital level well
above minimum regulatory quantitative requirements. Currently, there are three
federal regulatory definitions of capital that take the form of minimum ratios.
Note 5--Regulatory Matters, shows that the Corporation and PeoplesBank were well
capitalized on June 30, 2006.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
NET INTEREST INCOME
Net interest income for the six-month period ended June 30, 2006, was
$9,141,000, an increase of $1,298,000 or 16.5 percent above the same period in
2005. Earning assets averaged $451 million and yielded 7.12 percent (tax
equivalent) for 2006, compared to $385 million and 6.29 percent, respectively,
for 2005. The $67 million or 17 percent increase in average earning assets
occurred primarily in business loans and secondarily in consumer installment
loans. The average portfolio balance of investment securities for the current
period was $70 million compared to $73 million for 2005; however, the yield for
the current six-month period averaged 4.91 percent (tax equivalent) or 62 basis
points above 2005. Interest bearing liabilities averaged $400 million at an
average rate of 3.33 percent for 2006, compared to $339 million and 2.40
percent, respectively, for 2005. The $61 million or 18 percent increase in the
average balance of interest bearing liabilities occurred primarily in money
market deposits and floating rate CDs. Deposit growth was favorably impacted by
the introduction of new money market products and the addition of two financial
centers in March 2005. Net interest margin, ie., net interest income (tax
equivalent) as a percentage of average earning assets, was approximately 4.17
percent for both six-month periods ended June 30, 2006 and 2005. In the period
ahead, management expects that growth in net interest income will be constrained
as a result of higher funding costs and a
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relatively flat US treasury yield curve environment. Funding costs are expected
to increase in response to changes in deposit mix, the level of short-term
market interest rates and competition.
PROVISION FOR LOAN LOSSES
A $355,000 provision expense for loan losses was recorded for the six-month
period ended June 30, 2006, compared to $375,000 for the same period in 2005.
The current period provision was based on management's assessment of overall
credit quality, loan growth and macro-economic factors such as rising energy
costs and interest rates. Information regarding nonperforming assets and the
allowance for loan losses can be found within those sections of this report.
NONINTEREST INCOME
The following table presents the components of total noninterest income for the
six-month period ended June 30, 2006, compared to the same period for 2005.
Table 1 - Noninterest income
Six months ended Change
June 30, Increase (Decrease)
---------------- -------------------
(dollars in thousands) 2006 2005 $ %
---------------------- ------ ------ ---- ----
Trust and investment services fees $ 640 $ 580 $ 60 10%
Service charges on deposit accounts 920 769 151 20
Mutual fund, annuity and insurance sales 645 646 (1) (0)
Income from bank owned life insurance 127 131 (4) (3)
Other income 279 251 28 11
Gain on sales of mortgages 149 142 7 5
Loss on sales of securities 0 (86) 86 (100)
------ ------ ---- ----
Total noninterest income $2,760 $2,433 $327 13%
====== ====== ==== ====
The discussion that follows addresses changes within selected categories of
noninterest income.
Trust and investment services fees--For the first six-months of 2006, trust fees
increased $60,000 or 10 percent above 2005 due primarily to business growth.
Service charges on deposit accounts--For the first six-months of 2006, service
charges on deposits increased $151,000 or 20 percent above 2005 due to an
increase in the volume of transactions and account growth. Check card (debit
card) and automated teller machine (ATM) commissions, and overdraft fees
continued to trend up in response to increased customer usage of check cards.
Other income--The other income category is comprised of many individual fees.
For the first six-months of 2006, other income increased $28,000 or 11 percent,
due primarily to the recognition of a nonrecurring gain of $45,000 from the sale
of two small parcels of land to the local township for a road throughway.
Gain on sales of mortgages--For the first six-months of 2006, gains from the
sale of mortgages were slightly above the prior year due to a larger volume of
sales. If market interest rates continue to rise in
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the period ahead it is likely to slow down the housing market and adversely
affect mortgage banking operations.
Loss on sales of securities--For 2005, an infrequent loss of $86,000 was
recognized from the sale of securities available-for-sale in connection with an
"investment swap." The swap entailed selling low yielding investments at a loss
and replacing them with higher yielding investments, which increased portfolio
yield and interest income. There was no comparable transaction in 2006.
NONINTEREST EXPENSE
The following table presents the components of total noninterest expense for the
six-month period ended June 30, 2006, compared to the same period for 2005.
