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, 2007
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 (I.R.S. Employer
incorporation or 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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On July 24, 2007, 3,690,062
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 12
Item 3. Quantitative and qualitative disclosures about market risk 23
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 25
Item 3. Defaults upon senior securities 25
Item 4. Submission of matters to a vote of security holders 25
Item 5. Other information 26
Item 6. Exhibits 26
SIGNATURES 27
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
June 30, December 31,
(dollars in thousands, except per share data) 2007 2006
--------------------------------------------- --------- ------------
ASSETS
Interest bearing deposits with banks $ 142 $ 118
Cash and due from banks 11,850 11,104
Federal funds sold 24,089 24,150
-------- --------
Total cash and cash equivalents 36,081 35,372
Securities available-for-sale 79,386 73,423
Securities held-to-maturity (fair value $4,166 for 2007 and
$7,840 for 2006) 3,964 7,503
Loans held for sale 550 1,687
Loans (net of deferred fees of $481 in 2007 and $534 in 2006) 436,608 405,573
Less-allowance for loan losses (3,098) (3,126)
-------- --------
Net loans 433,510 402,447
Premises and equipment, net 10,203 10,495
Other assets 17,992 17,285
-------- --------
Total assets $581,686 $548,212
======== ========
LIABILITIES
Deposits
Noninterest bearing $ 48,512 $ 49,190
Interest bearing 442,626 407,455
-------- --------
Total deposits 491,138 456,645
Long-term debt 30,914 35,029
Junior Subordinated debentures 10,310 10,310
Other liabilities 4,465 3,442
-------- --------
Total liabilities 536,827 505,426
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; 3,684,157 shares issued and
outstanding on 6/30/07 and 3,502,919 on 12/31/06 9,210 8,757
Additional paid-in capital 31,890 28,839
Retained earnings 4,497 5,434
Accumulated other comprehensive loss (738) (244)
-------- --------
Total shareholders' equity 44,859 42,786
-------- --------
Total liabilities and shareholders' equity $581,686 $548,212
======== ========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
(dollars in thousands, except per share data) 2007 2006 2007 2006
--------------------------------------------- ------ ------ ------- -------
INTEREST INCOME
Loans, including fees $8,536 $7,115 $16,443 $14,120
Investment securities
Taxable 662 606 1,363 1,205
Tax-exempt 301 161 588 299
Dividends 33 41 88 70
Federal funds sold 304 24 558 39
Other 2 2 4 4
------ ------ ------- -------
Total interest income 9,838 7,949 19,044 15,737
INTEREST EXPENSE
Deposits 4,210 3,010 8,201 5,504
Federal funds purchased and other
short-term borrowings 0 21 0 133
Long-term debt 538 473 1,128 959
------ ------ ------- -------
Total interest expense 4,748 3,504 9,329 6,596
------ ------ ------- -------
Net interest income 5,090 4,445 9,715 9,141
PROVISION FOR (RECOVERY OF) LOAN LOSSES 35 145 (884) 355
------ ------ ------- -------
Net interest income after
provision for (recorvery of) loan
losses 5,055 4,300 10,599 8,786
NONINTEREST INCOME
Trust and investment services fees 304 315 628 640
Service charges on deposit accounts 483 486 937 920
Mutual fund, annuity and insurance sales 404 391 682 645
Income from bank owned life insurance 67 64 133 127
Other income 117 160 222 279
Gain on sales of mortgages 63 61 157 149
Loss on sales of securities (7) 0 (7) 0
------ ------ ------- -------
Total noninterest income 1,431 1,477 2,752 2,760
NONINTEREST EXPENSE
Personnel 2,568 2,140 5,104 4,279
Occupancy of premises, net 338 348 691 732
Furniture and equipment 345 337 685 744
Postage, stationery and supplies 131 118 240 239
Professional and legal 68 79 130 110
Marketing and advertising 156 145 227 253
Other 694 675 1,679 1,406
------ ------ ------- -------
Total noninterest expense 4,300 3,842 8,756 7,763
------ ------ ------- -------
Income before income taxes 2,186 1,935 4,595 3,783
PROVISION FOR INCOME TAXES 559 512 1,199 999
------ ------ ------- -------
Net income $1,627 $1,423 $ 3,396 $ 2,784
------ ------ ------- -------
Net income per share, basic $ 0.44 $ 0.39 $ 0.92 $ 0.76
Net income per share, diluted $ 0.43 $ 0.38 $ 0.90 $ 0.74
------ ------ ------- -------
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Six months ended
June 30,
-------------------
(dollars in thousands) 2007 2006
------------------------------------------------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,396 $ 2,784
Adjustments to reconcile net income to net cash provided by
operations
Depreciation 572 593
Provision for (recovery of) loan losses (884) 355
Amortization of investment in real estate partnership 252 242
Increase in cash surrender value of life insurance
investment (133) (127)
Originations of held for sale mortgages (10,284) (11,376)
Proceeds from sales of held for sale mortgages 11,578 12,301
Gain on sales of held for sale mortgages (157) (149)
Loss on sales of securities 7 0
Loss on sales of foreclosed real estate 2 0
Stock-based compensation expense 17 25
Increase in accrued interest receivable and other assets (53) (310)
Increase in accrued interest payable and other liabilities 1,023 499
Other, net 5 161
-------- --------
Net cash provided by operating activities 5,341 4,998
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (14,564) (6,692)
Maturities and calls 6,848 6,622
Sales 961 0
Securities, held-to-maturity, calls 3,648 0
Net increase in loans made to customers (30,810) (21,790)
Purchases of premises and equipment (283) (525)
Investment in unconsolidated subsidiary 0 (217)
Purchase of insurance agency assets 0 (63)
Proceeds from sales of premises and equipment 0 55
Proceeds from sales of foreclosed real estate 36 0
-------- --------
Net cash used in investing activities (34,164) (22,610)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 11,349 28,851
