Codorus Valley Bancorp, Inc. Form 10-K for fiscal year ended December 31, 2007

Table of Contents

 
 


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K


 

(Mark One)

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

For the fiscal year ended December 31, 2007

or

o 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)


 

 

 

Registrant’s telephone number, including area code: (717) 747-1519

 

 

 

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


 

 

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $2.50 par value

 

NASDAQ Stock Market LLC

 

 

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
o Yes  x No

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. x Yes  o No

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer o

Accelerated filer o

 

Non-accelerated filer o

Smaller Reporting Company x

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

The aggregate market value of Codorus Valley Bancorp, Inc.’s voting stock held by non-affiliates was approximately $63,775,357 as of June 30, 2007.

As of February 26, 2008, Codorus Valley Bancorp, Inc. had 3,742,209 shares of common stock outstanding, par value $2.50 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference to the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2008

1


 
 



Codorus Valley Bancorp, Inc.
Form 10-K Index

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

 

 

 

 

Part I

 

Item

 

 

 

 

1.

 

Business

3

 

1A.

 

Risk Factors

7

 

1B.

 

Unresolved Staff Comments

8

 

2.

 

Properties

8

 

3.

 

Legal proceedings

10

 

4.

 

Submission of matters to a vote of security holders

10

 

 

 

 

 

 

 

 

Part II

 

Item

 

 

 

 

5.

 

Market for Codorus Valley Bancorp, Inc.’s common equity, related shareholder matters and issuer purchase of equity securities

11

 

6.

 

Selected financial data

14

 

7.

 

Management’s discussion and analysis of financial condition and results of operations

15

 

7A.

 

Quantitative and qualitative disclosures about market risk

35

 

8.

 

Financial statements and supplementary data

39

 

9.

 

Changes in and disagreements with accountants on accounting and financial disclosure

68

 

9A(T).

 

Controls and procedures

68

 

9B.

 

Other information

68

 

 

 

 

 

 

 

 

Part III

 

Item

 

 

 

 

10.

 

Directors, executive officers and corporate governance of Codorus Valley Bancorp, Inc.

69

 

11.

 

Executive compensation

69

 

12.

 

Security ownership of certain beneficial owners and management and related shareholder matters

69

 

13.

 

Certain relationships and related transactions, and director independence

69

 

14.

 

Principal accountant fees and services

69

 

 

 

 

 

 

 

 

Part IV

 

Item

 

 

 

 

15.

 

Exhibits and financial statement schedules

70

 

 

 

 

 

 

 

 

Signatures

73

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PART I

Item 1: Business

Codorus Valley Bancorp, Inc. (Codorus Valley or Corporation) is a Pennsylvania business corporation, incorporated on October 7, 1986. On March 2, 1987, Codorus Valley became a bank holding company, under the Bank Holding Company Act of 1956. PeoplesBank, A Codorus Valley Company (PeoplesBank) is its wholly owned bank subsidiary. SYC Realty Co., Inc. is its wholly owned nonbank subsidiary. Codorus Valley’s business consists primarily of managing PeoplesBank, and its principal source of income is dividends received from PeoplesBank. On December 31, 2007, Codorus Valley had total consolidated assets of $595 million, total deposits and other liabilities of $546 million, and total shareholders’ equity of $49 million.

Bank subsidiary

PeoplesBank, organized in 1934, is a Pennsylvania chartered bank. It is not a member of the Federal Reserve System. PeoplesBank offers a full range of business and consumer banking services through fourteen financial centers located throughout York County, Pennsylvania. It also offers investment, insurance, trust and real estate settlement services. PeoplesBank also operated a loan production office in Towson, Maryland, which it closed in late 2007 due to the opening of the Hunt Valley Office in January 2008. The Hunt Valley Office, the Corporation’s fifteenth financial center, is located in the Executive Plaza complex, Hunt Valley, Maryland. The Federal Deposit Insurance Corporation insures the deposits of PeoplesBank to the maximum extent provided by law. On December 31, 2007, PeoplesBank had total loans of $447 million and total deposits of $513 million. PeoplesBank’s market share of deposits for York County, PA was approximately 8.3 percent as of June 30, 2007, the latest available date.

PeoplesBank is not dependent on deposits or exposed to a loan concentration to a single customer, or a small group of customers. Therefore, the loss of a single customer, or a small customer group, would not have a material adverse effect on the financial condition of PeoplesBank. At year-end 2007, the largest indebtedness of a single PeoplesBank client was $6,962,000, or 1.6 percent of the total loan portfolio, which was within the regulatory lending limit.

Most of the Corporation’s business is with customers in York County, Pennsylvania and northern Maryland. Although this limited market area may pose a concentration risk geographically, we believe that the diverse local economy and detailed knowledge of the customer base minimizes this risk. At year-end 2007, the Corporation had two industry concentrations that exceeded 10 percent of the total loan portfolio, real estate construction and land development was 18.8 percent and commercial real estate leasing was 11.5 percent. Commercial leasing involves borrowers who lease real estate to commercial tenants. Loans to borrowers within these industries are usually collateralized with real estate. Comparatively, at year-end 2006, only one industry concentration exceeded 10 percent of the total loan portfolio, real estate construction and land development, which was 22.5 percent of the portfolio.

Codorus Valley Financial Advisors, Inc. is a wholly owned subsidiary of PeoplesBank that sells non-deposit investment products. This subsidiary began operations in January 2000 and, prior to a name change in December 2005, operated under the name SYC Insurance Services, Inc. Products sold by Codorus Valley Financial Advisors, Inc. are not FDIC insured, are not obligations of or guaranteed by PeoplesBank and are subject to investment risk including the possible loss of principal.

SYC Settlement Services, Inc. is a wholly owned subsidiary of PeoplesBank that provides real estate settlement services. SYC Settlement began operations in January 1999.

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Historically, Codorus Valley Financial Advisors, Inc. and SYC Settlement Services, Inc. have not had a material impact on consolidated operating results.

Nonbank subsidiaries

In June 2006, Codorus Valley formed CVB Statutory Trust No. 2, a wholly-owned special purpose subsidiary whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7,217,000. In November 2004, Codorus Valley formed CVB Statutory Trust No. 1 to facilitate a pooled trust preferred debt issuance of $3,093,000.

On June 20, 1991, SYC Realty was incorporated as a wholly owned subsidiary of Codorus Valley. Codorus Valley created this nonbank subsidiary primarily for the purpose of disposing of selected properties obtained by PeoplesBank in satisfaction of debts previously contracted. SYC Realty commenced business operations in October 1995. To date, the financial impact of this subsidiary’s operations on Codorus Valley and PeoplesBank has not been material.

Employees

At year-end 2007, PeoplesBank employed 159 full-time employees and 45 part-time employees, which equated to 179 full-time equivalents. Employees are not covered by a collective bargaining agreement and management considers its relations with employees to be satisfactory.

Segment Reporting

Management has determined that it operates in only one segment, community banking. The Corporation’s non-banking activities are insignificant to the consolidated financial statements.

Competition

The banking industry in PeoplesBank’s service area, principally York County, Pennsylvania, and northern Maryland, specifically, Baltimore, Harford and Carroll counties, is extremely competitive. PeoplesBank competes through service, price and by leveraging its hometown image. It competes with commercial banks and other financial service providers such as thrifts, credit unions, consumer finance companies, investment firms and mortgage companies. Some financial service providers operating in PeoplesBank’s service area operate on a national and regional scale and possess resources that are greater than PeoplesBank’s.

Supervision and regulation

Codorus Valley is registered as a bank holding company, and is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve), under the Bank Holding Company Act of 1956, as amended. The Bank Holding Company Act requires bank holding companies to file periodic reports with, and is subject to examination by, the Federal Reserve. The Federal Reserve has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve may require Codorus Valley to use its resources to provide adequate capital funds to PeoplesBank during periods of financial stress or adversity.

The Bank Holding Company Act prohibits Codorus Valley from acquiring direct or indirect control of more than 5 percent of the outstanding voting stock of any bank, or substantially all of the assets of any bank, or merging with another bank holding company, without the prior approval of the Federal

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Reserve. The Pennsylvania Department of Banking must also approve certain similar transactions. Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks.

The Bank Holding Company Act restricts Codorus Valley to activities that the Federal Reserve has found to be closely related to banking, and which are expected to produce benefits for the public that will outweigh any potentially adverse effects. Therefore, the Bank Holding Company Act prohibits Codorus Valley from engaging in most nonbanking businesses, or acquiring ownership or control of more than 5 percent of the outstanding voting stock of any company engaged in a nonbanking business, unless the Federal Reserve has determined that the nonbanking business is closely related to banking. Under the Bank Holding Company Act, the Federal Reserve may require a bank holding company to end a nonbanking business if it constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

The operations of PeoplesBank are subject to federal and state statutes applicable to banks chartered under the banking laws of the Commonwealth of Pennsylvania and whose deposits the Federal Deposit Insurance Corporation (FDIC) insures.

The FDIC is the primary federal regulator of PeoplesBank. It regularly examines banks in such areas as loss allowances, loans, investments, management practices and other aspects of operations. These examinations are designed for the protection of PeoplesBank’s depositors rather than Codorus Valley’s shareholders. PeoplesBank must furnish annual and quarterly reports to the FDIC. 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. The one-time credit offset the new FDIC assessment cost for 2007; however, the credit will be depleted in the first quarter of 2008. Accordingly, PeoplesBank will recognize the assessment at that time. Management’s estimate of the FDIC assessment expense, net of the remaining credit, for 2008 is approximately $239,000.

Federal and state banking laws and regulations govern such things as: the scope of a bank’s business; permissible investments; the reserves against deposits a bank must maintain; the types and terms of loans a bank may make and the collateral it may take; the activities of a bank with respect to mergers and consolidations; the establishment of branches; and the sale of nondeposit investment products by the bank and its insurance subsidiary. The Pennsylvania Insurance Department, the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) control and supervise the licensing and activities of employees engaged in the sale of nondeposit investment products.

Pennsylvania business and banking laws restrict dividend payments if such payment would render the Corporation insolvent or result in negative net worth, and the Corporation and PeoplesBank are subject to regulatory capital requirements. More information about dividend restrictions and capital requirements can be found in Note 10-Regulatory Matters, to the 2007 financial statements.

The Federal Reserve Act imposes restrictions on a subsidiary bank of a bank holding company, such as PeoplesBank. The restrictions affect extensions of credit to the bank holding company and its subsidiaries, investments in the stock or other securities of the bank holding company and its subsidiaries, and taking such stock or securities as collateral for loans. The Federal Reserve Act and Federal Reserve regulations also place limitations and reporting requirements on extensions of credit by a bank to the principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulation may affect the terms upon

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which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.

PeoplesBank and the banking industry, in general, are affected by the monetary and fiscal policies of government agencies, including the Federal Reserve. Through open market securities transactions and changes in its federal funds and discount rates and reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment.

A brief discussion of selected federal agency requirements that affect Codorus Valley and/or PeoplesBank follows.

Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act (SOA) was signed into law in July 2002 and applies to all companies, both U.S. and non-U.S, that file periodic reports under the Securities Exchange Act of 1934. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SOA is the most far-reaching U.S. securities legislation enacted in some time. The SEC is responsible for establishing rules to implement various provisions of the SOA. The SOA includes very specific disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC. The SOA represents significant regulation of the accounting profession, corporate governance practices, such as the relationship between a board of directors and management and between a board of directors and its committees.

Section 404 of the SOA became effective for the year ended December 31, 2004, for companies whose public float (the product of outstanding shares times the share price on a specified date) was above $75 million. For smaller companies (nonaccelerated filers), including Codorus Valley, the effective date, after several postponements, was the fiscal year ending on or after December 15, 2007. Section 404 requires publicly held companies to document, test and certify that their internal control systems over financial reporting are effective. In January 2008, the SEC proposed delaying for another year the requirement that nonaccelerated filers provide an auditor’s report on their internal control over financial reporting. Compliance costs associated with Section 404 are expected to continue in the period ahead, but management does not expect these costs to be material.

USA Patriot Act of 2001 In October of 2001, the USA Patriot Act of 2001 was enacted to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations on financial institutions, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Periodically, various types of federal and state legislation are proposed that could result in additional regulation of, and restrictions on, the business of Codorus Valley and PeoplesBank. It cannot be predicted whether such legislation will be adopted or, if adopted, how such legislation would affect the business of Codorus Valley and its subsidiaries. As a consequence of the extensive regulation of commercial banking activities in the United States of America, Codorus Valley and PeoplesBank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the cost of doing business. Except as specifically described above, management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and results of operations of Codorus Valley will not be material. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation, which, if they were

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implemented, would have a material adverse effect upon the liquidity, capital resources or results of operations. However, the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on Codorus Valley’s results of operations.

Other information

This Annual Report on Form 10-K is filed with the Securities and Exchange Commission (SEC). Copies of this document and other SEC filings by Codorus Valley Bancorp, Inc. may be obtained electronically at PeoplesBank’s website at www.peoplesbanknet.com (select Investor Relations, then select SEC filings), or the SEC’s website at www.sec.gov/edgarhp.htm. Copies can also be obtained without charge by writing to: Treasurer, Codorus Valley Bancorp, Inc., P.O. Box 2887, York, PA 17405-2887.

Item 1A: Risk Factors

An investment in the Corporation’s common stock is subject to risks inherent to the Corporation’s business. The most material risks and uncertainties that management believes affect the Corporation are described below. Investors in the Corporation’s stock should carefully consider these risks and uncertainties together with all of the other information included or incorporated by reference in the report. These risks and uncertainties are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or focused on, or currently deems immaterial, or are not controllable by management may also impair the Corporation’s business operations. This report is qualified in its entirety by these risk factors.

If any of the following risks occur, the Corporation’s financial condition and results of operations could be materially and adversely affected. If these events were to occur, the value of the Corporation’s common stock could decline significantly, and investors in the Corporation’s stock could lose all or part of their investment.

Changes in market interest rates may adversely affect our earnings and financial condition.
The Corporation’s earnings and cash flows are largely dependent upon its net interest income, which is subject to interest rate risk due to fluctuations in market interest rates. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, unemployment, money supply, and domestic and international events, among others. We attempt to manage interest rate risk, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management is not an exact science. A rapid increase or decrease in market interest rates could adversely affect our financial performance. Interest rate risk is discussed under Item 7A-Quantitative and qualitative disclosures about market risk.

The Corporation is subject to credit risk.
The Corporation is subject to credit risk if loan customers do not repay their loans according to the terms of their loans, and the collateral securing the payment of loans is insufficient to assure repayment. The Corporation may experience significant credit losses, which could have a material adverse effect on its operating results. In an economic downturn or recession, our credit risk could increase. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Credit risk is discussed under the Credit Risk Management and Nonperforming Assets sections of this report.

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The Corporation’s allowance for possible loan losses may be insufficient.
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 strength of borrowers, adequacy of collateral, if collateral dependent, or the 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. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from management. Any increases in the allowance for loan losses will result in a decrease in net income, and possibly capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations. The adequacy of the allowance is discussed under the Allowance for Loan Losses section of this report and is incorporated herein by reference.

The trading volume in the Corporation’s common stock is less than that of other larger financial services companies.
Codorus Valley’s common stock is listed on the NASDAQ Global Market under the symbol CVLY. The trading volume in its common stock is less than that of other larger financial companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Corporation’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Corporation has no control. Given the lower trading volume of the Corporation’s common stock, significant sales of the Corporation’s common stock, or the expectation of these sales, could cause the Corporation’s stock price to languish or fall.