Table 2 - Noninterest expense
Six months ended Change
June 30, Increase (Decrease)
---------------- -------------------
(dollars in thousands) 2006 2005 $ %
-------------------------------- ------ ------ ----- ---
Personnel $4,279 $3,762 $ 517 14%
Occupancy of premises, net 732 651 81 12
Furniture and equipment 744 631 113 18
Postage, stationery and supplies 239 245 (6) (2)
Professional and legal 110 141 (31) (22)
Marketing and advertising 253 266 (13) (5)
Other 1,406 1,115 291 26
------ ------ ----- ---
Total noninterest expense $7,763 $6,811 $ 952 14%
====== ====== ===== ===
The discussion that follows addresses changes in selected categories of
noninterest expense.
Personnel--For the first six-months of 2006, personnel expense, comprised of
wages, payroll taxes and employee benefits, increased $517,000 or 14 percent
above 2005 due to: planned staff additions, including financial center expansion
in the prior year; increased health insurance premiums; and normal merit
increases.
Occupancy of premises, net--For the first six months of 2006, occupancy of
premises expense increased $81,000 or 12 percent above 2005 due to financial
center expansion and renovation in the prior period, and higher utility
expenses.
Furniture and equipment--For the first six-months of 2006, furniture and
equipment expense increased $113,000 or 18 percent above 2005 due in part to
financial center expansion and renovation in the prior period. Current period
expense was also impacted by the timing of ATM maintenance contracts and the
bulk replacement of personal computers.
Professional and legal--For the first six-months of 2006, professional and legal
expense decreased $31,000 or 22 percent below 2005 due to the settlement of two
lawsuits arising from routine bank
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business. During 2006, one of the aforementioned lawsuits resulted in a $32,000
reimbursement to PeoplesBank for legal expenses that it incurred in a prior
period.
Marketing and advertising--For the first six months of 2006, marketing and
advertising expense decreased slightly from 2005. The prior period included
expense associated with a branding initiative for PeoplesBank as well as costs
to promote the addition of two financial centers. During the current period,
PeoplesBank increased product promotions, particularly for deposit products.
Other-- The other expense category is comprised of many individual expenses. For
the first six months of 2006, other expense increased $291,000 or 26 percent
above 2005. The increase was due in part to increases in problem asset carrying
costs (the current period reflected a larger portfolio of nonaccrual loans, the
prior period included a $29,000 gain from the sale of collateral), and
ATM/point-of-sale processing expense (transaction volume), among others. Normal
business growth also contributed to the increase in other expense.
INCOME TAXES
The provision for federal income tax was $999,000 for the current six-month
period, compared to $777,000 for the same period in 2005. The $222,000 or 29
percent increase in the tax provision was primarily the result of a 22 percent
increase in pretax income. Income tax for both periods was reduced by the
recognition of tax credits from investments in low income housing partnerships.
For the current period, tax credits totaled $185,000, compared to $193,000 for
the first six months of 2005. Codorus Valley's effective federal income tax rate
was approximately 26 percent, compared to a marginal tax rate of 34 percent.
BALANCE SHEET REVIEW
LOANS
On June 30, 2006, loans were approximately $390 million, an increase of $22
million or 6 percent above year-end 2005. The increase was primarily
attributable to an increase in business loans and to a lesser degree consumer
loans. The year-to-date average yield (tax-equivalent basis) on loans was 7.12
percent for June 30, 2006, compared to 6.29 percent for the first six months of
2005.
DEPOSITS
On June 30, 2006, total deposits were approximately $427 million, an increase of
$42 million or 11 percent above year-end 2005. The increase in deposits, which
reflected the continuation of a long trend of successful sales efforts, occurred
primarily within the money market and CD categories, as shown in Note
3--Deposits of this report. The increase in money market deposits was partially
the result of new money market products, which were priced competitively and
heavily promoted. CD growth occurred in variable rate CD's, which re-price
weekly based on the one year US Treasury bond rate. The trend of rising
short-term interest rates, since July 2004, was a factor in overall deposit
growth and product selection by bank customers. The increase in deposits was
also attributable in part to the addition of two financial centers in March of
2005. The year-to-date average rate paid on interest-bearing deposits was 3.13
percent for June 30, 2006, compared to 2.13 percent for the first six months of
2005.