Net increase in time deposits 23,144 13,067
Net decrease in short-term borrowings 0 (9,781)
Proceeds from issuance of long-term debt 0 7,217
Repayment of long-term debt (4,115) (787)
Dividends paid (947) (822)
Issuance of common stock 107 0
Cash paid in lieu of fractional shares (6) (6)
-------- --------
Net cash provided by financing activities 29,532 37,739
-------- --------
Net increase in cash and cash equivalents 709 20,127
Cash and cash equivalents at beginning of year 35,372 12,085
-------- --------
Cash and cash equivalents at end of period $ 36,081 $ 32,212
======== ========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
(dollars in thousands, except share data) Stock Capital Earnings Loss Total
----------------------------------------- ------ ---------- -------- ------------- -------
For the six months ended June 30, 2007
Balance, December 31, 2006 $8,757 $28,839 $ 5,434 ($244) $42,786
Comprehensive income:
Net income 3,396 3,396
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (494) (494)
-------
Total comprehensive income 2,902
Cash dividends ($.258 per share, adjusted) (947) (947)
5% stock dividend - 175,148 shares at fair value 438 2,942 (3,386) (6)
Stock-based compensation 17 17
Issuance of common stock -
6,090 shares under stock option plan 15 92 107
------ ------- ------- ----- -------
Balance, June 30, 2007 $9,210 $31,890 $ 4,497 ($738) $44,859
====== ======= ======= ===== =======
For the six months ended June 30, 2006
Balance, December 31, 2005 $7,902 $23,035 $ 8,204 ($412) $38,729
Comprehensive income:
Net income 2,784 2,784
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (515) (515)
-------
Total comprehensive income 2,269
Cash dividends ($.224 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
====== ======= ======= ===== =======
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The interim financial statements 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, 2006.
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus
Valley Company (PeoplesBank), and its wholly owned nonbank subsidiary, SYC
Realty Company, Inc. (collectively referred to as Codorus Valley or the
Corporation). PeoplesBank has 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, 2007 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, 2007. The weighted average number of shares of common stock
outstanding used for basic and diluted calculations are provided below.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(in thousands, except per share data) 2007 2006 2007 2006
------------------------------------- ------ ------ ------ ------
Net income $1,627 $1,423 $3,396 $2,784
------ ------ ------ ------
Weighted average shares outstanding (basic) 3,683 3,659 3,680 3,659
Effect of dilutive stock options 91 84 91 84
------ ------ ------ ------
Weighted average shares outstanding (diluted) 3,774 3,743 3,771 3,743
Basic earnings per share $ .44 $ .39 $ .92 $ .76
Diluted earnings per share $ .43 $ .38 $ .90 $ .74
Comprehensive income
Accounting principles generally accepted in the United States of America require
that recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components
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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) 2007 2006 2007 2006
---------------------- ------- ----- ----- -----
Unrealized holding (losses) gains
arising during the period $(1,047) $(575) $(755) $(780)
Reclassification adjustment for losses
(gains) included in income 7 0 7 0
------- ----- ----- -----
Net unrealized (losses) gains (1,040) (575) (748) (780)
Tax effect 353 195 254 265
------- ----- ----- -----
Net of tax amount $ (687) $(380) $(494) $(515)
------- ----- ----- -----
Reclassification
Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 presentation.
Income Taxes
The Corporation adopted FASB Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" in the first quarter of 2007 and, after evaluation, has
determined that it is immaterial to the consolidated financial statements.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities-Including
an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS
No. 159 is effective for Codorus Valley on January 1, 2008. The Corporation is
evaluating the impact that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
In September 2006, the Financial Accounting Standards Board issued FASB
Statement No. 157, "Fair Value Measurements," which defines fair value,
establishes a framework for measuring fair value under Generally Accepted
Accounting Principles, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. The Corporation is currently
evaluating the potential impact, if any, of the adoption of FASB Statement No.
157 on our consolidated financial position, results of operations and cash
flows.
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF 06-4").
EITF 06-4 requires the recognition of a liability related to the postretirement
benefits covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder) has a
liability for the benefit it is providing to its employee. As such, if the
policyholder has agreed to maintain the insurance policy in
-8-
force for the employee's benefit during his or her retirement, then the
liability recognized during the employee's active service period should be based
on the future cost of insurance to be incurred during the employee's retirement.
Alternatively, if the policy holder has agreed to provide the employee with a
death benefit, then the liability for the future death benefit should be
recognized by following the guidance in SFAS No. 106 or Accounting Principles
Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose
to apply the guidance using either of the following approaches: (a) a change in
accounting principle through retrospective application to all periods presented
or (b) a change in accounting principle through a cumulative-effect adjustment
to the balance in retained earnings at the beginning of the year of adoption.