The Corporation is subject to extensive governmental regulation and supervision.
Periodically, federal and state legislation is proposed that could result in additional regulation of, or restrictions on, the business of Codorus Valley and its subsidiaries. Management is not aware of any current specific recommendations by regulatory authorities or proposed legislation, which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations. However, the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on Codorus Valley’s results of operations. Governmental regulation is discussed in Item I, under the Supervision and Regulation section within this report and is incorporated herein by reference.

Item 1B: Unresolved Staff Comments

Not applicable.

Item 2: Properties

Codorus Valley owns the following property, subject to a $1.7 million lien held by its wholly owned subsidiary, PeoplesBank.

 

 

 

Codorus Valley Corporate Center—The Corporate Center is located at 105 Leader Heights Road, York Township, York, PA. This facility serves as the corporate headquarters and is approximately 40,000 square feet. Approximately sixty-seven percent of the leasable space is leased to PeoplesBank and the remaining thirty-three percent is leased to nonaffiliated parties. The Corporate Center is adjacent to PeoplesBank’s Data Operations Center and the Leader Heights banking office.

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PeoplesBank owns the following properties without liens:

 

 

 

Glen Rock Office—Located at 1 Manchester Street in the borough of Glen Rock, PA. Two bank-owned parking lots are located nearby on Hanover Street and at 7 Manchester Street in the borough of Glen Rock.

 

 

 

Jacobus Office—Located at 1 North Main Street in the borough of Jacobus, PA.

 

 

 

Jefferson Office—Located at 6 Baltimore Street in Jefferson Borough, PA. A bank-owned parking lot is located nearby at 10 Baltimore Street in Jefferson Borough.

 

 

 

York New Salem Office—Located at 320 North Main Street in the borough of York New Salem, PA.

 

 

 

Leader Heights Office—This facility serves as both a banking office and data operations center. It is located at 109 Leader Heights Road in York Township, PA.

 

 

 

Cape Horn Office—Located at 2587 Cape Horn Road, Red Lion in Windsor Township, PA.

 

 

 

East York Office—Located at 2701 Eastern Boulevard, York in Springettsbury Township, PA.

PeoplesBank leases the following properties:

 

 

 

Stewartstown Office—Located at 2 Ballast Lane in the borough of Stewartstown, PA. This office is a 1,278 square foot unit of a business complex known as Village Square at Stewartstown. The lease, signed November 29, 1993, is for a twenty-year term with four five-year term renewal options.

 

 

 

South Hanover Office—Located at 1400 Baltimore Street, Hanover in Penn Township, PA. This office is a 1,850 square foot unit adjacent to a Rutter’s Farm Store and gas station. The capital lease, effective February 1, 2001, is for a fifteen-year term with three five-year term renewal options.

 

 

 

East Market Street Office—Located at 48 East Market Street, York City, PA. The office is approximately 685 square feet and located in the lobby entrance of the historic Yorktowne Hotel. The lease, effective February 1, 2006, is for a five-year term with one five-year renewal option.

 

 

 

West Philadelphia Street Office—Located within the Susquehanna Commerce Center at 221 W. Philadelphia Street, York City, PA. This office is a 2,814 square foot unit located in the City of York. The lease, effective December 10, 2002, is for an eight-year term with two five-year term renewal options.

 

 

 

Brogue Office—Located at 2510 Delta Road in Chanceford Township, PA. This office is a 1,600 square foot portion of a business complex known as Brogue Center. The lease, effective November 5, 2004, is for a five-year term with five five-year term renewal options.

 

 

 

West York Office—Located at 1477 Carlisle Road in West Manchester Township, PA. This office is a 2,800 square foot unit. The lease, effective December 1, 2004, is for a ten-year term with three five-year term renewal options.

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New Freedom Office-Located at 26 East Main Street, New Freedom Borough, PA. This office is a 1,600 square foot building. The lease, effective September 20, 2004, is for a ten-year term with five-year renewal options.

 

 

 

Hunt Valley Office – Located at 11350 McCormick Road, Executive Plaza I, Suite 101, Hunt Valley, MD. The 2,455 square foot office space is located in the Executive Plaza complex in Hunt Valley. The lease, effective January 1, 2008, is for a five-year term with a five year renewal option.

 

 

 

Towson Loan Production Office-Located at 40 West Chesapeake Avenue, Towson, MD. This 266 square foot office space is located on the 6th floor of the 40 West Chesapeake Building and is used as a loan production office (LPO). The lease, effective December 1, 2005, is renewable annually. This lease was terminated at the end of 2007 due to the opening of the Hunt Valley Office described above.

All of the above properties are located in York County, Pennsylvania, with the exception of the Hunt Valley Office and the Towson LPO, which are located in Maryland, and, in the opinion of management, are adequate for the business purposes of Codorus Valley and its subsidiaries.

Item 3: 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 governmental authorities.

Item 4: Submission of matters to a vote of security holders

No matters were submitted to a vote of security holders during the fourth quarter of 2007.

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PART II

Item 5:    Market for Codorus Valley Bancorp, Inc.’s common equity, related shareholder matters and issuer purchase of equity securities

Market Information

The shares of Codorus Valley Bancorp, Inc. are traded on the NASDAQ Global Market under the symbol CVLY. Codorus Valley had approximately 924 registered shareholders of record as of March 3, 2008. The following table sets forth high and low sales prices and dividends paid per share for Codorus Valley as reported by NASDAQ during the periods indicated. The sales prices and cash dividends per share listed are adjusted for stock dividends.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

   

Quarter

 

High

 

Low

 

Dividends
per share

 

High

 

Low

 

Dividends
per share

 

                           

First

 

$

19.50

 

$

18.12

 

$

0.129

 

$

18.57

 

$

16.43

 

$

0.112

 

Second

 

 

19.95

 

 

17.33

 

 

0.129

 

 

18.59

 

 

16.77

 

 

0.112

 

Third

 

 

19.49

 

 

16.50

 

 

0.135

 

 

18.14

 

 

17.01

 

 

0.118

 

Fourth

 

 

19.00

 

 

15.00

 

 

0.190

 

 

20.24

 

 

17.50

 

 

0.122

 

Codorus Valley has a long history of paying quarterly cash dividends on its common stock. Codorus Valley presently expects to pay future cash dividends at levels comparable with those of prior years. However, the payment of such dividends will depend primarily upon the earnings of its subsidiary, PeoplesBank. Management anticipates that substantially all of the funds available for the payment of dividends by Codorus Valley will be derived from dividends paid to it by PeoplesBank. The payment of cash dividends is also subject to restrictions on dividends and capital requirements as reported in Note 10-Regulatory Matters.

In December 2007, the Board of Directors reaffirmed the Share Repurchase Program (Program), which was authorized in 1995 and extended thereafter to permit the purchase of up to a maximum of 4.9 percent of the outstanding shares of the Corporation’s common stock at a price per share no greater than 200 percent of the latest quarterly published book value. For years ended December 31, 2007 and 2006, the Corporation had not acquired any of its common stock under the current Program.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about options outstanding and securities available for future issuance under the Corporation’s 1996 Stock Incentive Plan, 1998 Independent Directors Stock Option Plan, 2000 Stock Incentive Plan, 2001 Employee Stock Bonus Plan, 2007 Long Term Incentive Plan and 2007 Employee Stock Purchase Plan.

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Plan Category

 

Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights

 

Weighted-
average
exercise price
of outstanding
options,
warrants and
rights

 

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the first
column)

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

 

223,017

 

$

13.09

 

 

388,932

(1)

Equity compensation plans not approved by security holders

 

 

 

 

 

 

13,689

(2)

 

 

   

 

   

 

   

 

Total

 

 

223,017

 

$

13.09

 

 

402,621

 

 

 

   

 

   

 

   

 


 

 

 

 

(1)

Includes 175,000 shares available for issuance under the 2007 Employee Stock Purchase Plan.

 

(2)

Shares available for issuance under the 2001 Employee Stock Bonus Plan. The plan provides for issuance of shares of common stock to employees as performance-based compensation.

Shareholder Total Return Performance Graph

The following graph compares the yearly dollar change in the cumulative total shareholder return on Codorus Valley Bancorp, Inc.’s common stock against the cumulative total return of the SNL Mid-Atlantic Bank Index and the NASDAQ Composite Index for the period of five fiscal years commencing January 1, 2003, and ending December 31, 2007. The graph shows the cumulative investment return to shareholders based on the assumption that a $100 investment was made on December 31, 2002 in each of Codorus Valley’s common stock, the SNL Mid-Atlantic Bank Index and the NASDAQ Composite Index. We computed returns assuming the reinvestment of all dividends. The shareholder return shown on the following graph is not indicative of future performance.

The following graph and other information furnished under this Part II Item 5 (d) of this Form 10-K shall not be deemed to be “soliciting material” or be “filed” with the Commission or subject to Regulation 14A or 14C, or the liabilities of Section 18 of the Exchange Act of 1934, as amended.

12


Table of Contents


(LINE GRAPH)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ending

 

 

 

 

Company/Index/Market

 

12/31/02

 

12/31/03

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

 

Codorus Valley Bancorp, Inc.

 

 

100.00

 

 

148.43

 

 

147.35

 

 

160.06

 

 

190.12

 

 

173.02

 

SNL Mid-Atlantic Bank Index

 

 

100.00

 

 

142.18

 

 

150.59

 

 

153.26

 

 

183.94

 

 

139.10

 

NASDAQ Composite Index

 

 

100.00

 

 

150.36

 

 

163.00

 

 

166.58

 

 

183.68

 

 

201.91

 

13


Table of Contents


Item 6:    Selected financial data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

                       

Summary of operations (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

39,169

 

$

33,319

 

$

25,572

 

$

20,469

 

$

19,964

 

Interest expense

 

 

18,489

 

 

15,077

 

 

9,149

 

 

6,545

 

 

6,898

 

                                 

Net interest income

 

 

20,680

 

 

18,242

 

 

16,423

 

 

13,924

 

 

13,066

 

Provision for (recovery of) loan losses

 

 

(554

)

 

650

 

 

775

 

 

420

 

 

553

 

Noninterest income

 

 

5,688

 

 

5,465

 

 

5,003

 

 

4,626

 

 

4,380

 

Noninterest expense

 

 

18,368

 

 

15,890

 

 

14,482

 

 

12,769

 

 

12,290

 

                                 

Income before income taxes

 

 

8,554

 

 

7,167

 

 

6,169

 

 

5,361

 

 

4,603

 

Provision for income taxes

 

 

2,180

 

 

1,845

 

 

1,552

 

 

1,353

 

 

1,171

 

                                 

Net income

 

$

6,374

 

$

5,322

 

$

4,617

 

$

4,008

 

$

3,432

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share
(adjusted for stock dividends)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, basic

 

$

1.72

 

$

1.45

 

$

1.27

 

$

1.11

 

$

0.95

 

Net income, diluted

 

$

1.69

 

$

1.42

 

$

1.24

 

$

1.08

 

$

0.94

 

Cash dividends paid

 

$

0.58

 

$

0.46

 

$

0.43

 

$

0.40

 

$

0.37

 

Stock dividends distributed

 

 

5

%

 

10

%*

 

5

%

 

5

%

 

5

%

Book value

 

$

12.95

 

$

11.63

 

$

10.58

 

$

9.89

 

$

9.33

 

Cash dividend payout ratio

 

 

33.8

%

 

32.0

%

 

33.6

%

 

36.3

%

 

38.7

%

Weighted average shares outstanding

 

 

3,696,667

 

 

3,663,692

 

 

3,648,951

 

 

3,626,250

 

 

3,616,015

 

Weighted average diluted shares outstanding

 

 

3,777,122

 

 

3,749,572

 

 

3,721,702

 

 

3,701,562

 

 

3,657,217

 

* includes a special 5% stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average shareholders’ equity (ROE)

 

13.9

%

 

13.0

%

 

12.3

%

 

11.5

%

 

10.3

%

Return on average assets (ROA)

 

 

1.11

%

 

1.05

%

 

1.06

%

 

1.03

%

 

0.96

%

Net interest margin

 

 

3.97

%

 

3.97

%

 

4.16

%

 

4.01

%

 

4.13

%

Efficiency ratio

 

 

67.4

%

 

65.1

%

 

66.1

%

 

67.6

%

 

69.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

12.1

%

 

12.0

%

 

10.6

%

 

11.8

%

 

11.1

%

Total risk-based capital

 

 

12.9

%

 

12.7

%

 

11.3

%

 

12.3

%

 

11.7

%

Average shareholders’ equity to average assets

 

 

8.0

%

 

8.1

%

 

8.6

%

 

9.0

%

 

9.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of financial condition at year-end (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

84,369

 

$

80,926

 

$

69,664

 

$

74,140

 

$

74,069

 

Loans

 

 

447,497

 

 

407,260

 

 

369,631

 

 

300,260

 

 

262,363

 

Assets

 

 

594,607

 

 

548,212

 

 

476,052

 

 

407,671

 

 

372,547

 

Deposits

 

 

511,968

 

 

456,645

 

 

385,154

 

 

329,537

 

 

304,282

 

Borrowings

 

 

30,660

 

 

45,339

 

 

49,493

 

 

39,493

 

 

31,234

 

Equity

 

 

48,415

 

 

42,786

 

 

38,729

 

 

35,982

 

 

33,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of bank offices

 

 

14

 

 

14

 

 

14

 

 

12

 

 

11

 

Number of employees (full-time equivalents)

 

 

179

 

 

168

 

 

163

 

 

146

 

 

143

 

Wealth Management assets, market value (in thousands)

 

$

320,655

 

$

259,453

 

$

213,735

 

$

180,314

 

$

137,186

 

                                 

14


Table of Contents


Item 7: 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 Annual Report. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When words such as “believes,” “expects,” “anticipates” or similar expressions occur in this Annual Report, management is making forward-looking statements.

Shareholders 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 Annual Report. These factors include the following:

 

 

 

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 analyses 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 this Annual Report. Some of these policies are particularly sensitive, requiring that significant judgments, estimates and assumptions be made by management. 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 21 and 32 of this report.

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 strength 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 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.

15


Table of Contents


Declines in the fair value of available-for-sale and held-to-maturity securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers: 1) the length of time and the extent to which the fair value has been less than cost, 2) the financial condition and near-term prospects of the issuer, and 3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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 12. Based on stock options outstanding on December 31, 2007, approximately $43,000 will be expensed over the weighted average period of 1.3 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.

OVERVIEW

Executive summary

Throughout 2007, management and the Board of Directors continued to implement a series of initiatives, as guided by the Corporation’s long-range strategic plan. Selected accomplishments for 2007 included: creation of the Maryland Banking Group, which involved planning, staffing and site preparation for PeoplesBank’s newest financial center that opened in January 2008 in Hunt Valley, MD; restructuring the wealth management division of PeoplesBank to increase sales productivity and operating efficiency; implementing remote deposit capture, which allows business clients to deposit checks directly from their offices; and successfully introducing a new deposit product called the Hometown Spirit CD (or IRA), which results in charitable donations by PeoplesBank to local nonprofit organizations when customers open an account.