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SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On June 30, 2006, there were no short-term borrowings, compared to $10 million
outstanding at year-end 2005. Deposit growth during the current period provided
funds to repay short-term borrowings. On June 30, 2006, long-term debt was $46
million, compared to $40 million for year-end 2005. During June, Codorus Valley
issued $7.2 million in trust preferred debt securities to support planned
corporate growth. This obligation has a 30-year maturity, but is callable at
quarterly intervals after the fifth year. The interest rate is variable tied to
the 3-month LIBOR rate plus 154 basis points. A listing of outstanding long-term
debt instruments is provided in Note 4--Long-term Debt of this report.
Generally, funds for the payment of long-term debt come from operations and
refinancings.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Shareholders' equity or capital, as a source of funds, enables Codorus Valley to
maintain asset growth and absorb losses. Total shareholders' equity was
approximately $40.2 million on June 30, 2006, an increase of $1.5 million or 4
percent above December 31, 2005. The increase was caused primarily by an
increase in retained earnings from profitable operations.
On July 11, 2006, the Board of Directors declared a quarterly cash dividend of
$.13 per common share, payable on or before August 8, 2006, to shareholders of
record July 25, 2006. This follows $.13 per share ($.124 adjusted) cash
dividends paid in May and February. The Board also distributed a 5 percent stock
dividend in June, which resulted in the issuance of 157,713 common shares.
On October 14, 2004, the Corporation issued a press release, which was filed on
Form 8-K, announcing that the Board of Directors authorized the purchase, in
open market and privately negotiated transactions, of up to 4.9 percent or
approximately 146,000 shares of its then outstanding common stock.As of June
30, 2006, the Corporation had not acquired any of its common stock under the
authorization reported in October 2004.
As described under the caption, short-term borrowings and long-term debt,
Codorus Valley issued $7.2 million in trust preferred debt securities in June
2006 to support planned growth. The interest expense on trust preferred debt is
tax deductible, while the amount borrowed is included in Tier 1 capital, subject
to regulatory limitations, for regulatory capital purposes.
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators that involve quantitative
guidelines and qualitative judgments. Quantitative measures established by
regulators pertain to minimum capital ratios, as set forth in Note 5--Regulatory
Matters, to the financial statements. Management believes that Codorus Valley
and PeoplesBank were well capitalized on June 30, 2006, based on FDIC capital
guidelines.
RISK MANAGEMENT
NONPERFORMING ASSETS
Table 3--Nonperforming Assets, provides a summary of nonperforming assets and
related ratios. The paragraphs below provide information for selected categories
for June 30, 2006, compared to December 31, 2005.
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Table 3-Nonperforming Assets
June 30, December 31,
(dollars in thousands) 2006 2005
---------------------- -------- ------------
Nonaccrual loans $5,578 $1,034
Accruing loans that are contractually past due
90 days or more as to principal or interest 21 0
Foreclosed real estate, net of allowance 6 7
------ ------
Total nonperforming assets $5,605 $1,041
====== ======
Ratios:
Nonaccrual loans as a % of total period-end loans 1.43% 0.28%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 1.44% 0.28%
Nonperforming assets as a % of total period-end
stockholders' equity 13.94% 2.69%
Allowance for loan losses as a multiple of
nonaccrual loans 0.5x 2.5x
On June 30, 2006, nonaccrual loans consisted of collateralized business and
mortgage loans, and consumer loans. The Corporation recognizes interest income
on a cash basis for nonaccrual loans. On June 30, 2006, the $4,544,000 increase
in nonaccrual loans was primarily attributable to the addition of three
unrelated business loans in the amounts of $2,624,000, $686,000 and $533,000.
The $2,624,000 loan, which has matured, has been making interest payments and
management believes that the net realizable value of the real estate collateral,
based on a recent independent appraisal, along with personal guarantees is
adequate to ensure the ultimate recovery of interest and principal in full. In
management's judgment the net realizable value of the real estate collateral for
the $686,000 loan is insufficient. Accordingly, management established a
$206,000 loss allowance for this account. The $533,000 loan appears to be
adequately collateralized based on a 2003 appraisal. Management plans to have
the property reappraised in the third quarter and will establish a loss
allowance, if necessary, based on the appraisal value less costs to sell. On
June 30, 2006, the nonaccrual loan portfolio was comprised of 22 unrelated
accounts ranging in size from $12,000 to $2,624,000. Collection efforts
including modification of contractual terms for individual accounts, based on
prevailing market conditions, and liquidation of collateral assets are being
employed to maximize recovery.