Implementation is required in fiscal years beginning after December 15, 2007,
with early adoption permitted. The Corporation is evaluating the impact that the
adoption of EITF Issue No. 06-4 will have on its consolidated financial
statements.
NOTE 3--DEPOSITS
The composition of deposits on June 30, 2007 and December 31, 2006, was as
follows:
June 30, December 31,
(Dollars in thousands) 2007 2006
---------------------- -------- ------------
Noninterest bearing demand $ 48,512 $ 49,190
NOW 43,504 43,864
Money market 154,840 144,292
Savings 19,372 17,533
Time CDs less than $100,000 159,138 145,849
Time CDs $100,000 or more 65,772 55,917
-------- --------
Total deposits $491,138 $456,645
======== ========
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NOTE 4--LONG-TERM DEBT
A summary of long-term debt at June 30, 2007 and December 31, 2006 follows:
June 30, December 31,
(Dollars in thousands) 2007 2006
---------------------- -------- ------------
Obligations of PeoplesBank to FHLBP
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 4,373 4,504
Due 2012, 4.25%, amortizing 1,832 1,998
Due 2013, 3.46%, amortizing 3,164 3,403
Due 2014, 6.43%, convertible quarterly after
July 2009 3,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2011, floating rate based on 1 month
LIBOR plus 1.50%, amortizing 0 1,562
------- -------
30,369 34,467
Capital lease obligation 545 562
------- -------
Total long-term debt $30,914 $35,029
------- -------
PeoplesBank's obligations to Federal Home Loan Bank of Pittsburgh (FHLBP) are
fixed rate and fixed/floating (convertible) rate instruments. The FHLBP 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 FHLBP elects to exercise its conversion
option, PeoplesBank may repay the converted loan without a prepayment penalty.
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 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,
2007, based on FDIC capital guidelines.
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MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
--------------- ---------------- ----------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------- ------- ----- ------- ----- ------- -----
CODORUS VALLEY BANCORP, INC. (CONSOLIDATED)
AT JUNE 30, 2007
Capital ratios:
Tier 1 risk based $55,174 11.77% $18,747 4.0% n/a n/a
Total risk based 58,272 12.43 37,494 8.0 n/a n/a
Leverage 55,174 9.58 23,057 4.0 n/a n/a
AT DECEMBER 31, 2006
Capital ratios:
Tier 1 risk based $52,587 11.99% $17,538 4.0% n/a n/a
Total risk based 55,713 12.71 35,076 8.0 n/a n/a
Leverage 52,587 9.83 21,401 4.0 n/a n/a
PEOPLESBANK, A CODORUS VALLEY COMPANY
AT JUNE 30, 2007
Capital ratios:
Tier 1 risk based $50,919 10.96% $18,587 4.0% $27,881 6.0%
Total risk based 54,017 11.62 37,174 8.0 46,468 10.0
Leverage 50,919 8.91 22,884 4.0 28,605 5.0
AT DECEMBER 31, 2006
Capital ratios:
Tier 1 risk based $48,130 11.12% $17,316 4.0% $25,973 6.0%
Total risk based 51,256 11.84 34,631 8.0 43,289 10.0
Leverage 48,130 9.09 21,168 4.0 26,460 5.0
* To be well capitalized under prompt corrective action provisions.
NOTE 6--STOCK-BASED COMPENSATION
During the quarter ended June 30, 2007, shareholders approved and the
Corporation adopted the 2007 Long Term Incentive Plan and the 2007 Employee
Stock Purchase Plan, with 175,000 shares reserved for future issuance under each
plan.
No stock options were granted during the first six months of 2007. A summary of
stock options 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, 2007 284,205 $12.70 4.0 years $1,884
Exercised (12,300) 12.66
-------- ------ --------- ------
Outstanding at June 30, 2007 271,905 $12.71 3.5 years $1,662
======== ====== ========= ======
Exerciseable at June 30, 2007 251,700 $12.43 3.2 years $1,607
======== ====== ========= ======
Intrinsic value represents the amount by which the market price of the stock on
the measurement date exceeded the exercise price of the option. The intrinsic
value of options exercised during the first six months of 2007 was $78,000, cash
received from such exercises was $156,000 and the tax benefit recognized was
$26,000. There were no options exercises during the first six months of 2006.
-11-
As of June 30, 2007, total unrecognized compensation cost related to nonvested
options was $60,000. The cost is expected to be recognized over a weighted
average period of 1.4 years.
NOTE 7--CONTINGENT LIABILITIES
Management was not aware of any material contingent liabilities on June 30,
2007.
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
that involved in extending loan facilities to customers. The Corporation
generally holds collateral and/or personal guarantees supporting these
commitments. The Corporation had $3,403,000 of standby letters of credit
outstanding on June 30, 2007, compared to $6,121,000 on December 31, 2006.