Our financial performance was sound in 2007, as described in the Financial Highlights section below, even after removing the impact of favorable non-recurring transactions. Asset quality deteriorated as evidenced by a 2.25 percent nonperforming asset ratio (NPA ratio) at year-end 2007, compared to a 1.09 percent ratio at year-end 2006. Management believes that the two delinquent business loan accounts that elevated the NPA ratio at year-end 2007 are well collateralized by real estate and that all amounts due from these borrowers will ultimately be collected. The Corporation has no loss exposure to subprime lending or investments collateralized by subprime mortgage collateral because it does not participate in the subprime lending market, nor does it invest in securities backed by subprime mortgages.

In the period ahead, management will remain focused on profitable balance sheet growth, acquiring and nurturing client relationships, branch office expansion, risk management, and increasing noninterest income. Challenges include an expected economic slowdown, a possible recession, continued downturn in the real estate markets, and competitive pricing pressures.

Financial Highlights

The Corporation earned $6,374,000 or $1.72 per share ($1.69 diluted) for 2007, compared to $5,322,000 or $1.45 per share ($1.42 diluted) for 2006, and $4,617,000 or $1.27 per share ($1.24 diluted) for 2005. The $1,052,000 or 20 percent increase in earnings for 2007 was primarily attributable to a $2,438,000 or 13 percent increase in net interest income and a $1,204,000 decrease in loan loss provision, which more than offset a $2,478,000 or 16 percent increase in noninterest expense. The increase in net interest

16


Table of Contents


income reflected an increase in interest income from a larger volume of earning assets, principally business and home equity loans, and investment securities. The $720,000 or 57 percent increase in business loan fees for 2007 also positively contributed. Approximately $612,000 ($403,000 after-tax) of the increase in fees from selected business loan accounts, including a recovery of fees from a large delinquent account, was unusually large as to amount. The net interest margin (tax equivalent basis), which was favorably impacted by the increase in loan fees, was 3.97 percent for 2007, the same as 2006. The significant decrease in the loan loss provision reflected the favorable impact of an $839,000 ($554,000 after-tax) recovery of loan losses that were incurred by PeoplesBank during 2002-2003. Due to the adequacy of the allowance for loan losses at the time of the recovery, the full amount of the recovery was recorded as a reduction to the loan loss provision. The increase in noninterest expense was due in part to increased personnel costs, including staff additions associated with planned business growth, and increases in performance based compensation and benefits costs. The recognition of a $437,000 ($288,000 after-tax) prepayment penalty on the early pay off of a $5 million Federal Home Loan Bank advance also contributed to the increase in noninterest expense. The advance was due July 2014 and had an above market interest rate of 6.43 percent. The Corporation paid off the advance to reduce interest expense in future periods. At year-end 2007, total assets were $595 million, an increase of approximately $46 million, or 8 percent, above year-end 2006.

Comparatively, net income for 2006 increased $705,000 or 15 percent above 2005, the result of increases in net interest income and noninterest income, which more than offset an increase in noninterest expense. The $1,819,000 or 11 percent increase in net interest income was primarily the result of an increase in the volume of earning assets, principally business loans. While net interest income increased, net interest margin decreased due to increased funding costs, which resulted from a flat (and sometimes inverted) US treasury yield curve environment and competitive pricing pressures. The net interest margin was 3.97 percent for 2006, compared to 4.16 percent for 2005. The $462,000 or 9 percent increase in noninterest income was attributable to increases in income from wealth management and deposit services, which resulted from increased sales and business growth. The $1,408,000 or 10 percent increase in noninterest expense was attributable in part to corporate expansion, principally in 2005, planned staff additions and normal business growth. At year-end 2006, total assets were $548 million, an increase of approximately $72 million or 15 percent above year-end 2005. Asset growth occurred primarily in business and consumer loans, which were funded by strong deposit growth, principally money market deposits and floating rate CDs.

Annual cash dividends per share, as adjusted, totaled $.58 for 2007, compared to $.46 for 2006. A five percent stock dividend was distributed in 2007. Comparatively, two five percent stock dividends, which included a special five percent stock dividend, were distributed in 2006. Book value per share, as adjusted, was $12.95 for year-end 2007, compared to $11.63 for year-end 2006.

Net income as a percentage of average total assets (return on assets or ROA), was 1.11 percent for 2007, compared to 1.05 percent for 2006. Net income as a percentage of average shareholders’ equity (return on equity or ROE), was 13.91 percent for 2007, compared to 12.99 percent for 2006.

At December 31, 2007, nonperforming assets as a percentage of total loans and net foreclosed real estate was 2.25 percent, compared to 1.09 percent at year-end 2006. Information regarding nonperforming assets is provided in the Risk Management section of this report, including Table 10—Nonperforming Assets. The allowance for loan losses as a percentage of total loans was .77 percent for year-end 2007 and year-end 2006. Information regarding the allowance is provided in the Risk Management section of this report, including Tables 11 - Analysis of Allowance for Loan Losses and 12 – Allocation of Allowance for Loan Losses. Based its evaluation of probable loan losses and the current loan portfolio, management believes that the allowance is adequate to support losses inherent in the portfolio at December 31, 2007.

17


Table of Contents


Throughout 2007, the Corporation 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. Table 9—Capital Ratios, shows that the Corporation and PeoplesBank were well capitalized on December 31, 2007.

A more detailed analysis of the factors and trends affecting earnings follows.

INCOME STATEMENT ANALYSIS

Net Interest Income

The Corporation’s principal source of revenue is net interest income, which is the difference between interest income earned on loans and investment securities, and interest expense incurred on deposits and borrowed funds. Fluctuations in net interest income are caused by changes in interest rates, volumes and the composition or mix of interest rate sensitive assets and liabilities.

For analytical purposes, Tables 1, 2, and 3 are presented on a tax equivalent basis to make it easier to compare taxable and tax-exempt assets. Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is increased by the amount of federal income taxes which would have been incurred if the income was taxable at the statutory rate of 34 percent. Unless otherwise noted, the discussion that follows is based on interest income and interest expense as reported in the consolidated statements of income, not on a tax equivalent basis.

Net interest income for 2007 was $20,680,000, an increase of $2,438,000 or 13 percent above 2006. The increase was primarily the result of an increase in the volume of earning assets. Earning assets averaged $537 million and yielded 7.42 percent (tax equivalent basis) for 2007, compared to $471million and 7.17 percent, respectively, for 2006. The $66 million or 14 percent increase in earning assets was the result of growth in business and home equity loans, investment securities and overnight investment in federal funds sold. The $720,000 or 57 percent increase in business loan fees for 2007 contributed to the increase in the yield on average assets. Approximately $612,000 of the increase in fees from selected business loan accounts, including a recovery of fees from a large delinquent account, was unusually large as to amount. Interest bearing liabilities averaged $481million at an average rate of 3.84 percent for 2007, compared to $418 million and 3.60 percent, respectively, for 2006. The $63 million or 15 percent increase in the average volume of interest bearing liabilities occurred primarily in short-term fixed rate CDs and money market deposits. Current period deposit growth was primarily attributable to rate promotions. Consumer perceptions regarding the greater volatility of capital markets was also a likely contributing factor to overall deposit growth. The cost of servicing long-term corporate debt declined 5 percent in 2007, compared to the preceding year due to a decrease in volume. The Corporation paid off approximately $6.5 million in above-market rate corporate debt in 2007; however, the effect of this reduction in debt was offset by the full years’ impact of adding $7 million in trust preferred debt in June 2006 as a capital strategy to support planned balance sheet growth. The net interest margin, on a tax equivalent basis, was 3.97 percent for both 2007 and 2006. Excluding the impact of the aforementioned nonrecurring business loan fees, the margin for 2007 would have been 3.86 percent. Net interest margin is net interest income (tax equivalent basis) as a percentage of average earning assets. In the period ahead, management expects that growth in net interest income will remain constrained by the low interest rate environment and competitive pricing pressures.

Comparatively, net interest income for 2006 was $18,242,000, an increase of $1,819,000 or 11 percent above 2005. The increase was primarily the result of an increase in the volume of earning assets. Earning assets averaged $471 million and yielded 7.17 percent (tax equivalent basis) for 2006, compared to $401 million and 6.45 percent, respectively, for 2005. The $71 million or 18 percent increase in

18


Table of Contents


earning assets occurred primarily in business loans and secondarily in consumer loans. Rising market interest rates resulted in increases in yields on variable rate business loans, investment securities and overnight investments, which also contributed to the increase in net interest income. Interest bearing liabilities averaged $418 million at an average rate of 3.60 percent for 2006, compared to $352 million and 2.60 percent, respectively, for 2005. The $66 million or 19 percent increase in the average volume of interest bearing liabilities occurred primarily in money market deposits and floating rate CDs. Deposit growth for 2006 was attributable to several factors including the successful introduction of new money market products, the addition of two financial centers in March 2005, and higher market interest rates, which improved returns for bank depositors. Funding costs also increased as a result of issuing $7.2 million in floating rate trust preferred debt in June 2006, as a capital strategy to support planned balance sheet growth. The net interest margin, on a tax equivalent basis, was 3.97 percent for 2006, compared to 4.16 percent for 2005.

Table 1-Net Interest Income (tax equivalent basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5 Year
CAGR*

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

                           

 

Total interest income

 

$

39,169

 

$

33,319

 

$

25,572

 

$

20,469

 

$

19,964

 

13.6

%

 

Tax equivalent adjustment

 

 

634

 

 

482

 

 

257

 

 

231

 

 

238

 

n/a

 

 

                                       

Adjusted total interest income

 

 

39,803

 

 

33,801

 

 

25,829

 

 

20,700

 

 

20,202

 

13.7

%

 

Total interest expense

 

 

18,489

 

 

15,077

 

 

9,149

 

 

6,545

 

 

6,898

 

-15.7

%

 

                                       

Net interest income

 

$

21,314

 

$

18,724

 

$

16,680

 

$

14,155

 

$

13,304

 

12.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

536,612

 

$

471,251

 

$

400,632

 

$

353,390

 

$

322,391

 

11.6

%

 

Average interest bearing liabilities

 

$

481,245

 

$

418,353

 

$

351,949

 

$

314,398

 

$

290,405

 

11.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yield on earning assets

 

 

7.42

%

 

7.17

%

 

6.45

%

 

5.86

%

 

6.27

%

 

 

 

Rate on interest bearing liabilities

 

 

3.84

%

 

3.60

%

 

2.60

%

 

2.08

%

 

2.38

%

 

 

 

                                 

 

 

 

Interest rate spread

 

 

3.58

%

 

3.57

%

 

3.85

%

 

3.78

%

 

3.89

%

 

 

 

Net interest margin

 

 

3.97

%

 

3.97

%

 

4.16

%

 

4.01

%

 

4.13

%

 

 

 

* Compound annual growth rate (CAGR) is the average annual rate of growth over the five-year period beginning in 2002.

19


Table of Contents


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007 compared to 2006

 

 

 

Year ended
December 31,

 

 

 

 

 

 

Increase

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

(Decrease)

 

Volume

 

Rate

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

8

 

$

10

 

$

(2

)

$

(2

)

$

 

Federal funds sold

 

 

1,149

 

 

521

 

 

628

 

 

659

 

 

(30

)

Securities, taxable

 

 

2,799

 

 

2,699

 

 

100

 

 

(96

)

 

196

 

Securities, tax-exempt

 

 

1,733

 

 

1,104

 

 

629

 

 

776

 

 

(147

)

Loans, taxable

 

 

33,764

 

 

29,156

 

 

4,608

 

 

3,162

 

 

1,446

 

Loans, tax-exempt

 

 

350

 

 

311

 

 

39

 

 

67

 

 

(28

)

                                 

Total interest income

 

 

39,803

 

 

33,801

 

 

6,002

 

 

4,566

 

 

1,437

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW, money market

 

 

6,054

 

 

4,829

 

 

1,225

 

 

740

 

 

485

 

Savings

 

 

111

 

 

116

 

 

(5

)

 

(5

)

 

 

Time deposits less than $100,000

 

 

7,083

 

 

5,746

 

 

1,337

 

 

964

 

 

373

 

Time deposits $100,000 or more

 

 

3,169

 

 

2,075

 

 

1,094

 

 

918

 

 

176

 

Short-term borrowings

 

 

 

 

133

 

 

(133

)

 

(133

)

 

 

Long-term debt

 

 

2,072

 

 

2,178

 

 

(106

)

 

(147

)

 

41

 

                                 

Total interest expense

 

 

18,489

 

 

15,077

 

 

3,412

 

 

2,337

 

 

1,075

 

                                 

Net interest income

 

$

21,314

 

$

18,724

 

$

2,590

 

$

2,229

 

$

362

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31,

 

2006 compared to 2005

 

 

 

 

 

 

 

 

 

Increase

 

 

 

 

 

(dollars in thousands)

 

2006

 

2005

 

(Decrease)

 

Volume

 

Rate

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

10

 

$

5

 

$

5

 

$

1

 

$

4

 

Federal funds sold

 

 

521

 

 

130

 

 

391

 

 

227

 

 

164

 

Securities, taxable

 

 

2,699

 

 

2,530

 

 

169

 

 

(265

)

 

434

 

Securities, tax-exempt

 

 

1,104

 

 

675

 

 

429

 

 

533

 

 

(104

)

Loans, taxable

 

 

29,156

 

 

22,407

 

 

6,749

 

 

4,130

 

 

2,619

 

Loans, tax-exempt

 

 

311

 

 

82

 

 

229

 

 

280

 

 

(51

)

                                 

Total interest income

 

 

33,801

 

 

25,829

 

 

7,972

 

 

4,906

 

 

3,066

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW, money market

 

 

4,829

 

 

1,940

 

 

2,889

 

 

427

 

 

2,462

 

Savings

 

 

116

 

 

113

 

 

3

 

 

(7

)

 

10

 

Time deposits less than $100,000

 

 

5,746

 

 

4,040

 

 

1,706

 

 

602

 

 

1,104

 

Time deposits $100,000 or more

 

 

2,075

 

 

1,162

 

 

913

 

 

495

 

 

418

 

Short-term borrowings

 

 

133

 

 

73

 

 

60

 

 

9

 

 

51

 

Long-term debt

 

 

2,178

 

 

1,821

 

 

357

 

 

244

 

 

113

 

                                 

Total interest expense

 

 

15,077

 

 

9,149

 

 

5,928

 

 

1,770

 

 

4,158

 

                                 

Net interest income

 

$

18,724

 

$

16,680

 

$

2,044

 

$

3,136

 

$

(1,092

)

                                 

Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate. Taxable loans include net loan fees of $1,973,000 in 2007, $1,253,000 in 2006, and $1,178,000 in 2005.