The level of loans contractually past due 90 days or more as to principal or
interest was insignificant for June 30, 2006 and December 31, 2005.
ALLOWANCE FOR LOAN LOSSES
Table 4--Analysis of Allowance for Loan Losses, shows the allowance was
$2,925,000 or .75 percent of total loans on June 30, 2006, compared to
$2,207,000 or .69 percent of total loans, respectively, on June 30, 2005. The
$718,000 or 32.5 percent increase in the allowance was based on management's
estimate to bring the allowance to a level reflective of risk in the portfolio,
loan growth, and macro-economic factors such as rising energy costs and interest
rates. Based on a recent evaluation of potential loan losses in the current
portfolio, management believes that the allowance is adequate to support losses
inherent in the loan portfolio on June 30, 2006.
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Table 4-Analysis of Allowance for Loan Losses
(dollars in thousands) 2006 2005
---------------------- ------ ------
Balance-January 1, $2,538 $1,865
Provision charged to operating expense 355 375
Loans charged off:
Commercial 10 34
Real estate-mortgage 0 9
Consumer 20 47
------ ------
Total loans charged off 30 90
Recoveries:
Commercial 34 41
Real estate-mortgage 2 1
Consumer 26 15
Total recoveries 62 57
------ ------
Net (recoveries) charge-offs (32) 33
------ ------
Balance-June 30, $2,925 $2,207
------ ------
Ratios:
Net annualized (recoveries) charge-offs
to average total loans -0.02% 0.02%
Allowance for loan losses to total loans
at period-end 0.75% 0.69%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 52.2% 406.4%
LIQUIDITY
Codorus Valley's loan-to-deposit ratio, which is used as a broad measure of
liquidity, was approximately 91.3 percent on June 30, 2006, compared to 95.6
percent on December 31, 2005. Liquidity for both periods was adequate based on
availability from many sources, including the potential liquidation of a $58
million portfolio of available-for-sale securities, valued at June 30, 2006.
Another important source of liquidity for PeoplesBank is available credit from
the FHLBank Pittsburgh. On March 31, 2006, the latest available date, available
funding from the FHLBank Pittsburgh was approximately $80 million. The
successful promotion of deposit products and the addition of two financial
centers in March 2005 have increased liquidity in the form of deposit growth.
The issuance of $7.2 million in trust preferred debt securities by Codorus
Valley in June 2006 also provided liquidity.
Off-Balance Sheet Arrangements
Codorus Valley'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 of existing loans, and letters of credit made under the
same standards as on-balance sheet instruments. Unused commitments on June 30,
2006, totaled $125,553,000 and consisted of $79,274,000 in unfunded commitments
of existing loans, $41,304,000 to grant new loans and $4,975,000 in letters of
credit. Due to fixed maturity dates and
-22-
specified conditions within these instruments, many will expire without being
drawn upon. Management believes that amounts actually drawn upon can be funded
in the normal course of operations and therefore do not present a significant
liquidity risk to Codorus Valley.
Contractual Obligations
Codorus Valley has various long-term contractual obligations outstanding at June
30, 2006, including long-term debt, time deposits and obligations under capital
and operating leases, which were reported in Table 13 of the Annual Report on
Form 10-K for the year ended 2005. A comparative schedule of deposits, which
includes time deposits, is provided in Note 3 of this Form 10-Q report. A
comparative schedule of long-term debt is provided in Note 4.
MARKET RISK MANAGEMENT
In the normal course of conducting business, Codorus Valley is exposed to market
risk, principally interest rate risk, through the operations of its banking
subsidiary. Interest rate risk arises from market driven fluctuations in
interest rates, which may affect cash flows, income, expense and values of
financial instruments. An asset-liability management committee comprised of
members of management manages interest rate risk.
Codorus Valley performed a simulation on its balance sheet for June 30, 2006 and
December 31, 2005. The results of the point-in-time analyses are shown in Table
3--Interest Rate Sensitivity. The most likely scenario for June 30, 2006,
assumes that short-term interest rates will increase 25-basis points (August
2006) and then decrease 25-basis points (May 2007) during the 12-month
simulation period. Continued growth in interest rate sensitive liabilities,
principally floating rate CDs and money market funds have gradually shifted the
balance sheet to a liability sensitive position. Liability sensitivity means
that deposits and debt will reprice to a greater and faster degree than the
loans and investments that they fund. This suggests that earnings may increase
if market interest rates decrease. Conversely, earnings may decrease if
short-term market interest rates, which have been influenced by the Federal
Reserve Bank, continue to trend upward. Under the low rate scenario (down 200
basis points) for both periods, management presumed that trust preferred
investment securities, which are callable at a premium, would be called and
would result in a one time increase in interest income to the Corporation. A
detailed discussion of market interest rate risk is provided in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2005.