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 letters of
credit. The current amount of the liability as of June 30, 2007 and December 31,
2006, under standby letters of credit issued, is not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of the significant changes in the results
of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for Codorus Valley Bancorp, Inc. (Codorus
Valley or the Corporation), a bank holding company, and its wholly owned
subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided
below. Codorus Valley's consolidated financial condition and results of
operations consist almost entirely of PeoplesBank's financial condition and
results of operations. Current performance does not guarantee, and may not be
indicative of, similar performance in the future.
FORWARD-LOOKING STATEMENTS:
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the Corporation and its subsidiaries. When words
such as "believes," "expects," "anticipates" or similar expressions occur in the
Form 10-Q, management is making forward-looking statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that are incorporated by reference, could
affect the future financial results of the Corporation and its subsidiaries,
both individually and collectively, and could cause those results to differ
materially from those expressed in the forward-looking statements contained or
incorporated by reference in this Form 10-Q. These factors include:
- operating, legal and regulatory risks;
- changes in market interest rates;
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- 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 2006 Annual Report on
Form 10-K for the period ended December 31, 2006. Some of these policies require
management to make significant judgments, estimates and assumptions that have a
material impact on the carrying value of certain assets and liabilities.
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, and present value of future cash flows and other relevant factors.
Estimates related to the value of collateral also have a 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. Additional information is contained in Management's
Discussion and Analysis regarding critical accounting estimates, including the
provision and allowance for loan losses, located on pages 14 and 22 of this Form
10-Q.
The Corporation changed its method of accounting for stock-based compensation in
2006, in accordance with Financial Accounting Standard No. 123(R). Based on
stock options outstanding on June 30, 2007, approximately $60,000 will be
expensed over the weighted average period of 1.4 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, 2007, COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
FINANCIAL HIGHLIGHTS
The Corporation earned $1,627,000 or $.44 per share ($.43 diluted), for the
three-month period ended June 30, 2007, compared to $1,423,000 or $.39 per share
($.38 diluted), for the same period of 2006. The $204,000 or 14 percent increase
in net income for the current quarter was primarily the result of an increase in
net interest income. Net interest income increased 15 percent as a result of an
increase in the volume of interest earning assets, principally business loans,
overnight investments and investment securities. The increase in the volume of
interest earning assets more than offset a decrease in net interest margin,
which was 3.91 percent for the current quarter, compared to 4.01 percent for the
second quarter of 2006. The margin declined due to an increase in deposit costs,
resulting from an increase in deposit volume and rate. The margin was also
adversely affected by the flat US treasury yield curve
-13-
environment. The $110,000 decrease in the provision for loan losses for the
current quarter, due to adequacy of the allowance, also contributed to the
improvement in earnings. Noninterest income for the current quarter decreased 3
percent compared to the second quarter of 2006. The prior period included a
non-recurring $45,000 gain from the sale of real estate. Noninterest expense for
the current quarter increased 12 percent above the second quarter of 2006 due
largely to an increase in personnel expense, which included performance
incentives and staff additions associated with normal business growth.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income for the three-month period ended June 30, 2007, was
$5,090,000, an increase of $645,000 or 15 percent above the same period in 2006.
The increase was due primarily to an increase in the volume of interest earning
assets (particularly loans), which more than offset a decrease in net interest
margin. Interest earning assets averaged $538 million for the current quarter,
representing an $82 million or 18 percent increase above the second quarter of
2006. The increase in interest earning assets occurred primarily in business
loans, overnight investments and investment securities. The net interest margin
was 3.91 percent for the second quarter of 2007, compared to 4.01 percent for
the same quarter in 2006. The decline in the net interest margin was primarily
the result of an increase in interest expense due to a larger volume of interest
bearing deposits and higher interest rates, due to the lingering presence of the
flat US treasury yield curve environment and competitive pricing pressures.
PROVISION FOR LOAN LOSSES
A $35,000 provision expense for loan losses was recorded for the second quarter
of 2007, compared to $145,000 for the same quarter in 2006. The current quarter
provision reflects management's judgment of an appropriate level for the
allowance for loan losses at June 30, 2007.
NONINTEREST INCOME
The following table presents the components of total noninterest income for the
second quarter of 2007, compared to the second quarter of 2006. The $46,000 or 3
percent decrease was primarily attributable to a decrease in other income. Other
income for 2006 included a nonrecurring gain of $45,000 from the sale of two
small parcels of land to a local township for a road throughway.
-14-
TABLE 1 - NONINTEREST INCOME
Three months ended Change
June 30, Increase (Decrease)
------------------ -------------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- ---
Trust and investment services fees $ 304 $ 315 $(11) (3)%
Service charges on deposit accounts 483 486 (3) (1)
Mutual fund, annuity and insurance sales 404 391 13 3
Income from bank owned life insurance 67 64 3 5
Other income 117 160 (43) (27)
Gain on sales of mortgages 63 61 2 3
Loss on sales of securities (7) 0 (7) 0.0
------ ------ ---- ---
Total noninterest income $1,431 $1,477 $(46) (3)%
====== ====== ==== ===
NONINTEREST EXPENSE
The following table presents the components of total noninterest expense for the
second quarter of 2007, compared to the second quarter of 2006. The $458,000 or
12 percent increase was primarily attributable to an increase in personnel
expense. For the second quarter of 2007, personnel expense, comprised of wages,
payroll taxes and employee benefits, increased $428,000 or 20 percent due
largely to performance incentives and staff additions associated with normal
business growth. Other expense for the current quarter included a net recovery
of problem loan carrying costs of approximately $79,000 from a nonperforming
business loan. The increase in other expense, as adjusted, was the result of
normal business growth.