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Table 3-Average Balances and Interest Rates (tax equivalent basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

 

         

(dollars in thousands)

 

Average
Balance

 

Interest

 

Rate

 

Average
Balance

 

Interest

 

Rate

 

Average
Balance

 

Interest

 

Rate

 

                                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

133

 

$

8

 

5.71

%

$

171

 

$

10

 

5.85

%

$

143

 

$

5

 

3.50

%

Federal funds sold

 

 

22,622

 

 

1,149

 

5.08

 

 

9,992

 

 

521

 

5.21

 

 

3,640

 

 

130

 

3.57

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

54,066

 

 

2,799

 

5.18

 

 

56,061

 

 

2,699

 

4.81

 

 

62,615

 

 

2,530

 

4.04

 

Tax-exempt

 

 

29,669

 

 

1,733

 

5.84

 

 

17,420

 

 

1,104

 

6.34

 

 

9,734

 

 

675

 

6.93

 

                                                   

Total investment securities

 

 

83,735

 

 

4,532

 

5.41

 

 

73,481

 

 

3,803

 

5.18

 

 

72,349

 

 

3,205

 

4.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable (1)

 

 

424,645

 

 

33,764

 

7.95

 

 

383,098

 

 

29,156

 

7.61

 

 

323,479

 

 

22,407

 

6.93

 

Tax-exempt

 

 

5,477

 

 

350

 

6.39

 

 

4,509

 

 

311

 

6.90

 

 

1,021

 

 

82

 

8.03

 

                                                   

Total loans

 

 

430,122

 

 

34,114

 

7.93

 

 

387,607

 

 

29,467

 

7.60

 

 

324,500

 

 

22,489

 

6.93

 

                                                   

Total earning assets

 

 

536,612

 

 

39,803

 

7.42

 

 

471,251

 

 

33,801

 

7.17

 

 

400,632

 

 

25,829

 

6.45

 

Other assets (2)

 

 

38,873

 

 

 

 

 

 

 

36,575

 

 

 

 

 

 

 

35,216

 

 

 

 

 

 

                                                   

Total assets

 

$

575,485

 

 

 

 

 

 

$

507,826

 

 

 

 

 

 

$

435,848

 

 

 

 

 

 

                                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW, money market

 

$

198,008

 

$

6,054

 

3.06

%

$

171,693

 

$

4,829

 

2.81

%

$

140,698

 

$

1,940

 

1.38

%

Savings

 

 

18,657

 

 

111

 

0.60

 

 

19,428

 

 

116

 

0.60

 

 

20,709

 

 

113

 

0.55

 

Time deposits less than $100,000

 

 

158,789

 

 

7,083

 

4.46

 

 

135,968

 

 

5,746

 

4.23

 

 

118,328

 

 

4,040

 

3.41

 

Time deposits $100,000 or more

 

 

66,061

 

 

3,169

 

4.80

 

 

45,795

 

 

2,075

 

4.53

 

 

32,105

 

 

1,162

 

3.62

 

                                                   

Total interest bearing deposits

 

 

441,515

 

 

16,417

 

3.72

 

 

372,884

 

 

12,766

 

3.42

 

 

311,840

 

 

7,255

 

2.33

 

Short-term borrowings

 

 

0

 

 

0

 

0.00

 

 

2,857

 

 

133

 

4.66

 

 

2,534

 

 

73

 

2.88

 

Long-term debt

 

 

39,730

 

 

2,072

 

5.21

 

 

42,612

 

 

2,178

 

5.11

 

 

37,575

 

 

1,821

 

4.85

 

                                                   

Total interest bearing liabilities

 

 

481,245

 

 

18,489

 

3.84

 

 

418,353

 

 

15,077

 

3.60

 

 

351,949

 

 

9,149

 

2.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

 

44,942

 

 

 

 

 

 

 

45,621

 

 

 

 

 

 

 

43,452

 

 

 

 

 

 

Other liabilities

 

 

3,477

 

 

 

 

 

 

 

2,870

 

 

 

 

 

 

 

2,763

 

 

 

 

 

 

Shareholders’ equity

 

 

45,821

 

 

 

 

 

 

 

40,982

 

 

 

 

 

 

 

37,684

 

 

 

 

 

 

                                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

575,485

 

 

 

 

 

 

$

507,826

 

 

 

 

 

 

$

435,848

 

 

 

 

 

 

                                                   

Net interest income

 

 

 

 

$

21,314

 

 

 

 

 

 

$

18,724

 

 

 

 

 

 

$

16,680

 

 

 

                                                   

Interest rate spread

 

 

 

 

 

 

 

3.58

%

 

 

 

 

 

 

3.57

%

 

 

 

 

 

 

3.85

%

                                                   

Net interest margin

 

 

 

 

 

 

 

3.97

%

 

 

 

 

 

 

3.97

%

 

 

 

 

 

 

4.16

%

                                                   

 

 

(1)

Interest includes net loan fees of $1,973,000 in 2007, $1,253,000 in 2006, and $1,178,000 in 2005.

(2)

Average balance includes average nonaccrual loans of $4,122,253 in 2007, $3,721,000 in 2006, and $686,000 in 2005.

Provision for Loan Losses

The provision for loan losses is an expense charged to earnings to address estimated losses attributable to uncollectible loans. The provision reflects management’s judgment of an appropriate level for the allowance for loan losses. The Risk Management section, including Tables 10 – Nonperforming Assets, 11 – Analysis of Allowance for Loan Losses, and 12 – Allocation of Allowance for Loan Losses, of this report, provides detailed information about the allowance, provision and credit risk. For 2007, the provision was a $554,000 credit (recovery), compared to a $650,000 expense in 2006 and a $775,000 expense in 2005. In February 2007, PeoplesBank recovered $839,000 ($554,000 after-tax), 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 substantially reimbursed PeoplesBank for losses that were incurred in 2002 and 2003 that pertained to a group of related equipment leasing contracts that PeoplesBank acquired through a third-party broker. The Bank of New York was escrow agent for payments under those contacts. During the fourth quarter of 2007, the Corporation recorded a $365,000 loan loss provision due to its concern about a general economic slowdown, or possible

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recession, and continued downturn in the real estate market. The Corporation does not participate in the subprime lending market and, accordingly, it has no loss exposure to subprime lending.

Noninterest Income

The following table presents the components of total noninterest income for each of the past three years. A key operating strategy is to increase noninterest or fee based income by offering new services, enhancing traditional services and expanding sales into new geographic markets.

Table 4-Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

 

Trust and investment services fees

 

$

1,260

 

$

1,255

 

$

1,147

 

Service charges on deposit accounts

 

 

1,979

 

 

1,870

 

 

1,638

 

Mutual fund, annuity and insurance sales

 

 

1,506

 

 

1,349

 

 

1,156

 

Income from bank owned life insurance

 

 

271

 

 

263

 

 

269

 

Other income

 

 

431

 

 

485

 

 

507

 

Gain on sales of mortgages

 

 

248

 

 

323

 

 

372

 

Loss on sales of securities

 

 

(7

)

 

(80

)

 

(86

)

                     

Total noninterest income

 

$

5,688

 

$

5,465

 

$

5,003

 

                     

The discussion that follows addresses changes in noninterest income.

Trust and investment services fees—For 2007, trust fees were flat compared to 2006 partially as a result of a transfer of selected fee based accounts to Codorus Valley Financial Advisors (reference mutual fund, annuity and insurance sales below). For 2006, trust fees increased $108,000 or 9 percent above 2005 due to business growth.

Service charges on deposit accounts—For 2007, service charges on deposit accounts increased $109,000 or 6 percent above 2006. Comparatively, 2006 service charges increased $232,000 or 14 percent above 2005. The increase for both periods was due largely to an increase in check card (debit card) interchange income in response to increased customer usage. Insufficient funds fees (NSF fees) for the current period were slightly below 2006 due to an internal change in the order of posting transactions and heightened disclosure of NSF fees on checking account statements.

Mutual fund, annuity and insurance sales—For 2007, income from the sale of mutual funds, annuities and insurance products by Codorus Valley Financial Advisors, a subsidiary of PeoplesBank, increased $157,000 or 12 percent above 2006 due to an increase in sales, and the transfer of accounts from the trust division as previously described. For 2006, income from this category increased $193,000 or 17 percent above 2005 due to an increase in sales.

Other income—Other income is comprised of many fees including, but not limited to: real estate settlement fees, ATM fees (from non-customers using PeoplesBank’s ATMs), safe deposit box rental fees, credit card merchant fees, checking supplies fees, wire transfer fees and internet banking fees. For 2007, other income decreased $54,000 or 11 percent compared to 2006, and 2006 decreased $22,000 or 4 percent compared to 2005. The decrease for both periods was due in part to a decrease in income from real estate settlement services, which resulted from a downturn in the real estate market and competition.

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Year 2006 contained a nonrecurring gain of $45,000 from the sale of two small parcels of land, totaling .3 acre, to the local township for a road throughway. One parcel was held by Codorus Valley Bancorp, Inc. and the other was held by its subsidiary, PeoplesBank.

Gain on sales of mortgages—For 2007, gains from the sale of mortgages decreased $75,000 or 23 percent below 2006, due in part to management’s decision to retain a portion of loan production in the portfolio to increase interest income. Comparatively, 2006 gains decreased $49,000 or 13 percent below 2005. For both periods, mortgage banking operations were adversely affected by a downturn in the residential real estate market.

Loss on sales of securities—For 2006 and 2005, the Corporation recognized losses of $80,000 and $86,000, respectively, from the sale of securities in connection with an “investment swap.” A swap entails selling low yielding investments at a loss (investments purchased in a low interest rate environment) and replacing them with higher yielding investments, which increases portfolio yield and interest income in future periods.

Noninterest Expense

The following table presents the components of total noninterest expense for each of the past three years.

Table 5-Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

 

Personnel

 

$

10,676

 

$

9,080

 

$

8,163

 

Occupancy of premises, net

 

 

1,333

 

 

1,368

 

 

1,311

 

Furniture and equipment

 

 

1,324

 

 

1,350

 

 

1,241

 

Postage, stationery and supplies

 

 

449

 

 

410

 

 

468

 

Professional and legal

 

 

317

 

 

277

 

 

326

 

Marketing and advertising

 

 

675

 

 

589

 

 

698

 

Other

 

 

3,594

 

 

2,816

 

 

2,275

 

                     

Total noninterest expense

 

$

18,368

 

$

15,890

 

$

14,482

 

                     

The discussion that follows addresses changes in noninterest expense. Generally, corporate expansion in the form of financial center additions and normal business growth were the principal expense drivers for all three years.

Personnel—For 2007, personnel expense, comprised of wages, payroll taxes and employee benefits, increased $1,596,000 or 18 percent above 2006. Comparatively, 2006 increased $917,000 or 11 percent above 2005. The increases for both periods were due to staff additions associated with planned business growth, and increases in performance based compensation and benefits costs.

Occupancy of premises, net—For 2007, occupancy of premises expense declined slightly from the prior year due to lower utility and maintenance costs. Comparatively, for 2006 this expense category increased $57,000 or 4 percent above 2005, which reflected a full year’s cost impact of two financial centers that opened in 2005.

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Furniture and equipment—For 2007, furniture and equipment expense decreased $26,000 or 2 percent, which was most likely the result of full depreciation of furniture purchased 10 years ago for the corporate center headquarters. Comparatively, 2006 increased $109,000 or 9 percent above 2005 due in part to financial center expansion and renovation in 2005, the timing of ATM maintenance contracts and a bulk replacement of personal computers.

Postage, stationery and supplies— For 2007, the postage, stationery and supplies expense category increased $39,000 or 10 percent above 2006, due primarily to normal business growth. Comparatively, 2006 decreased $58,000 or 12 percent below 2005. Stationery and supplies expense for 2005 was higher than normal due to franchise expansion and implementation of a branding initiative (new logo) for PeoplesBank.

Professional and legal—For 2007, professional and legal expense increased $40,000 or 14 percent above 2006 due to increases in CPA and legal expenses. The increase in CPA expense included review services to enable the company to comply with Section 404 of the Sarbanes-Oxley Act (SOX404). 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 in 2007. Years 2007 and 2006 included consulting expense for assistance with SOX404 compliance, i.e., process documentation and testing, of approximately $51,000, and $43,000, respectively. 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, although in January 2008 the SEC proposed delaying this requirement for one year. Compliance costs associated with Section 404 are expected to be incurred in the period ahead, but management does not expect these costs to be material.

Marketing and advertising—For 2007, marketing and advertising expense increased $86,000 or 15 percent above 2006, due to increased advertising promotions, increases in client incentives and sponsorship costs, and normal business growth. Comparatively, 2006 decreased $109,000 or 16 percent below 2005. Expense for 2005 was relatively high due to the cost of developing and implementing a strategic branding initiative for PeoplesBank, coupled with costs to promote the addition of two financial centers.

Other— For 2007, other expense, which is comprised of many underlying expenses, increased $778,000 or 28 percent above 2006 due in part to the recognition of a $437,000 prepayment penalty on the early pay off of a $5 million Federal Home Loan Bank advance. The Corporation paid off the advance, which was due July 2014 and had an above market interest rate of 6.43 percent, to reduce interest expense in future periods. There was no comparable prepayment penalty in the prior year. Increases in miscellaneous loan expense (loan volume), Pennsylvania shares tax (the prior period tax was reduced by education tax credits), ATM/point-of-sale processing costs (transaction volume, account growth), and normal business growth also contributed to the increase in other expense. Comparably, in 2006 other expense increased $541,000 or 24 percent above 2005. The increase was primarily the result of increases in problem loan and foreclosed real estate carrying costs, miscellaneous expense, ATM/point-of-sale processing costs, employee training, Pennsylvania shares tax, and normal business growth. Problem loan and foreclosed real estate carrying costs increased $192,000 above 2005, due in part to larger portfolio of nonaccrual loans and to the recognition of an unusually large $151,000 gain from the sale of loan collateral in 2005. Miscellaneous expense for 2006 also included the recognition of two non-recurring expenses. The first was a $62,000 loss (charge-off) on architectural drawings for a branch office prototype that did not materialize. The second was a $35,000 expense for services to create a manuscript of the history of PeoplesBank, which management plans to use for client appreciation and promotional purposes.

24


Table of Contents


In the period ahead, it is probable that noninterest expense will increase as a result of planned franchise expansion, financial center renovations, investment in information technology, and regulatory compliance. 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. The one-time credit offset the new FDIC assessment cost for 2007; however, the credit will be depleted in the first quarter of 2008. Accordingly, PeoplesBank will recognize the assessment at that time. Management’s estimate of the FDIC assessment expense, net of the remaining credit, for 2008 is approximately $239,000.

Income Taxes

The provision for income taxes was $2,180,000 for 2007, an increase of $335,000 or 18 percent above 2006 due to a 19 percent increase in pretax income. Comparatively, 2006 increased $293,000 or 19 percent above 2005 due to a 16 percent increase in pretax income. For 2007, the Corporation recognized $305,000 in tax benefits, principally tax credits, compared to $317,000 for 2006 and $330,000 for 2005 from investments in low-income housing partnerships. For all three years, the Corporation’s marginal federal income tax rate was 34 percent, compared to an effective tax rate of approximately 25 percent.

BALANCE SHEET REVIEW

Federal funds sold

On December 31, 2007, federal funds sold, i.e., overnight investments, were $25 million, compared to $24 million for year-end 2006. The level of overnight investment was relatively high for both periods as a result of funds generation from strong deposit growth as described within the Deposits section of this report.

Investment Securities

The investment securities portfolio is an interest earning asset, second in size to the loan portfolio. Investment securities serve as an important source of revenue and liquidity, and as collateral for public and trust deposits. The investment securities portfolio is managed to comply with the Corporation’s Investment Securities Policy, and accounted for in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

On December 31, 2007, the securities available-for-sale portfolio totaled $81million, which reflected an $8 million or 11 percent increase from year-end 2006. The increase occurred primarily from the purchase of high quality US agency mortgage-backed bonds and tax-exempt municipal bonds. Decisions to purchase or sell securities are based on an assessment of current economic and financial conditions, including the interest rate environment, liquidity and income requirements. Securities available-for-sale are limited to high quality debt instruments as shown in Note 3—Securities Available-for-Sale and Held-to-Maturity. Note 3 shows that unrealized gains for this portfolio exceeded unrealized losses for year-end 2007 due to declining market interest rates. Table 6—Analysis of Investment Securities shows that the available-for-sale portfolio had a yield of 5.23 percent on December 31, 2007, compared to 4.92 percent on December 31, 2006. The increase in yield reflected higher market interest rates and an investment focus on municipal bonds and US government agency mortgage-backed securities.