Table 5-Interest Rate Sensitivity
Change in
Forecasted Change in interest rates net income
interest rate ramped over 12 months -------------
scenario (basis points) $000's %
--------------- ------------------------ ------ ----
AT JUNE 30, 2006
Most likely +25 then -25 (126) (2.6)
High +200 (172) (3.5)
Flat (baseline) 0 0 0.0
Low -200 225 4.6
AT DECEMBER 31, 2005
Most likely +50 (1) 0.0
High +200 2 0.0
Flat (baseline) 0 0 0.0
Low -200 39 0.7
-23-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the section entitled "Market risk management" within Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations on page 23 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Codorus Valley maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Corporation
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Based upon their
evaluation of those controls and procedures performed as of June 30, 2006, the
chief executive and chief financial officers of Codorus Valley concluded that
Codorus Valley's disclosure controls and procedures were adequate.
Codorus Valley made no changes in its internal controls or in other factors that
has materially affected, or is reasonably likely to materially affect the
Corporation's internal control over financial reporting, as evaluated by the
chief executive and chief financial officers.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against Codorus Valley Bancorp, Inc. or
any of its subsidiaries which are expected to have a material impact upon the
financial position and/or operating results of the Corporation. Management is
not aware of any proceedings known or contemplated by government authorities.
ITEM 1A. RISK FACTORS
Management is not aware of any material changes in the risk factors previously
disclosed in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Codorus Valley made no sales or repurchases of equity securities during the
quarter ended June 30, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of shareholders was held on May 16, 2006, at 9:00 am,
Codorus Valley Corporate Center, 105 Leader Heights Road, York, Pennsylvania
17403.
(b), (c) Two directors were re-elected at the May 16, 2006, meeting. Votes were
as follows:
Votes
Term Votes Against or
Re-elected Expires For Withheld*
---------- ------- --------- ---------
Class A:
Rodney L. Krebs 2009 2,488,157 146,245
Dallas L. Smith 2009 2,418,951 139,856
* Includes broker nonvotes
Directors whose term continued after the meeting:
Term Expires
------------
Class B:
M. Carol Druck** 2007
Donald H. Warner 2007
Michael L. Waugh 2007
Class C:
D. Reed Anderson, Esquire 2008
MacGregor S. Jones 2008
Larry J. Miller 2008
** On June 27, 2006, M. Carol Druck resigned as Director of Codorus Valley
Bancorp, Inc. and PeoplesBank due to relocation and retirement. This event
was reported on a Current Report/Form 8-K and filed with the Commission on
June 28, 2006.
ITEM 5. OTHER INFORMATION
Nothing to report.
ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
3(i) Articles of Incorporation (Incorporated by reference to Exhibit 3(i)
to the Registrant's Current Report on Form 8-K, filed with the
Commission on October 14, 2005.)
3(ii) By-laws (Incorporated by reference to Exhibit 3(ii) to the
Registrant's Current Report on Form 8-K, filed with the Commission on
October 14, 2005.)
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4 Rights Agreement dated as of November 4, 2005 (Incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form 8-K,
filed with the Commission on November 8, 2005.)
10.1 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 99 of
Registration Statement No. 333-09277 on Form S-8, filed with the
Commission on July 31, 1996.)
10.2 Employment Agreement between Codorus Valley Bancorp, Inc.,
PeoplesBank, A Codorus Valley Company and Larry J. Miller dated
December 27, 2005. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, filed with the Commission on
January 3, 2006.)
10.3 Change of Control Agreement by and among Codorus Valley Bancorp, Inc.,
PeoplesBank, A Codorus Valley Company and Jann A. Weaver, dated
December 27, 2005. (Incorporated by reference to Exhibit 10.7 to the
Registrant's Current Report on Form 8-K, filed with the Commission on
January 3, 2006.)