TABLE 2 - NONINTEREST EXPENSE
Three months ended Change
June 30, Increase (Decrease)
------------------ -------------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- ---
Personnel $2,568 $2,140 $428 20%
Occupancy of premises, net 338 348 (10) (3)
Furniture and equipment 345 337 8 2
Postage, stationery and supplies 131 118 13 11
Professional and legal 68 79 (11) (14)
Marketing and advertising 156 145 11 8
Other 694 675 19 3
------ ------ ---- ---
Total noninterest expense $4,300 $3,842 $458 12%
====== ====== ==== ===
INCOME TAXES
The provision for income tax was $559,000 for the second quarter of 2007,
compared to $512,000 for the same period in 2006. The $47,000 or 9 percent
increase in the tax provision was the result of a 13 percent increase in pretax
income. Codorus Valley's effective federal income tax and marginal tax rates
were 25 percent and 34 percent, respectively, for quarters ended June 30, 2007,
and 2006. The effective
-15-
tax rate reflects the impact of low income housing credits and tax-exempt
interest income, including income from bank owned life insurance.
SIX MONTHS ENDED JUNE 30, 2007, COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
FINANCIAL HIGHLIGHTS
The Corporation earned $3,396,000 or $.92 per share ($.90 diluted) for the
six-month period ended June 30, 2007, compared to $2,784,000 or $.76 per share
($.74 diluted), for the same period of 2006. The $612,000 or 22 percent increase
in net income was primarily the result of an $839,000 pre-tax ($554,000
after-tax) first quarter 2007 recovery of loan losses that were incurred by
PeoplesBank during 2002-2003. Due to the adequacy of the allowance for loan
losses, the full amount of the recovery was recorded as a reduction to the loan
loss provision. In spite of a decrease in net interest margin (3.84% vs. 4.17%)
attributable to a flat US treasury yield curve environment and competitive
pricing pressures, the Corporation increased net interest income by 6 percent
due largely to an increase in interest earning assets. The positive effect on
net income for 2007 from the reduction in loan loss provision and increase in
interest earning assets more than offset an increase in noninterest expense.
Noninterest expense increased 13 percent for the first six months of 2007 due
primarily to increased personnel costs, caused by the timing of performance
incentives and staff additions associated with normal business growth, and the
recognition of a $185,000 ($122,000 after-tax) prepayment penalty on the early
pay-down of a $2 million Federal Home Loan Bank advance. The Corporation paid
down the advance, which had an above market rate, to reduce interest expense in
future periods.
Total assets were approximately $582 million on June 30, 2007, an increase of
$65 million or 13 percent above June 30, 2006. Asset growth occurred primarily
in business loans and investment securities, which were funded by strong deposit
growth, primarily money market deposits and CDs.
Net income as a percentage of average shareholders' equity (ROE) was 15.28
percent for the first six months (annualized) of 2007, compared to 13.98 percent
for the same period of 2006. Net income as a percentage of average total assets
(ROA) was 1.20 percent for the first six months (annualized) of 2007, compared
to 1.14 percent for the same period of 2006. The efficiency ratio was 67.8
percent for the first six months of 2007, compared to 63.8 percent for the same
period of 2006.
On June 30, 2007, nonperforming assets as a percentage of total loans and net
foreclosed real estate were 1.72 percent, compared to 1.44 percent for June 30,
2006. Information regarding nonperforming assets is provided in the Risk
Management section of this report, including Table 5--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, 2007. An analysis of the allowance is
provided in Table 6--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, 2007.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
-16-
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income for the six-month period ended June 30, 2007, was
$9,715,000, an increase of $574,000 or 6 percent above the same period in 2006.
The increase was due primarily to an increase in the volume of interest earning
assets, which more than offset a decrease in net interest margin. Earning assets
averaged $527 million and yielded 7.41 percent (tax equivalent basis) for the
first six months of 2007, compared to $451 million and 7.12 percent,
respectively, for the same period in 2006. The $76 million or 17 percent
increase in average earning assets occurred primarily in business loans,
overnight investments and investment securities. Net interest margin was 3.84
percent for the first six months of 2007(annualized), compared to 4.17 percent
for the same period in 2006. The decrease in margin was primarily the result of
an increase in interest expense related to a larger volume of interest bearing
liabilities and higher rates. Interest bearing liabilities averaged $473 million
at an average rate of 3.98 percent for the first six months of 2007, compared to
$400 million and 3.33 percent, respectively, for the same period in 2006.
Current period deposit rates were higher than the prior period and reflected the
lingering presence of the flat (or slightly inverted) US treasury yield curve
environment and customer preference for deposit products with competitive rates,
principally high-yielding money markets and CDs. In the period ahead, management
expects that increases in net interest income will remain challenging for the
Corporation and the financial services industry as a result of competitive
pricing pressures, particularly if the flat US treasury yield curve environment
persists.