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Securities classified as held-to-maturity, recorded at amortized cost, reflect management’s intent and the Corporation’s ability to hold these instruments to maturity. On December 31, 2007, securities held-to-maturity totaled $3.4 million, compared to $7.5 million for year-end 2006. The decrease in the portfolio balance was the result of bonds being called by issuers exercising their call options. The held-to-maturity portfolio for both years consisted of fixed rate, long-term preferred stock (trust preferreds) issued by commercial bank holding companies. These trust preferreds are junior subordinated debt that pays interest semi-annually, are callable in 2007 and thereafter, and mature in years 2026-2028. Table 6 shows that the portfolio has a weighted average yield of 8.34 percent. As of December 31, 2007, all trust preferred instruments were limited to $500,000 per issuer and rated investment grade by a national rating service, with one exception, which was not rated. In the period ahead, it is probable that more high yielding trust preferred investments will be called by issuers based on the current level of market interest rates. If this occurs, the call will be at a premium; however, reinvestment yields are expected to be much lower.

Table 6-Analysis of Investment Securities (amortized cost basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007
Maturity Distribution

 

 

 

 

 

 

 

 

 

 

 

One year
or less

 

One
through
five years

 

Five
through
ten years

 

After
ten years

 

No stated
maturity

 

Total

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

Amount

 

Yield(1)

 

                                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agencies(2)

 

$

11,023

 

$

37,256

 

$

 

$

 

$

 

$

48,279

 

 

4.64

%

State and municipal

 

 

280

 

 

7,990

 

 

17,192

 

 

5,277

 

 

 

 

30,739

 

 

6.14

%

Equity securities(3)

 

 

 

 

 

 

 

 

 

 

1,471

 

 

1,471

 

 

5.98

%

                                             

Total

 

$

11,303

 

$

45,246

 

$

17,192

 

$

5,277

 

$

1,471

 

$

80,489

 

 

5.23

%

                                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yield

 

 

3.88

%

 

5.22

%

 

5.79

%

 

6.20

%

 

5.98

%

 

5.23

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate trust preferreds

 

$

 

$

 

$

 

$

3,448

 

$

 

$

3,448

 

 

8.34

%

                                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yield

 

 

0.00

%

 

0.00

%

 

0.00

%

 

8.34

%

 

0.00

%

 

8.34

%

 

 

 


 

 

(1)

Weighted average yields (tax equivalent basis) were calculated on the amortized cost basis.

(2)

U.S. agency mortgage-backed securities are included in the maturity categories based on average expected life.

(3)

Equity securities consist of Federal Home Loan Bank stock and Atlantic Central Bankers Bank stock.

Loans

On December 31, 2007, total loans were $446 million, an increase of approximately $40 million or 10 percent above year-end 2006. Table 7 presents the composition of total loans on a comparative basis for five year-end periods. The table shows a clear trend of growth and corporate emphasis on commercial lending. At year-end 2007, commercial loans increased $17 million or 5 percent above year-end 2006, while consumer loans increased $23 million or 24 percent. For 2007, growth in the commercial loan portfolio was constrained by an unusually large volume of loan run-off, while total consumer loans experienced an unusually large increase due to a successful marketing promotion of home equity loans. During 2007, PeoplesBank’s mortgage banking staff focused on originating and selling residential

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mortgages without retaining servicing rights. These loans are classified on the balance sheet as loans held for sale and reported at the lower of cost or fair value. On December 31, 2007, loans held for sale were $1.8 million, representing a slight increase above year-end 2006.

Table 7-Loan Portfolio Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(dollars in thousands)

 

2007

 

%

 

2006

 

%

 

2005

 

%

 

2004

 

%

 

2003

 

%

 

                                           

Commercial, industrial and agricultural

 

$

243,144

 

54.5

 

$

218,673

 

53.9

 

$

207,545

 

56.4

 

$

189,658

 

63.5

 

$

163,676

 

62.9

 

Real estate - construction and land development

 

 

83,625

 

18.8

 

 

91,414

 

22.5

 

 

74,478

 

20.2

 

 

35,395

 

11.9

 

 

28,147

 

10.8

 

                                                     

Total commercial related loans

 

 

326,769

 

73.3

 

 

310,087

 

76.4

 

 

282,023

 

76.6

 

 

225,053

 

75.4

 

 

191,823

 

73.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential mortgages

 

 

55,257

 

12.4

 

 

31,509

 

7.8

 

 

26,190

 

7.1

 

 

24,954

 

8.3

 

 

25,134

 

9.7

 

Installment

 

 

63,693

 

14.3

 

 

63,977

 

15.8

 

 

59,896

 

16.3

 

 

48,664

 

16.3

 

 

43,249

 

16.6

 

                                                     

Total consumer related loans

 

 

118,950

 

26.7

 

 

95,486

 

23.6

 

 

86,086

 

23.4

 

 

73,618

 

24.6

 

 

68,383

 

26.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

445,719

 

100.0

 

$

405,573

 

100.0

 

$

368,109

 

100.0

 

$

298,671

 

100.0

 

$

260,206

 

100.0

 

                                                     

The following table shows that, at December 31, 2007, the commercial loan portfolio was comprised of $186 million or 57 percent in fixed rate loans and $141 million or 43 percent in floating or adjustable rate loans. Comparatively, the mix was 58/42 on December 31, 2006. Floating rate loans reprice periodically with changes in the Wall Street Journal (WSJ) prime rate and LIBOR. Adjustable rate loans reprice at annual intervals based on the US treasury yield curve. Additional loan information can be found in Note 4—Loans, and within the Risk Management section of this report.

Table 8-Selected Loan Maturities and Interest Rate Sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007
Maturity Distribution

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

1 year
or less

 

1-5
years

 

over 5
years

 

Total

 

                   

Commercial, industrial and agricultural

 

$

37,152

 

$

62,986

 

$

143,006

 

$

243,144

 

Real estate-construction and land development

 

 

57,982

 

 

21,301

 

 

4,342

 

 

83,625

 

                           

Total commercial related loans

 

$

95,134

 

$

84,287

 

$

147,348

 

$

326,769

 

                           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed interest rates

 

$

12,193

 

$

51,690

 

$

121,961

 

$

185,844

 

Floating or adjustable interest rates

 

 

82,941

 

 

32,597

 

 

25,387

 

 

140,925

 

                           

Total commercial related loans

 

$

95,134

 

$

84,287

 

$

147,348

 

$

326,769

 

                           

Other Assets

Included in other assets are PeoplesBank’s investments in real estate partnerships and life insurance. On December 31, 2007, the carrying value of investments in two unrelated real estate partnerships totaled $3.1 million, compared to $3.6 million at year-end 2006. The purpose of these partnerships is to provide low cost housing to income qualified families. PeoplesBank’s role in these real estate partnerships is solely as an investor, whose return is in the form of federal tax credits, which will be realized over a specified number of years. Also included in other assets is an investment in life insurance policies on a select group of employees and directors. This investment is carried at the cash surrender value of the underlying policies. The cash surrender value was approximately $7.8 million on December 31, 2007, which included the impact of a $249,000 payout for death benefits. Comparatively, the cash surrender value on December 31, 2006, was also $7.8 million. Additional information about investment in real

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estate partnerships and bank owned life insurance can be found in Note 1 under the appropriate subheadings.

Funding

Deposits

Deposits are the principal source of funding for earning assets. On December 31, 2007, total deposits were $512 million, an increase of $55 million or 12 percent above year-end 2006. The increase in deposits occurred primarily within short-term CDs (7-13 month maturities), which were priced competitively. Growth in money market deposits was constrained by a decrease in short-term market interest rates instigated by the Federal Reserve to stimulate the national economy. To increase return, some money market customers re-allocated their funds out of money market deposits and into short-term CDs. In addition to promotions, deposit growth was also attributable in part to the addition of two financial centers in March of 2005. The average rate paid on interest bearing deposits was 3.72 percent for 2007, compared to 3.42 percent for 2006. A comparative breakdown of deposits is located in Note 8—Deposits. On December 31, 2007, the balance of certificates of deposit $100,000 and above was $80 million. Of this total, $18 million mature within three months, $17 million mature after three months but within six months, $21 million mature after six months but within twelve months, and the remaining $24 million mature beyond twelve months.

Short-term Borrowings and Long-term Debt

In order to meet short-term funding needs, PeoplesBank may borrow from larger correspondent banks in the form of federal funds purchased. It also can use credit available at the Federal Home Loan Bank of Pittsburgh (FHLBP). Interest rates are established daily based on prevailing market conditions for overnight funds. On December 31, 2007 and 2006, PeoplesBank had no outstanding short-term borrowings.

Long-term debt is a primary funding source for asset growth. On December 31, 2007, long-term debt was $30.7 million, compared to $45.3 million for year-end 2006. The decrease in long-term debt was the result of a $7 million FHLBP advance that matured in October, in addition to the early payoff of $6.5 million in borrowings. During 2007, PeoplesBank paid in full a $5 million Federal Home Loan Bank advance with a 6.43 percent interest rate that matures in 2014. As a result of paying off the advance before its scheduled maturity, PeoplesBank incurred a $437,000 pre-payment penalty included in other expense. Also during the year, the Corporation paid in full a $1.5 million mortgage on the corporate center office building with a LIBOR + 150 basis points variable interest rate that matures in 2011 without prepayment penalty. The reduction of debt in 2007 was made with excess liquidity and is expected to lower interest expense in future periods. In 2006, the Corporation issued $7.2 million in trust preferred debt securities to provide capital 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 obligations is provided in Note 9—Short-term Borrowings and Long-term Debt. Generally, funds for the payment of long-term debt come from operations and refinancings.

PeoplesBank’s maximum borrowing capacity, as established quarterly by the FHLBP, was approximately $122 million as of September 30, 2007, the most recent available date. On December 31, 2007, PeoplesBank had approximately $20 million outstanding on its account with the FHLBP at an average rate of 3.97 percent.

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Shareholders’ Equity and Capital Adequacy

Shareholders’ equity or capital enables the Corporation to maintain asset growth and absorb losses. Capital adequacy can be negatively affected by a multitude of factors, including: corporate expansion, balance sheet growth, losses, dividend policy, and regulatory mandates, among others. Total shareholders’ equity was $48.4 million on December 31, 2007, compared to $42.8 million for year-end 2006. The increase in equity was primarily attributable to profitable operations.

The Corporation typically pays cash dividends on a quarterly basis. The Board of Directors determines the dividend rate after considering the Corporation’s capital requirements, current and projected net income, and other factors. Annual cash dividends per common share totaled $.58 for 2007, which included a special dividend of $.05 per share solely as a result of the recovery the company realized from loan losses experienced in a prior period. Comparatively, cash dividends totaled $.46 per share for 2006. All per share amounts were adjusted for stock dividends.

Periodically, the Corporation distributes stock dividends as an additional means of enhancing long-term shareholder value. The Corporation distributed a 5 percent stock dividend in June of 2007, 2006 and 2005. Additionally, in 2006 the Corporation distributed a special 5 percent stock dividend in December. Distribution of these stock dividends resulted in the issuance of 175,148 additional common shares in 2007, 324,038 shares in 2006 and 149,593 shares in 2005. The weighted average number of shares of common stock outstanding, adjusted for stock dividends, was 3,696,667 for 2007, 3,663,692 for 2006, and 3,648,951 for 2005.

As disclosed in this report, the Corporation maintains various employee, director and shareholder benefit plans that could result in the issuance of its common stock. Information regarding these plans can be found in Note 11-Benefit Plans and Note 12-Stock-Based Compensation to the consolidated financial statements. On February 20, 2007, the Corporation filed a Form 8-K to disclose the adoption of the 2007 Long-Term Incentive Compensation Plan (LTIP). The LTIP is designed to provide stock-based awards to officers, directors and other key employees. Also in February 2007, the Corporation established the 2007 Employee Stock Purchase Plan to provide eligible employees with a convenient method of purchasing company stock at a discount. Both of these plans, which were disclosed in the 2007 Proxy Statement, were approved by shareholders at the annual meeting of shareholders held on May 15, 2007.

In December 2007, the Board of Directors reaffirmed the Share Repurchase Program (Program), which was authorized in 1995, and as periodically amended, to permit the purchase of up to a maximum of 4.9 percent of the outstanding shares of the Corporation’s common stock at a price per share no greater than 200 percent of the latest quarterly published book value. For years ended December 31, 2007 and 2006, the Corporation had not acquired any of its common stock under the current Program.

As described more fully under Recent Accounting Pronouncements within Note 1—Summary of Significant Accounting Policies, management plans to adopt EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” as a cumulative-effect adjustment on January 1, 2008. Accordingly, management anticipates a one time charge to retained earnings of approximately $713,000 at that time. Recognition of the current liability as an expense through the income statement is expected to approximate $56,000 for 2008.

The Corporation 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 Table 9. Table 9 provides a comparison of the Corporation’s and PeoplesBank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirement for the periods indicated. The Corporation issued $7.2

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Table of Contents


million in trust preferred debt securities in June 2006 and $3.1 million in November 2004 to support business growth, which are included in Tier 1 capital for regulatory capital purposes.

Table 9-Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratios

 

Federal

 

Federal

 

Capital *

 

 

 

at December 31,

 

Minimum

 

Well

 

at December 31,

 

(dollars in thousands)

 

2007

 

2006

 

Required

 

Capitalized

 

2007

 

2006

 

                           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

4.00%

 

 

6.00%

 

 

 

 

 

 

 

(as a percentage of risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Codorus Valley Bancorp, Inc. (consolidated)

 

 

12.14

%

 

11.99

%

 

 

 

 

 

 

$

57,727

 

$

52,587

 

PeoplesBank

 

 

11.39

 

 

11.12

 

 

 

 

 

 

 

 

53,759

 

 

48,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

8.00%

 

 

10.00%

 

 

 

 

 

 

 

(as a percentage of risk weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Codorus Valley Bancorp, Inc. (consolidated)

 

 

12.86

%

 

12.71

%

 

 

 

 

 

 

$

61,161

 

$

55,713

 

PeoplesBank

 

 

12.11

 

 

11.84

 

 

 

 

 

 

 

 

57,193

 

 

51,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage

 

 

 

 

 

 

 

 

4.00%

 

 

5.00%

 

 

 

 

 

 

 

(Tier 1 capital as a percentage of average total assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Codorus Valley Bancorp, Inc. (consolidated)

 

 

9.84

%

 

9.83

%

 

 

 

 

 

 

$

57,727

 

$

52,587

 

PeoplesBank

 

 

9.22

 

 

9.09

 

 

 

 

 

 

 

 

53,759

 

 

48,130

 


 

 

*

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

Risk Management

The Corporation’s Risk Management Committee (Committee) meets at least quarterly and includes members of senior management and an independent director. The objective of the Committee is to identify and manage risk inherent in the operations of the Corporation and its affiliates. The Committee’s risk review is broad in scope and includes the following risks: credit, interest rate, liquidity, price, transaction, compliance, strategic and reputation. A primary responsibility of the Committee is to develop, implement and monitor compliance with formal risk management policies and procedures.