10.4 Change of Control Agreement by and among Codorus Valley Bancorp, Inc.,
PeoplesBank, A Codorus Valley Company and Harry R. Swift, dated
December 27, 2005. (Incorporated by reference to Exhibit 10.6 to the
Registrant's Current Report on Form 8-K, filed with the Commission on
January 3, 2006.)
10.5 1998 Independent Directors Stock Option Plan (Incorporated by
reference to Exhibit 4.3 of Registrant Statement No. 333-61851 on Form
S-8, filed with the Commission on August 19, 1998.)
10.6 2000 Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 of
Registration Statement No. 333-40532 on Form S-8, filed with the
Commission on June 30, 2000.)
10.7 2001 Employee Stock Bonus Plan (Incorporated by reference to Exhibit
99.1 of Registration Statement No. 333-68410 on Form S-8, filed with
the Commission on August 27, 2001.)
10.8 Dividend Reinvestment and Stock Purchase Plan (Incorporated by
reference to Exhibit 4(a) Registration Statement no. 33-46171 on
Amendment no. 4 to Form S-3, filed with the Commission on July 23,
2004.)
10.9 Amendment to Salary Continuation Agreement by and among PeoplesBank, A
Codorus Valley Company, a wholly owned subsidiary of Codorus Valley
Bancorp, Inc. and Larry J. Miller dated December 27, 2005.
(Incorporated by reference to Exhibit 10.3 to the Registrant's Current
Report on Form 8-K, filed with the Commission on January 3, 2006.)
10.10 Amendment to Salary Continuation Agreement by and among PeoplesBank, A
Codorus Valley Company, a wholly owned subsidiary of Codorus Valley
Bancorp, Inc. and Harry R. Swift dated December 27, 2005.
(Incorporated by reference to Exhibit 10.4 to the Registrant's Current
Report on Form 8-K, filed with the Commission on January 3, 2006.)
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10.11 Amendment to Salary Continuation Agreement by and among PeoplesBank, A
Codorus Valley Company, a wholly owned subsidiary of Codorus Valley
Bancorp, Inc. and Jann A. Weaver dated December 27, 2005.
(Incorporated by reference to Exhibit 10.5 to the Registrant's Current
Report on Form 8-K, filed with the Commission on January 3, 2006.)
10.12 Form of Group Term Replacement Plan, dated December 1, 1998, as
amended, including Split Dollar Policy Endorsements pertaining to
senior officers of the Corporation's subsidiary, PeoplesBank, A
Codorus Valley Company. (Incorporated by reference to Exhibit 10.12 to
the Registrant's Annual Report on Form 10-K, filed on March 29, 2005.)
10.13 Sample form of Director Group Term Replacement Plan, dated December 1,
1998, including Split Dollar Policy Endorsements pertaining to
non-employee directors of the Corporation's subsidiary, PeoplesBank, A
Codorus Valley Company. (Incorporated by reference to Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K, filed on March 29, 2005.)
10.14 Long Term Nursing Care Agreement between Codorus Valley Bancorp, Inc.,
PeoplesBank, A Codorus Valley Company and Larry J. Miller, dated
December 27, 2005. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K, filed with the Commission on
January 3, 2006.)
10.15 Codorus Valley Bancorp, Inc. Change in Control and Supplemental
Benefit Trust Agreement between Codorus Valley Bancorp, Inc.,
PeoplesBank, A Codorus Valley Company and Hershey Trust Company, dated
January 25, 2006. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, filed with the Commission on
January 27, 2006.)
10.16 Amended and Restated Declaration of Trust of CVB Statutory Trust No.
2, dated June 28, 2006. (Incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K, filed with the Commission
on June 30, 2006.)
10.17 Indenture, dated as of June 28, 2006 between Codorus Valley Bancorp,
Inc., as issuer, and the trustee named therein, relating to the Junior
Subordinated Debt Securities due 2036. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed
with the Commission on June 30, 2006.)
10.18 Guarantee Agreement, dated June 28, 2006, between Codorus Valley
Bancorp, Inc. and the guarantee trustee named therein. (Incorporated
by reference to Exhibit 10.3 to the Registrant's Current Report on
Form 8-K, filed with the Commission on June 30, 2006.)
31a Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31b Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the authorized
undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
August 8, 2006 /s/ Larry J. Miller
Date ----------------------------------------
Larry J. Miller
President & CEO
(Principal executive officer)
August 8, 2006 /s/ Jann A. Weaver
Date ----------------------------------------
Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting
officer)
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