PROVISION FOR LOAN LOSSES
As a result of a large loan loss recovery during the current period and adequacy
of the allowance on June 30, 2007, the Corporation recorded an $884,000 credit
to the provision for loan losses, compared to a $355,000 provision expense for
the same period in 2006. In February 2007, PeoplesBank recovered approximately
$839,000, representing its portion of a $12 million restitution fund created in
settlement of a claim by the United States Department of Justice against the
Bank of New York. The funds materially reimbursed PeoplesBank for loan losses
that were incurred in 2002 and 2003 that pertained to a group of related
equipment leasing contracts that PeoplesBank acquired from a third-party broker
who designated Bank of New York as escrow agent for payments under these
contracts.
NONINTEREST INCOME
The following table presents the components of total noninterest income for the
first six months of 2007, compared to the first half of 2006. Overall,
noninterest income was stable. Other income for 2006 included a nonrecurring
gain of $45,000 from the sale of two small parcels of land to the local township
for a road throughway.
-17-
TABLE 3 - NONINTEREST INCOME
Six Change
months ended Increase
June 30, (Decrease)
--------------- ------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- -----
Trust and investment services fees $ 628 $ 640 $(12) (2)%
Service charges on deposit accounts 937 920 17 2
Mutual fund, annuity and insurance sales 682 645 37 6
Income from bank owned life insurance 133 127 6 5
Other income 222 279 (57) (20)
Gain on sales of mortgages 157 149 8 5
Loss on sales of securities (7) 0 (7) 0.0
------ ------ ---- ---
Total noninterest income $2,752 $2,760 $ (8) (0)%
====== ====== ==== ===
NONINTEREST EXPENSE
The following table presents the components of total noninterest expense for the
first six months of 2007, compared to the first half of 2006.
TABLE 4 - NONINTEREST EXPENSE
Six Change
months ended Increase
June 30, (Decrease)
--------------- ----------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- ---
Personnel $5,104 $4,279 $825 19%
Occupancy of premises, net 691 732 (41) (6)
Furniture and equipment 685 744 (59) (8)
Postage, stationery and supplies 240 239 1 0
Professional and legal 130 110 20 18
Marketing and advertising 227 253 (26) (10)
Other 1,679 1,406 273 19
------ ------ ---- ---
Total noninterest expense $8,756 $7,763 $993 13%
====== ====== ==== ===
The discussion that follows addresses changes in selected categories of
noninterest expense.
Personnel--For the first six months of 2007, personnel expense, comprised of
wages, payroll taxes and employee benefits, increased $825,000 or 19 percent
above 2006 levels due to performance incentives and staff additions associated
with normal business growth.
Professional and legal--For the first six months of 2007, professional and legal
expense increased $20,000 or 18 percent above 2006. The first quarter of 2006
included a $35,000 reimbursement of legal expenses to PeoplesBank, which
resulted from the settlement of a lawsuit from routine bank business. There was
no comparable reimbursement for 2007.
In the period ahead, management anticipates an increase in professional fees
such as CPA fees and consulting fees to comply with Section 404 of the
Sarbanes-Oxley Act. Based on current compliance requirements for the
Corporation, the CEO and CFO must certify as to the adequacy of controls over
-18-
financial reporting on December 31, 2007, and thereafter. Effective December 31,
2008, and thereafter, the Corporation's public accounting firm is required to
audit and opine on the Corporation's controls over financial reporting.
Marketing and advertising--For the first six months of 2007, marketing and
advertising expense decreased $26,000 or 10% below last year due to timing.
Other--For the first six months of 2007, other expense increased $273,000 or 19
percent due primarily to the recognition of a $185,000 prepayment penalty on the
early pay-down of a $2 million Federal Home Loan Bank advance. The Corporation
paid down the advance, which had an above market interest rate, to reduce
interest expense in future periods. There was no comparable prepayment penalty
in the prior year.
Effective January 1, 2007, the Federal Deposit Insurance Corporation (FDIC)
created a new risk framework of four risk categories and established assessment
rates to coincide with each category. Assessment rates for Risk Category I
institutions, which includes PeoplesBank, range from 5 to 7 basis points. The
FDIC also approved a one-time assessment credit for banks in existence on
December 31, 1996, that paid a deposit insurance assessment prior to that date.
Management believes that the one-time credit will more than offset the new FDIC
assessment cost for 2007. It anticipates that the credit will be depleted in the
first quarter of 2008. Accordingly, PeoplesBank will begin to recognize the FDIC
assessment cost at that time.
INCOME TAXES
The provision for income tax was $1,199,000 for the current six-month period,
compared to $999,000 for the same period in 2006. The $200,000 or 20 percent
increase in the tax provision was the result of a 21 percent increase in pretax
income. Codorus Valley's effective federal income tax rates were 25 percent and
26 percent, respectively, for the six-month periods ended June 30, 2007, and
2006. The marginal tax rate was 34 percent for both periods.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
On June 30, 2007, the securities available-for-sale portfolio was approximately
$79 million, compared to $73 million for year-end 2006. The increase occurred
primarily from the purchase of high quality US agency mortgage-backed bonds and
tax-exempt municipal bonds.
On June 30, 2007, the securities held-to-maturity portfolio recorded at
amortized cost, was approximately $4 million, compared to approximately $8
million for year-end 2006. The decrease in the portfolio was the result of five
bonds being called by issuers exercising their call options. The
held-to-maturity portfolio for both periods consisted of fixed rate, junior
subordinated debt instruments issued by commercial bank holding companies. These
investments are callable in 2007 and thereafter, and mature in years 2026-2028.