Credit Risk Management

The Corporation emphasizes the management of credit risk. To support this objective a sound lending policy framework has been established. This framework includes seven basic policies that guide the lending process and minimize risk. First, the Corporation follows detailed written lending policies and procedures. Second, lending authority is granted commensurate with dollar amount, loan type, level of risk, and loan officer experience. Third, loan review committees function at both the senior lending officer level and the board level to review and approve loans that exceed preestablished dollar thresholds and/or meet other criteria. Fourth, the Corporation directly lends mainly within its primary geographical market area, York County, Pennsylvania and northern Maryland. Although this focus may pose a geographical concentration risk, the diverse local economy and employee knowledge of customers minimizes this risk. Fifth, the loan portfolio is diversified to prevent dependency upon a single customer or small group of related customers. Sixth, Corporation does not participate in the subprime lending market, nor does it invest in securities backed by subprime mortgages. And seventh, the Corporation does not lend to foreign countries or persons residing therein.

In addition to a comprehensive lending policy, numerous internal reviews of loan and foreclosed real estate portfolios occur throughout the year. In addition to internal controls, loan portfolios are reviewed

30


Table of Contents


by independent auditors in connection with their annual financial statement audit and are examined periodically by bank regulators.

One component of the internal credit risk review is the identification and management of industry concentrations, defined as greater than 10 percent of the total loan portfolio. At year-end 2007, the Corporation had two industry concentrations that exceeded 10 percent of the total loan portfolio, real estate construction and land development was 18.8 percent and commercial real estate leasing was 11.5 percent. Commercial leasing involves borrowers who lease real estate to commercial tenants. Loans to borrowers within these industries are usually collateralized with real estate. Comparatively, at year-end 2006, only one industry concentration exceeded 10 percent of the total loan portfolio, real estate construction and land development, which was 22.5 percent of the portfolio.

Nonperforming Assets

The following table presents asset categories posing the greatest risk of loss. Management generally places a loan on nonaccrual status and ceases accruing interest income when loan payment performance is unsatisfactory and the loan is past due 90 days or more. Loans past due 90 days or more and still accruing interest, are contractually past due, but well collateralized and in the process of collection. The final category, foreclosed real estate, is real estate acquired to satisfy debts owed to PeoplesBank. Table 10 also provides a summary of nonperforming assets and related ratios. The paragraphs below explain significant changes in the aforementioned categories for December 31, 2007, compared to December 31, 2006.

Table 10-Nonperforming Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

$

9,411

 

$

4,368

 

$

1,034

 

$

622

 

$

516

 

Accruing loans that are contractually past due 90 days or more as to principal or interest

 

 

222

 

 

4

 

 

 

 

19

 

 

49

 

Foreclosed real estate, net of allowance

 

 

403

 

 

38

 

 

7

 

 

1,535

 

 

1,326

 

                                 

Total nonperforming assets

 

$

10,036

 

$

4,410

 

$

1,041

 

$

2,176

 

$

1,891

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans as a % of total year-end loans

 

 

2.11

%

 

1.08

%

 

0.28

%

 

0.21

%

 

0.20

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets as a % of total year-end loans and net foreclosed real estate

 

 

2.25

%

 

1.09

%

 

0.28

%

 

0.72

%

 

0.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets as a % of total year-end stockholders’ equity

 

 

20.73

%

 

10.31

%

 

2.69

%

 

6.05

%

 

5.60

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a multiple of nonaccrual loans

 

 

.4x

 

 

.7x

 

 

2.5x

 

 

3.0x

 

 

3.3x

 

On December 31, 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 December 31, 2007, the nonaccrual loan portfolio was $9,411,000, compared to $4,368,000 on December 31, 2006. Most of the portfolio balance at year-end 2007 was attributable to two unrelated

31


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business loans with outstanding principal balances of $4,658,000 and $3,298,000, respectively. In management’s judgment, both loans are adequately secured by real estate, which should ensure the ultimate recovery of interest and principal in full. On December 31, 2007, nonaccrual loans were comprised of 11 unrelated accounts ranging in size from $4,000 to $4,658,000. For 2007, the gross interest income that would have been recorded if the nonaccrual loans had been current in accordance with their original terms and current throughout the period was approximately $836,000. The amount of interest income on those nonaccrual loans that was included in net income for 2007 was approximately $628,000. The interest income recognized on impaired loans, which includes nonaccrual loans, in Note 5-Impaired, Nonaccrual and Past Due Loans is a lesser amount because it includes interest income only from the time the loan was impaired. Management and the Board of Directors evaluate the adequacy of the allowance for loan losses at least quarterly. 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.

Foreclosed real estate, net of allowance, was $403,000 on December 31, 2007, compared to $38,000 on December 31, 2006. The current period portfolio contains one property that management is trying to liquidate. The provision expense for foreclosed real estate, due to declines in the fair value of individual assets, was $0 for 2007 and 2006, and $17,000 for 2005.

On December 31, 2007, loans contractually past due 90 days or more as to principal or interest totaled $222,000, compared to $4,000 on December 31, 2006. At year-end 2007, the delinquency pertained to one business loan account that paid off in full in February 2008.

On December 31, 2007, there were approximately $7.8 million in potential problem loans closely monitored by management. Potential problem loans consist of loans for which management has doubts as to the ability of the borrower to comply with present repayment terms, and which are not disclosed in Table 10. A loss allowance is established for those potential problem loans that in management’s judgment were inadequately collateralized. Comparatively, management was monitoring approximately $1.9 million in potential problem loans on December 31, 2006.

Allowance for Loan Losses

Although the Corporation maintains sound credit policies, certain loans deteriorate and must be charged off as losses. The allowance for loan losses is maintained to absorb losses inherent in the portfolio at December 31, 2007. The allowance is increased by provisions charged to expense and is reduced by loan charge-offs, net of recoveries. The allowance is based upon management’s continuous evaluation of the loan portfolio coupled with a formal review of adequacy on a quarterly basis, which is subject to review and approval by the Board. In analyzing the adequacy of the allowance, management considers the results of internal and external credit reviews, past loss experience, changes in the size and composition of the loan portfolio, adequacy of collateral, general economic conditions and the local business outlook. All of these factors are susceptible to significant change. Determining the level of the allowance for probable loan losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. Management must make estimates using assumptions and information which are often subjective and fluid. Table 11 presents an analysis of the activity in the allowance for loan losses over a five-year period. Table 12 presents an allocation of the allowance for loan losses by major loan category. The unallocated component of the allowance for loan losses represents probable losses inherent in the portfolio that are not fully captured in the allocated allowance analyses, such as: industry concentrations, imprecision in the loan risk evaluation process and current economic factors.

The allowance was $3,434,000 or .77 percent of total loans on December 31, 2007, compared to $3,126,000 and .77 percent, respectively, on December 31, 2006. The current period allowance was based on management’s estimate of the amount necessary to bring the allowance to a level reflective of

32


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the risk in the loan portfolio and loan growth. Management considered macro-economic factors that could adversely affect the ability of PeoplesBank’s loan clients to repay their loans, including a general economic slowdown or possible recession, increases in food and energy costs, rising unemployment and continued downturn in the real estate market. These factors contributed to an increase in the unallocated component in 2007 as noted in Table 12. The $839,000 recovery in 2007 of prior period commercial loan losses was discussed in the provision for loan loss section of this report. The Corporation does not participate in the subprime lending market and accordingly, it has no loss exposure to subprime lending. Based on its 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 December 31, 2007.

Table 11-Analysis of Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - beginning of year

 

$

3,126

 

$

2,538

 

$

1,865

 

$

1,694

 

$

1,515

 

Provision charged (recovery credited) to operating expense

 

 

(554

)

 

650

 

 

775

 

 

420

 

 

553

 

Loans charged off

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

7

 

 

104

 

 

34

 

 

336

 

 

684

 

Real estate-mortgage

 

 

31

 

 

27

 

 

99

 

 

30

 

 

 

Consumer

 

 

28

 

 

19

 

 

80

 

 

111

 

 

86

 

                                 

Total loans charged off

 

 

66

 

 

150

 

 

213

 

 

477

 

 

770

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

886

 

 

58

 

 

74

 

 

216

 

 

370

 

Real estate-mortgage

 

 

16

 

 

3

 

 

2

 

 

1

 

 

 

Consumer

 

 

26

 

 

27

 

 

35

 

 

11

 

 

26

 

                                 

Total recoveries

 

 

928

 

 

88

 

 

111

 

 

228

 

 

396

 

                                 

Net (recoveries) charge-offs

 

 

(862

)

 

62

 

 

102

 

 

249

 

 

374

 

                                 

Balance - end of year

 

$

3,434

 

$

3,126

 

$

2,538

 

$

1,865

 

$

1,694

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (recoveries) charge-offs as a % of average total loans

 

 

(0.20

)%

 

0.02

%

 

0.03

%

 

0.09

%

 

0.15

%

Allowance for loan losses as a % of total loans

 

 

0.77

%

 

0.77

%

 

0.69

%

 

0.62

%

 

0.65

%

Allowance for loan losses as a % of nonaccrual loans and loans past due 90 days or more

 

 

36

%

 

71

%

 

245

%

 

291

%

 

300

%

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Table of Contents


Table 12-Allocation of Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

                   

(dollars in thousands)

 

Amount

 

% Total
Loans

 

Amount

 

% Total
Loans

 

Amount

 

% Total
Loans

 

Amount

 

% Total
Loans

 

Amount

 

% Total
Loans

 

                                           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, industrial and agricultural

 

$

1,622

 

54.5

 

$

1,500

 

53.9

 

$

1,339

 

56.4

 

$

1,216

 

63.5

 

$

1,105

 

62.9

 

Real estate - construction and land development

 

 

615

 

18.8

 

 

549

 

22.5

 

 

439

 

20.2

 

 

213

 

11.9

 

 

80

 

10.8

 

                                                     

Total commercial related

 

 

2,237

 

73.3

 

 

2,049

 

76.4

 

 

1,778

 

76.6

 

 

1,429

 

75.4

 

 

1,185

 

73.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential mortgages

 

 

22

 

12.4

 

 

22

 

7.8

 

 

19

 

7.1

 

 

13

 

8.3

 

 

15

 

9.7

 

Installment

 

 

147

 

14.3

 

 

122

 

15.8

 

 

141

 

16.3

 

 

116

 

16.3

 

 

115

 

16.6

 

                                                     

Total consumer related

 

 

169

 

26.7

 

 

144

 

23.6

 

 

160

 

23.4

 

 

129

 

24.6

 

 

130

 

26.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

1,028

 

n/a

 

 

933

 

n/a

 

 

600

 

n/a

 

 

307

 

n/a

 

 

379

 

n/a

 

                                                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,434

 

100.0

 

$

3,126

 

100.0

 

$

2,538

 

100.0

 

$

1,865

 

100.0

 

$

1,694

 

100.0

 

                                                     

Note: The specific allocation for any particular loan category may be reallocated in the future as risk perceptions change. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire loan portfolio.

Liquidity

Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan customers, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, it provides funds for growth and business opportunities as they arise. Liquidity is generated from transactions relating to both the Corporation’s assets and liabilities. The primary sources of asset liquidity are scheduled investment security maturities and cash inflows, funds received from customer loan payments, and asset sales. The primary sources of liability liquidity are deposit growth, short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. For 2007, management believes that liquidity was more than adequate based on the level of overnight investment, the potential liquidation of an $81 million portfolio of available-for-sale securities, valued at December 31, 2007, and available credit from the Federal Home Loan Bank of Pittsburgh. On September 30, 2007, the latest available date, available net funding from the FHLBP was approximately $102 million. The Corporation’s loan-to-deposit ratio was 87 percent for year-end 2007, compared to 89 percent for year-end 2006.

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Financial instruments with off-balance sheet risk are disclosed in Note 14-Commitments to Extend Credit of this report and totaled $161million at December 31, 2007, compared to $122 million at December 31, 2006. Normally these commitments have fixed expiration dates or termination clauses and are for specific purposes. Accordingly, many of the commitments are expected to expire without

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being drawn and therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

Contractual Obligations

The following table presents the amount and timing of payments due under long-term contractual obligations.

Table 13-Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007
Payments due by period

 

 

 

 

 

 

 

(dollars in thousands)

 

Total

 

Less than
1 year

 

1-3
years

 

3-5
years

 

More than
5 years

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

30,134

 

$

1,125

 

$

13,359

 

$

5,096

 

$

10,554

 

Capital lease

 

 

526

 

 

40

 

 

93

 

 

132

 

 

261

 

Operating leases

 

 

997

 

 

201

 

 

386

 

 

267

 

 

143

 

Time deposits

 

 

254,140

 

 

181,897

 

 

66,600

 

 

5,643

 

 

 

Supplemental retirement plans

 

 

5,825

 

 

 

 

 

 

150

 

 

5,675

 

                                 

Total

 

$

291,622

 

$

183,263

 

$

80,438

 

$

11,288

 

$

16,633

 

                                 

Impact of Inflation and Changing Prices

The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation may impact the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation may also significantly affect noninterest expenses, which tend to rise during periods of general inflation. The level of inflation can be measured by the change in the Consumer Price Index (CPI) for all urban consumers (December vs. December). The change in the CPI for 2007 was 4.1 percent, compared to 2.5 percent for 2006 and 3.4 percent for 2005.

Management believes that the most significant impact on financial results is the Corporation’s ability to react to changes in market interest rates. As discussed below in the Market Risk Management section, management strives to structure the balance sheet to increase net interest income by managing interest rate sensitive assets and liabilities to reprice in response to changes in market interest rates. Additionally, management is focused on increasing fee income, an income component that is less sensitive to changes in market interest rates.

Item 7A: Quantitative and qualitative disclosures about market risk

Market Risk Management

In the normal course of conducting business, the Corporation is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary, PeoplesBank. Interest rate risk arises from market driven fluctuations in interest rates that may affect cash flows, income, expense and the values of financial instruments. PeoplesBank is particularly vulnerable to changes in short-term interest rates such as the Wall Street Journal Prime rate (prime), LIBOR and short-term US treasury rates. An Asset-Liability Committee (Committee) comprised of members of senior management manages interest

35


Table of Contents


rate risk. The Committee’s objective is to maximize net interest income within acceptable levels of liquidity and interest rate risk and within capital adequacy constraints. PeoplesBank is not subject to foreign currency or commodity price risk and it does not own any trading assets.

The Committee manages interest rate risk primarily through sensitivity analysis. Asset-liability management simulation software (ALM model) is used to model and measure the potential loss in future net income based on hypothetical changes in interest rates. Interest rate forecasts are supplied by a national forecasting service and integrated with the ALM model. The Corporation’s policy limit for the maximum negative impact on net income is 10 percent over a twelve-month period. This policy limit is tested on a quarterly basis by measuring the change in net income from a baseline scenario where interest rates are held constant, to a high rate scenario (gradual 200 basis point increase in prime and fed funds rates), a low rate scenario (gradual 200 basis point decrease in prime and fed funds rates) and a most likely scenario (defined by a forecasting service) over the future twelve-month period. Important ALM modeling assumptions include: the use of a static balance sheet and contractual cash flows; varying levels of prepayments for loans and mortgage-backed securities; stability of noninterest income and expense; reinvestment of repriceable cash flows in the same type of asset or liability; and constant product rate spreads, determined at the balance sheet date, over the twelve-month measurement period. The ALM model also includes significant balance sheet characteristics such as rate caps and floors. For both year-end periods, management presumed that in all scenarios trust preferred investment securities, which are callable at a premium, would be called by the issuers due to the relatively high coupon rate and would result in a one time increase in interest income.