In the period ahead, it is probable that more of these high yielding investments
will be called by issuers based on the current level of market interest rates.
If such calls occur, the calls will be at a premium; however, reinvestment
yields are expected to be much lower.
-19-
LOANS
On June 30, 2007, total loans were $437 million, an increase of $31 million or 8
percent above year-end 2006. The increase was primarily attributable to an
increase in business loans. The average yield (tax-equivalent basis) earned on
total loans was 7.88 percent for the first six months of 2007, compared to 7.54
percent for the same period of 2006.
DEPOSITS
On June 30, 2007, total deposits were approximately $491 million, an increase of
$34 million or 8 percent above year-end 2006. 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. The flat or slightly inverted US treasury yield curve environment
(deposits rates are priced off of the short end of the curve), customer
preference for higher rate deposit products and competitive pricing pressures
are factors that increased deposit interest rates. The average rate paid on
interest-bearing deposits was 3.85 percent for the first six months of 2007,
compared to 3.13 percent for the same period of 2006.
LONG-TERM DEBT
On June 30, 2007, long-term debt was approximately $31 million, compared to $35
million outstanding at year-end 2006. During the second quarter of 2007, Codorus
Valley paid in full a $1.5 million mortgage on the corporate center office
building without prepayment penalty. In March 2007, PeoplesBank paid down $2
million on a $5 million Federal Home Loan Bank advance, and incurred a $185,000
prepayment penalty included in other noninterest expense. The reduction in
long-term debt was made with excess liquidity and is expected to lower interest
expense in future periods. A listing of outstanding long-term debt obligations
is provided in Note 4--Long-term Debt.
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 $45 million on June 30, 2007, an increase of $2 million, or
approximately 5 percent above December 31, 2006. The increase was caused
primarily by retained earnings from profitable operations.
On July 10, 2007, the Board of Directors declared a quarterly cash dividend of
$.135 per common share payable on or before August 14, 2007, to shareholders of
record July 24, 2007. This dividend followed $.135 per share (or $.129 as
adjusted for the stock dividend) cash dividends paid in May and February. The
Board also distributed a 5 percent stock dividend in June, which resulted in the
issuance of 175,148 common shares.
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, 2007, based on FDIC capital
guidelines.
-20-
RISK MANAGEMENT
NONPERFORMING ASSETS
Table 5--Nonperforming Assets, provides a summary of nonperforming assets and
related ratios. The paragraphs below provide information for selected categories
for June 30, 2007, compared to December 31, 2006.
TABLE 5-NONPERFORMING ASSETS
June 30, December 31,
(dollars in thousands) 2007 2006
---------------------- -------- ------------
Nonaccrual loans $6,634 $4,368
Accruing loans that are contractually past due
90 days or more as to principal or interest 350 4
Foreclosed real estate, net of allowance 535 38
------ ------
Total nonperforming assets $7,519 $4,410
====== ======
Ratios:
Nonaccrual loans as a % of total period-end loans 1.52% 1.08%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 1.72% 1.09%
Nonperforming assets as a % of total period-end
shareholders' equity 16.76% 10.31%
Allowance for loan losses as a multiple of
nonaccrual loans .5x .7x
On June 30, 2007, 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, 2007, the nonaccrual loans
portfolio balance totaled $6,634,000 and was comprised of 12 unrelated accounts
ranging in size from $4,000 to $3,582,000. The largest account, totaling
$3,582,000, involves a public-private construction project that management is
closely monitoring to determine if unexpected public funding issues can be
resolved. Management is also in the process of obtaining appraisals for the real
estate collateral that supports this loan. The underlying real estate collateral
for the second largest account, totaling $2,624,000, has been sold at public
auction, and management is awaiting court approval for the distribution of the
proceeds, which should provide full recovery of all unpaid principal, interest
and fees.
On June 30, 2007, foreclosed real estate, net of allowance, totaled $535,000,
compared to $38,000 on December 31, 2006. The current portfolio contains two
unrelated properties. One property, with a carrying value of approximately
$132,000, is under contract of sale. Settlement is scheduled for September 2007,
and management anticipates full recovery of the carrying value. The remaining
property has a carrying value of approximately $403,000. Management is presently
evaluating its liquidation options and the value of collateral.
-21-
On June 30, 2007, loans contractually past due 90 days or more as to principal
or interest totaled $350,000, representing one account. The real estate
supporting this loan is under contract of sale with settlement scheduled for
August 1, 2007. Management anticipates full recovery of all unpaid principal,
interest and fees.
ALLOWANCE FOR LOAN LOSSES
Table 6--Analysis of Allowance for Loan Losses, shows the allowance was
$3,098,000 or .71 percent of total loans on June 30, 2007, compared to
$2,925,000 or .75 percent of total loans on June 30, 2006. The current period
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 the heightened level of energy costs and interest rates, and a slow down
in the real estate market. The large recovery of prior period commercial loan
losses was discussed in the provision for loan loss section of this report.
Based on a recent evaluation of probable loan losses in the current portfolio,
management believes that the allowance is adequate to support losses inherent in
the loan portfolio on June 30, 2007.
TABLE 6-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2007 2006
---------------------- ------- -------
Balance-January 1, $3,126 $2,538
Provision charged (credited) to operating expense (884) 355
Loans charged off:
Commercial 7 10
Real estate-mortgage 0 0
Consumer 21 20
------ ------
Total loans charged off 28 30
Recoveries:
Commercial 865 34
Real estate-mortgage 1 2
Consumer 18 26
------ ------
Total recoveries 884 62
------ ------
Net recoveries (856) (32)
------ ------
Balance-June 30, $3,098 $2,925
------ ------
Ratios:
Net recoveries (annualized) to average total loans (0.41)% (0.02)%
Allowance for loan losses to total loans at
period-end 0.71% 0.75%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 44.4% 52.2%
LIQUIDITY
At June 30, 2007, management believes that liquidity was more than adequate
based on the level of overnight investment, the potential liquidation of a $79
million portfolio of available-for-sale securities, valued at June 30, 2007, and
available credit from the Federal Home Loan Bank of Pittsburgh (FHLBP).
Available funding from the FHLBP was approximately $94 million based on the
latest available
-22-
information from the FHLBP. The Consolidated Statements of Cash Flows, included
in this report, present the changes in cash from operating, investing and
financing activities. Codorus Valley's loan-to-deposit ratio, which is used as a
broad measure of liquidity, was approximately 88.9 percent on June 30, 2007,
compared to 88.8 percent on December 31, 2006.
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 under existing loan facilities, and letters of credit made
under the same standards as on-balance sheet instruments. Unused commitments on
June 30, 2007, totaled $128,102,000 and consisted of $95,305,000 in unfunded
commitments under existing loan facilities, $29,394,000 to grant new loans and
$3,403,000 in letters of credit. Due to fixed maturity dates and specified
conditions within these instruments, many commitments 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, 2007, 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 2006. 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 financial simulations on its balance sheet for June 30,
2007 and December 31, 2006 to determine its sensitivity to market interest rate
risk. The results of the point-in-time analyses are shown in Table 7--Interest
Rate Sensitivity. For both periods the asset-liability management model
portrayed a balance sheet that was liability sensitive. Liability sensitivity
means that deposits and corporate debt are likely to re-price to a greater and
faster degree than the loans and investments that they fund. This
asset-liability position suggests that net income may increase if market
interest rates decrease significantly. Conversely, net income would be expected
to decrease if short-term market interest rates increase significantly. Under
the flat and low rate scenarios 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,
2006.
-23-
TABLE 7-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, 2007
Most likely 0 (211) (3.2)
High +200 (284) (4.4)
Flat (baseline) 0 0 0.0
Low -200 72 1.1
AT DECEMBER 31, 2006
Most likely -75 (91) (1.5)
High +200 (300) (5.0)
Flat (baseline) 0 0 0.0
Low -200 78 1.3
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, 2007, 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 significant changes in its internal controls or in other
factors that could significantly affect these controls in the quarter ended June
30, 2007, as evaluated by the chief executive and chief financial officers.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no known 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, 2006.
-24-
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, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of shareholders was held on May 15, 2007, at 9:00 am,
Codorus Valley Corporate Center, 105 Leader Heights Road, York, Pennsylvania
17403.
(b), (c) Three directors were re-elected at the May 15, 2007, meeting. Votes
were as follows:
Votes
Term Votes Against or
Re-elected Expires For Withheld*
---------- ------- --------- ----------
Class B:
William H. Simpson 2010 2,828,839 131,163
Donald H. Warner 2010 2,825,313 134,689
Michael L. Waugh 2010 2,787,707 172,295
* Includes broker non-votes
Directors whose term continued after the meeting:
Term Expires
------------
Class C:
D. Reed Anderson, Esquire 2008
MacGregor S. Jones 2008
Larry J. Miller 2008
Class A:
Rodney L. Krebs 2009
Dallas L. Smith 2009
(c) Proposal to approve and adopt the 2007 Codorus Valley Bancorp, Inc. Employee
Stock Purchase Plan
Votes were as follows:
Votes For Votes Against Abstentions Broker Non-Vote
--------- ------------- ----------- ---------------
2,430,012 103,180 91,686 335,124
(c) Proposal to approve and adopt the 2007 Codorus Valley Bancorp Inc. Long-Term
Incentive Plan
Votes were as follows:
Votes For Votes Against Abstentions Broker Non-Vote
--------- ------------- ----------- ---------------
2,392,071 183,772 49,035 335,124
-25-
ITEM 5. OTHER INFORMATION
Nothing to report.
ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3(i) Amended 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) Amended By-laws (Incorporated by reference to Exhibit 3(ii) to the
Registrant's Current Report on Form 8-K, filed with the Commission on
May 10, 2007.)
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 2007 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit A to Codorus Valley Bancorp's proxy statement, filed with the
Commission on April 10, 2007)
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the authorized
undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
August 9, 2007 /s/ Larry J. Miller
Date ----------------------------------------
Larry J. Miller
President & CEO
(Principal executive officer)
August 9, 2007 /s/ Jann A. Weaver
Date ----------------------------------------
Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting
officer)
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