The Corporation performed a financial simulation on the balance sheet for December 31, 2007 and 2006. The results of these point-in-time analyses are shown in Table 14. For both periods the ALM model portrayed a balance sheet that was liability sensitive. Liability sensitivity means that deposits and debt are likely to re-price to a greater and faster degree than the loans and investments that they fund. This suggests that net income may increase if market interest rates, particularly short-term rates, decrease. Conversely, net income would be expected to decrease if market interest rates increase. In response to market interest rates over the past two years, loan clients have shown a preference for longer term fixed rate loans, while deposit clients have shown a preference for money market deposits and short-term CDs. The result has been a gradual shift in the balance sheet to a liability sensitive position. On the December 31, 2007 measurement date, the model projects hypothetical losses even under declining rate scenarios; however, the losses are less than projected by the rising rate scenario. This is due in part to the timing and magnitude of changes in various interest rates forecasted by the forecasting service. For example, the most likely scenario projects prime and federal funds rates to decline by 50 basis points over the next twelve months, while US treasury rates increase 17 to 48 basis points depending on the term. Accordingly, deposit rates tied to the US treasury curve for modeling purposes result in greater interest expense which decreases net income.

36


Table of Contents


Table 14-Interest Rate Sensitivity

 

 

 

 

 

 

 

 

 

 

 

Forecasted
interest rate
scenario

 

Change in interest rates
ramped over 12 months
(basis points)

 

Change in
net income

 

 

 

 

 

 

$000’s

 

%

 

                   

 

 

 

 

 

 

 

 

 

 

 

 

at December 31, 2007

 

 

 

 

 

 

 

Most likely

 

-50

 

 

 

(497

)

 

(7.7

)

High

 

+200

 

 

 

(580

)

 

(8.9

)

Flat (baseline)

 

0

 

 

 

0

 

 

0.0

 

Low

 

-200

 

 

 

(327

)

 

(5.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Measurement of interest rate risk requires many assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower rates on net income. Actual results may differ from simulated results due to many factors including: timing of cash flows, magnitude and frequency of interest rate changes, customer behavior, changes in market conditions, and management strategies.

37


Table of Contents


Report of Management’s Assessment of
Internal Controls Over Financial Reporting

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2007, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2007, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, with an emphasis on Internal Control Over Financial Reporting-Guidance for Smaller Public Companies, also issued by COSO. Based on this assessment, management concluded that, as of December 31, 2007, the Corporation’s internal control over financial reporting is effective based on those criteria.

This Annual Report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Corporation to provide only management’s report in this Annual Report.

 

 

 

/s/ Larry J. Miller

 

/s/ Jann A. Weaver

 

Larry J. Miller

 

Jann A. Weaver

(Principal Executive Officer)

 

(Principal Financial and Accounting

Vice-Chairman, President

 

Officer) Treasurer, and

and Chief Executive Officer

 

Assistant Secretary

 

 

 

March 11, 2008

 

 

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Table of Contents


Item 8: Financial statements and supplementary data

 

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets


 

 

 

 

 

 

 

 

 

 

December 31,

 

(dollars in thousands, except per share data)

 

2007

 

2006

 

           

Assets

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

118

 

$

118

 

Cash and due from banks

 

 

13,946

 

 

11,104

 

Federal funds sold

 

 

24,989

 

 

24,150

 

               

Total cash and cash equivalents

 

 

39,053

 

 

35,372

 

Securities, available-for-sale

 

 

80,921

 

 

73,423

 

Securities, held-to-maturity (fair value $3,624 for 2007 and $7,840 for 2006)

 

 

3,448

 

 

7,503

 

Loans held for sale

 

 

1,778

 

 

1,687

 

Loans (net of deferred fees of $315 in 2007 and $534 in 2006)

 

 

445,719

 

 

405,573

 

Less-allowance for loan losses

 

 

(3,434

)

 

(3,126

)

               

Net loans

 

 

442,285

 

 

402,447

 

Premises and equipment, net

 

 

10,252

 

 

10,495

 

Other assets

 

 

16,870

 

 

17,285

 

               

Total assets

 

$

594,607

 

$

548,212

 

               

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest bearing

 

$

46,719

 

$

49,190

 

Interest bearing

 

 

465,249

 

 

407,455

 

               

Total deposits

 

 

511,968

 

 

456,645

 

Long-term debt

 

 

20,350

 

 

35,029

 

Junior subordinated debentures

 

 

10,310

 

 

10,310

 

Other liabilities

 

 

3,564

 

 

3,442

 

               

Total liabilities

 

 

546,192

 

 

505,426

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred stock, par value $2.50 per share;1,000,000 shares authorized; 0 shares issued and outstanding

 

 

 

 

 

Common stock, par value $2.50 per share;10,000,000 shares authorized; 3,738,950 shares issued and outstanding for 2007 and 3,502,919 for 2006

 

 

9,347

 

 

8,757

 

Additional paid-in capital

 

 

32,516

 

 

28,839

 

Retained earnings

 

 

6,267

 

 

5,434

 

Accumulated other comprehensive income (loss)

 

 

285

 

 

(244

)

               

Total shareholders’ equity

 

 

48,415

 

 

42,786

 

               

Total liabilities and shareholders’ equity

 

$

594,607

 

$

548,212

 

               

See accompanying notes.

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Table of Contents


 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Income


 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

(dollars in thousands, except per share data)

 

2007

 

2006

 

2005

 

               

Interest income

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

34,007

 

$

29,361

 

$

22,462

 

Investment securities

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,650

 

 

2,563

 

 

2,461

 

Tax-exempt

 

 

1,206

 

 

729

 

 

445

 

Dividends

 

 

149

 

 

136

 

 

69

 

Federal funds sold

 

 

1,149

 

 

520

 

 

130

 

Other

 

 

8

 

 

10

 

 

5

 

                     

Total interest income

 

 

39,169

 

 

33,319

 

 

25,572

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

16,417

 

 

12,766

 

 

7,255

 

Federal funds purchased and other short-term borrowings

 

 

 

 

133

 

 

73

 

Long-term debt

 

 

2,072

 

 

2,178

 

 

1,821

 

                     

Total interest expense

 

 

18,489

 

 

15,077

 

 

9,149

 

                     

Net interest income

 

 

20,680

 

 

18,242

 

 

16,423

 

 

Provision for (recovery of) loan losses

 

 

(554

)

 

650

 

 

775

 

                     

Net interest income after provision for (recovery of) loan losses

 

 

21,234

 

 

17,592

 

 

15,648

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

Trust and investment services fees

 

 

1,260

 

 

1,255

 

 

1,147

 

Service charges on deposit accounts

 

 

1,979

 

 

1,870

 

 

1,638

 

Mutual fund, annuity and insurance sales

 

 

1,506

 

 

1,349

 

 

1,156

 

Income from bank owned life insurance

 

 

271

 

 

263

 

 

269

 

Other income

 

 

431

 

 

485

 

 

507

 

Gain on sales of mortgages

 

 

248

 

 

323

 

 

372

 

Loss on sales of securities

 

 

(7

)

 

(80

)

 

(86

)

                     

Total noninterest income

 

 

5,688

 

 

5,465

 

 

5,003

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

Personnel

 

 

10,676

 

 

9,080

 

 

8,163

 

Occupancy of premises, net

 

 

1,333

 

 

1,368

 

 

1,311

 

Furniture and equipment

 

 

1,324

 

 

1,350

 

 

1,241

 

Postage, stationery and supplies

 

 

449

 

 

410

 

 

468

 

Professional and legal

 

 

317

 

 

277

 

 

326

 

Marketing and advertising

 

 

675

 

 

589

 

 

698

 

Other

 

 

3,594

 

 

2,816

 

 

2,275

 

                     

Total noninterest expense

 

 

18,368

 

 

15,890

 

 

14,482

 

                     

Income before income taxes

 

 

8,554

 

 

7,167

 

 

6,169

 

 

Provision for income taxes

 

 

2,180

 

 

1,845

 

 

1,552

 

                     

Net income

 

$

6,374

 

$

5,322

 

$

4,617

 

                     

Net income per share, basic

 

$

1.72

 

$

1.45

 

$

1.27

 

Net income per share, diluted

 

$

1.69

 

$

1.42

 

$

1.24

 

See accompanying notes.

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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,374

 

$

5,322

 

$

4,617

 

Adjustments to reconcile net income to cash provided by operations:

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

1,123

 

 

1,165

 

 

1,115

 

Provision for (recovery of) loan losses

 

 

(554

)

 

650

 

 

775

 

Provision for losses on foreclosed real estate

 

 

 

 

 

 

17

 

Deferred federal income tax benefit

 

 

(235

)

 

(372

)

 

(93

)

Amortization of investment in real estate partnerships

 

 

503

 

 

484

 

 

472

 

Increase in cash surrender value of life insurance investment

 

 

(271

)

 

(263

)

 

(269

)

Originations of held for sale mortgages

 

 

(17,845

)

 

(23,249

)

 

(29,402

)

Proceeds from sales of held for sale mortgages

 

 

18,002

 

 

23,407

 

 

29,841

 

Gain on sales of held for sale mortgages

 

 

(248

)

 

(323

)

 

(372

)

Loss on sales of securities

 

 

7

 

 

80

 

 

86

 

Gain on sales of premises and equipment

 

 

 

 

(43

)

 

 

Loss (gain) on sales of foreclosed real estate

 

 

2

 

 

(4

)

 

(154

)

Stock-based compensation expense

 

 

55

 

 

54

 

 

 

Increase in accrued interest receivable

 

 

(91

)

 

(376

)

 

(532

)

Decrease (increase) in other assets

 

 

361

 

 

(392

)

 

48

 

(Decrease) increase in accrued interest payable

 

 

(23

)

 

365

 

 

149

 

Increase in other liabilities

 

 

145

 

 

464

 

 

348

 

Other, net

 

 

160

 

 

190

 

 

240

 

                     

Net cash provided by operating activities

 

 

7,465

 

 

7,159

 

 

6,886

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Securities, available-for-sale

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

(23,333

)

 

(26,404

)

 

(17,985

)

Maturities and calls

 

 

15,195

 

 

10,874

 

 

17,327

 

Sales

 

 

961

 

 

2,176

 

 

3,918

 

Securities, held-to-maturity, calls

 

 

4,172

 

 

1,676

 

 

 

Net decrease (increase) in restricted investment in bank stock

 

 

460

 

 

520

 

 

(2

)

Net increase in loans made to customers

 

 

(40,080

)

 

(37,566

)

 

(69,506

)

Purchases of premises and equipment

 

 

(883

)

 

(775

)

 

(2,174

)

Investment in real estate partnership

 

 

 

 

 

 

(420

)

Investment in life insurance

 

 

(7

)

 

(7

)

 

(7

)

Investment in nonconsolidated subsidiary

 

 

 

 

(217

)

 

 

Proceeds from life insurance

 

 

249

 

 

 

 

 

Purchase of insurance agency assets

 

 

 

 

(63

)

 

(60

)

Proceeds from sales of premises and equipment

 

 

 

 

55

 

 

 

Proceeds from sales of foreclosed real estate

 

 

167

 

 

9

 

 

1,690

 

                     

Net cash used in investing activities

 

 

(43,099

)

 

(49,722

)

 

(67,219

)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Net increase in demand and savings deposits

 

 

2,949

 

 

36,066

 

 

27,459

 

Net increase in time deposits

 

 

52,374

 

 

35,425

 

 

28,158

 

Net decrease in short-term borrowings

 

 

 

 

(9,781

)

 

(3,099

)

Proceeds from issuance of long-term debt

 

 

 

 

7,217

 

 

20,500

 

Repayment of long-term debt

 

 

(14,679

)

 

(1,590

)

 

(7,401

)

Dividends paid

 

 

(2,155

)

 

(1,703

)

 

(1,554

)

Issuance of common stock

 

 

832

 

 

229

 

 

276

 

Cash paid in lieu of fractional shares

 

 

(6

)

 

(13

)

 

(6

)

                     

Net cash provided by financing activities

 

 

39,315

 

 

65,850

 

 

64,333

 

                     

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

3,681

 

 

23,287

 

 

4,000

 

Cash and cash equivalents at beginning of year

 

 

35,372

 

 

12,085

 

 

8,085

 

                     

Cash and cash equivalents at end of year

 

$

39,053

 

$

35,372

 

$

12,085

 

                     

 

Supplemental disclosures

 

 

 

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

18,512

 

$

14,712

 

$

9,000

 

Income taxes paid

 

$

1,765

 

$

1,732

 

$

1,095

 

See accompanying notes.

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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total

 

                       

 

Balance, December 31, 2004

 

$

7,481

 

$

20,293

 

$

8,034

 

$

174

 

$

35,982

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

4,617

 

 

 

 

 

4,617

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities net of reclassification adjustment for gains included in net income

 

 

 

 

 

 

 

 

 

 

 

(586

)

 

(586

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,031

 

Cash dividends ($.43 per share)

 

 

 

 

 

 

 

 

(1,554

)

 

 

 

 

(1,554

)

5% stock dividend - 149,593 shares at fair value

 

 

374

 

 

2,513

 

 

(2,893

)

 

 

 

 

(6

)

Issuance of common stock - 18,638 shares under stock option plan

 

 

47

 

 

229

 

 

 

 

 

 

 

 

276

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

 

7,902

 

 

23,035

 

 

8,204

 

 

(412

)

 

38,729

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

5,322

 

 

 

 

 

5,322

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities net of reclassification adjustment for losses included in net income

 

 

 

 

 

 

 

 

 

 

 

168

 

 

168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,490

 

Cash dividends ($.46 per share)

 

 

 

 

 

 

 

 

(1,703

)

 

 

 

 

(1,703

)

5% stock dividend - 157,713 shares at fair value

 

 

394

 

 

2,667

 

 

(3,068

)

 

 

 

 

(7

)

5% stock dividend - 166,325 shares at fair value

 

 

416

 

 

2,899

 

 

(3,321

)

 

 

 

 

(6

)

Stock-based compensation

 

 

 

 

 

54

 

 

 

 

 

 

 

 

54

 

Issuance of common stock - 18,060 shares under stock option plan

 

 

45

 

 

184

 

 

 

 

 

 

 

 

229

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

 

 

8,757

 

 

28,839

 

 

5,434

 

 

(244

)

 

42,786

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

6,374

 

 

 

 

 

6,374

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities net of reclassification adjustment for losses included in net income

 

 

 

 

 

 

 

 

 

 

 

529

 

 

529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,903

 

Cash dividends ($.58 per share)

 

 

 

 

 

 

 

 

(2,155

)

 

 

 

 

(2,155

)

5% stock dividend - 175,148 shares at fair value

 

 

438

 

 

2,942

 

 

(3,386

)

 

 

 

 

(6

)

Stock-based compensation

 

 

 

 

 

55

 

 

 

 

 

 

 

 

55

 

Issuance of common stock - 60,883 shares under stock option plan

 

 

152

 

 

680

 

 

 

 

 

 

 

 

832

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

$

9,347

 

$

32,516

 

$

6,267

 

$

285

 

$

48,415

 

                                 

See accompanying notes.

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Codorus Valley Bancorp, Inc.
Notes to Consolidated Financial Statements

NOTE 1-Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation
Codorus Valley Bancorp, Inc. (Corporation or Codorus Valley) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank). PeoplesBank operates two wholly owned subsidiaries, Codorus Valley Financial Advisors, Inc. (formerly SYC Insurance Services, Inc.) which sells nondeposit investment products, and SYC Settlement Services, Inc., which provides real estate settlement services. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation.

The consolidated financial statements include the accounts of Codorus Valley and its wholly owned bank subsidiary, PeoplesBank, and its wholly owned nonbank subsidiary, SYC Realty Company, Inc. The corporate purpose of SYC Realty, which has been inactive for all reportable periods, is to purchase and sell property acquired through debts previously contracted with an affiliate. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

Investment Securities
The classification of securities is determined at the time of acquisition and is reevaluated at each reporting date. Securities classified as available-for-sale are debt securities, except for investment in restricted stock of the Federal Home Loan Bank and Atlantic Central Bankers Bank which is required as a condition of membership and carried at cost. The Corporation intends to hold debt securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in maturity mix of assets and liabilities, liquidity needs, regulatory considerations and other factors. Debt securities available-for-sale are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive income or loss in shareholders’ equity. Premiums and discounts are recognized in interest income using the interest method over the estimated life of the securities. Realized gains and losses from the sale of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the statement of income.

Securities classified as held-to-maturity are those debt securities that the Corporation has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over the estimated life of the securities.

Declines in the fair value of available-for-sale and held-to-maturity securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers: 1) the length of time and the extent to which the fair value has been less than cost, 2) the financial condition and near-term prospects of the issuer, and 3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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Loans Held for Sale
Loans held for sale are reported at the lower of cost or fair value, as determined in the aggregate. The amount by which cost exceeds fair value, if any, is accounted for as a valuation allowance and is charged to expense in the period of the change.

Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are generally deferred and recognized as adjustments of interest rate yields, by being amortized to interest income over the terms of the related loans. Determination of a loans past due status is based on contractual terms. When circumstances indicate that collection of a loan is doubtful, the accrual of interest income is discontinued and unpaid interest previously credited to income is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when management determines that circumstances have improved to the extent that all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on current economic conditions, prior loss experience, adequacy of collateral, risk characteristics of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as additional information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that PeoplesBank will be unable to collect all amounts when due according to contractual terms of the loan agreement. Factors considered by management in determining impairment, include: payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. An insignificant delay or shortfall in the amount of payments received would not cause a loan to be rendered impaired. Impairment is measured on an individual loan basis for business loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous consumer loans are collectively evaluated for impairment using

44


Table of Contents


loss factors derived in part from historical charge-offs. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosure, unless such loans are the subject of a restructuring agreement. Income on impaired loans is recognized under the same policy as disclosed under the heading Loans in this Note.

Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the assets’ estimated useful lives. Estimated useful lives are ten to forty years for buildings and improvements, five to ten years for furniture and equipment and three to five years for computer equipment and software. Maintenance and repairs are charged to expense as incurred. The cost of significant improvements to existing assets is capitalized. When facilities are retired or otherwise disposed of, the depreciated cost is removed from the asset accounts and any gain or loss is reflected in the statement of income.

Foreclosed Real Estate
Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding, acceptance of a deed-in-lieu of foreclosure, or insubstance foreclosures. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Appraisals are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition. Revenue and expense from operations and changes in the valuation allowance are included in expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of other expense. At year-end 2007, foreclosed real estate, net of allowance, was $403,000, compared to $38,000 for year-end 2006.

Investments in Real Estate Partnerships
In March 2003, PeoplesBank acquired a 73.47 percent limited partner interest in a real estate joint venture known as Village Court, which was formed to develop, construct, own and operate a 60-unit affordable housing complex located in Dover Township, York County, Pennsylvania. Construction of the housing complex was completed in the fourth quarter of 2004 and the complex was fully leased by December 31, 2004. The investment balance included in other assets was $1,990,000 at December 31, 2007, compared to $2,251,000 at December 31, 2006. Additionally, PeoplesBank is a 99.99 percent limited partner in a real estate joint venture known as SMB Properties that rehabilitated and now operates seven buildings in the City of York, Pennsylvania as part of a revitalization initiative. The buildings provide low-income housing to qualified families and to a lesser degree, space for commercial purposes. The investment balance included in other assets was $1,086,000 at December 31, 2007, compared to $1,328,000 at December 31, 2006.

Investment and related tax credits are accounted for under the effective yield method of accounting under which tax credits are recognized as they are allocated and the cost of the investment is amortized to provide a constant yield over the period that tax credits are allocated, generally ten years.

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Table of Contents


Bank Owned Life Insurance
PeoplesBank invests in bank owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by PeoplesBank on a select group of employees and directors. PeoplesBank is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies and is included in other assets in the amount of $7,807,000 at December 31, 2007, compared to $7,922,000 at December 31, 2006. Income from the increase in cash surrender value of the policies is a separate line item within the noninterest income section of the income statement.

Trust and Investment Services Assets
Assets held by PeoplesBank in a fiduciary or agency capacity for its customers are not included in the consolidated statements of financial condition since these items are not assets of PeoplesBank.

Advertising
Advertising costs are charged to expense when incurred.

Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance, when in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the effective date.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the year ended December 31, 2007. Our policy is to recognize interest and penalties on unrecognized tax benefits in income taxes expense in the Consolidated Statement of Income. The Company did not recognize any interest and penalties for the year ended December 31, 2007. The tax years subject to examination by the taxing authorities are the years ended December 31, 2006, 2005, 2004 and 2003.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operation.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the evaluation of other than temporary impairment losses of securities.

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Per Share Data
Basic net income per share is calculated as net income divided by the weighted average number of common shares outstanding. Diluted net income per share is calculated as net income divided by the weighted average number of common shares outstanding plus common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method. All share and per share amounts are adjusted for stock dividends that are declared prior to the issuance of the financial statements.

The computation of net income per share for the years ended December 31, 2007, 2006 and 2005 is provided in the table below. Anti-dilutive options excluded from the computation of earnings per share were 0 for 2007, 0 for 2006, and 53,607 for 2005.

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

2007

 

2006

 

2005

 

               

Net income

 

$

6,374

 

$

5,322

 

$

4,617

 

                     

 

Weighted average shares outstanding (basic)

 

 

3,697

 

 

3,664

 

 

3,649

 

Effect of dilutive stock options

 

 

80

 

 

86

 

 

73

 

                     

Weighted average shares outstanding (diluted)

 

 

3,777

 

 

3,750

 

 

3,722

 

 

Basic earnings per share

 

$

1.72

 

$

1.45

 

$

1.27

 

Diluted earnings per share

 

$

1.69

 

$

1.42

 

$

1.24

 

Stock dividends issued by the Board of Directors of Codorus Valley for the years 2005 through 2007 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Stock
Dividend

 

 

Declaration
Date

 

 

Record
Date

 

 

Payable
Date

 

                     

5%

 

 

4/10/2007

 

 

4/24/2007

 

 

6/7/2007

 

5%

 

 

10/10/2006

 

 

10/24/2006

 

 

12/7/2006

 

5%

 

 

4/11/2006

 

 

4/25/2006

 

 

6/08/2006

 

5%

 

 

4/12/2005

 

 

4/26/2005

 

 

6/09/2005

 

Stock Based Compensation
The Corporation adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (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 12 – Stock-Based Compensation.

Cash Flow Information
For purposes of the statements of cash flows, the Corporation considers interest bearing deposits with banks, cash and due from banks, and federal funds sold to be cash and cash equivalents. Noncash items for the years ended December 31, 2007, 2006 and 2005 consisted of the transfer of loans to foreclosed real estate for $576,000, $38,000 and $22,000, respectively.

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Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. These financial instruments are recorded on the balance sheet when they become a receivable to the Corporation.

Comprehensive Income
Accounting principles generally accepted in the U.S. 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 of comprehensive income or loss. The components of other comprehensive income and related tax effects are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

Unrealized holding gains (losses) arising during the year

 

$

794

 

$

175

 

$

(974

)

Reclassification adjustment for losses included

 

 

 

 

 

 

 

 

 

 

in income

 

 

7

 

 

80

 

 

86

 

                     

Net unrealized gains (losses)

 

 

801

 

 

255

 

 

(888

)

Tax effect

 

 

(272

)

 

(87

)

 

302

 

                     

Net of tax amount

 

$

529

 

$

168

 

$

(586

)

               

Segment Reporting

Management has determined that it operates in only one segment, community banking. The Corporation’s non-banking activities are insignificant to the consolidated financial statements.

Reclassification

Certain amounts in the 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation.

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. Effective January 1, 2008, the Corporation adopted SFAS No. 159 and has determined that it is immaterial to the 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. Effective January 1, 2008, the Corporation adopted FASB Statement No. 157 and has determined that it is immaterial to the consolidated financial statements.

In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective Date of FASB Statement No. 157,” that would permit a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial

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items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company’s operating income or net earnings.

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 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. Management has elected the cumulative-effect adjustment method under EITF Issue No. 06-4 and anticipates a one time charge of approximately $713,000 to retained earnings on January 1, 2008. Recognition of the current liability as an expense through the income statement is expected to approximate $56,000 for 2008.

FASB statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008.

Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. Effective January 1, 2008, the Corporation adopted SAB 110 and expects it will not have an impact on its consolidated financial statements.

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In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company expects that EITF 06-11 will not have an impact on its consolidated financial statements.

NOTE 2-Restrictions on Cash and Due from Banks

Cash balances reserved to meet regulatory requirements of the Federal Reserve Bank and balances maintained at other banks for compensating balance requirements averaged approximately $752,000 for 2007 and $802,000 for 2006.

NOTE 3-Securities Available-for-Sale and Held-to-Maturity

A summary of available-for-sale and held-to-maturity securities at December 31 is provided below. Equity securities consist of Federal Home Loan Bank stock and Atlantic Central Bankers Bank stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross Unrealized

 

Estimated
Fair
Value

 

 

 

 

 

 

 

(dollars in thousands)

 

 

Gains

 

Losses

 

 

                           

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

21,512

 

$

138

 

$

(28

)

$

21,622

 

State and municipal

 

 

30,739

 

 

363

 

 

(130

)

 

30,972

 

Mortgage-backed, U.S. agency

 

 

26,767

 

 

164

 

 

(75

)

 

26,856

 

Equity securities

 

 

1,471

 

 

 

 

 

 

1,471

 

                           

Total available-for-sale

 

$

80,489

 

$

665

 

$

(233

)

$

80,921

 

                           

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities-corporate trust preferred

 

$

3,448

 

$

176

 

$

 

$

3,624

 

                           

Total held-to-maturity

 

$

3,448

 

$

176

 

$

 

$

3,624

 

                           

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

32,309

 

$

23

 

$

(400

)

$

31,932

 

State and municipal

 

 

27,397

 

 

336

 

 

(73

)

 

27,660

 

Mortgage-backed, U.S. agency

 

 

12,154

 

 

13

 

 

(268

)

 

11,899

 

Equity securities

 

 

1,932

 

 

 

 

 

 

1,932

 

                           

Total available-for-sale

 

$

73,792

 

$

372

 

$

(741

)

$

73,423

 

                           

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities-corporate trust preferred

 

$

7,503

 

$

337

 

$

 

$

7,840

 

                           

Total held-to-maturity

 

$

7,503

 

$

337

 

$

 

$

7,840

 

                           

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The amortized cost and estimated fair value of debt securities at December 31, 2007, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities if call options on selected debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

Held-to-maturity

 

 

 

       

(dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

                           

Due in one year or less

 

$

11,303

 

$

11,277

 

$

 

$

 

Due after one year through five years

 

 

45,246

 

 

45,632

 

 

 

 

 

Due after five years through ten years

 

 

17,192

 

 

17,368

 

 

 

 

 

Due after ten years

 

 

5,277

 

 

5,173

 

 

3,448

 

 

3,624

 

                           

Total debt securities

 

$

79,018

 

$

79,450

 

$

3,448

 

$

3,624

 

                           

Gross losses realized from the sale of available-for-sale securities were ($7,000), ($80,000), and ($86,000) for 2007, 2006 and 2005, respectively. Securities, issued by agencies of the federal government, with a carrying value of $41,961,000 and $40,875,000 on December 31, 2007 and 2006, respectively, were pledged to secure public and trust deposits.

The table below shows investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12
months

 

12 months or more

 

Total

 

 

 

         

 

(dollars in thousands)

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

                           

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

 

$

 

$

9,995

 

$

28

 

$

9,995

 

$

28

 

State and Municipal

 

 

6,553

 

 

98

 

 

2,535

 

 

32

 

 

9,088

 

 

130

 

Mortgage-backed, U.S. agency

 

 

1,479

 

 

8

 

 

3,259

 

 

67

 

 

4,738

 

 

75

 

                                       

Total temporarily impaired
debt securities, available-
for-sale

 

$

8,032

 

$

106

 

$

15,789

 

$

127

 

$

23,821

 

$

233

 

                                       

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

750

 

$

1

 

$

26,712

 

$

399

 

$

27,462

 

$

400

 

State and Municipal

 

 

6,741

 

 

55

 

 

1,580

 

 

18

 

 

8,321

 

 

73

 

Mortgage-backed, U.S. agency

 

 

2,809

 

 

5

 

 

4,886

 

 

263

 

 

7,695

 

 

268

 

                                       

Total temporarily impaired
debt securities, available-
for-sale

 

$

10,300

 

$

61

 

$

33,178

 

$

680

 

$

43,478

 

$

741

 

                                       

Management believes that unrealized losses at December 31, 2007, were primarily the result of changes in market interest rates and that it has the ability to hold these investments for a time necessary to recover the amortized cost. The $106,000 unrealized loss within the less than 12 months category was attributable to fifteen different securities issued primarily by municipalities. The $127,000 unrealized loss in the 12 months or more category relates to twenty securities issued primarily by the following agencies of the federal government: Federal Home Loan Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). Management believes

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that collection of the contractual principal and interest is probable and therefore, all impairment is considered to be temporary.

NOTE 4-Loans

The composition of the loan portfolio at December 31, is as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

 

2007

 

 

2006

 

               

Commercial, industrial and agricultural

 

$

243,144

 

$

218,673

 

Real estate - construction and land development

 

 

83,625

 

 

91,414

 

               

Total commercial related loans

 

 

326,769

 

 

310,087

 

Real estate - residential mortgages

 

 

55,257

 

 

31,509

 

Installment

 

 

63,693

 

 

63,977

 

               

Total consumer related loans

 

 

118,950

 

 

95,486

 

               

Total loans

 

$

445,719

 

$

405,573

 

               

Concentrations of credit risk arise when a number of customers are engaged in similar business activities in the same geographic region or have similar economic features that could cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Most of the Corporation’s business is with customers in York County, Pennsylvania and northern Maryland, specifically Baltimore, Harford and Carroll counties. Although this focus may pose a concentration risk geographically, we believe that the diverse local economy and detailed knowledge of the customer base minimizes this risk. At year-end 2007, the Corporation had two industry concentrations that exceeded 10 percent of the total loan portfolio, real estate construction and land development which was 18.8 percent of the portfolio and commercial real estate leasing was 11.5 percent of the portfolio. Comparatively, at year-end 2006, only one industry concentration real estate construction and land development exceeded 10 percent of the total loan portfolio at 22.5 percent of the portfolio. Loans to borrowers within these industries are usually collateralized by real estate.

The principal balance of loans outstanding to directors, executive officers, principal shareholders, and any associates of such persons was $4,763,000 at December 31, 2007, and $4,662,000 at December 31, 2006. During 2007, total loan additions were $2,332,000 and total payments collected were $2,231,000. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collection. As of year-end 2007, all loans to this group were current and performing in accordance with contractual terms.

NOTE 5-Impaired, Nonaccrual and Past Due Loans

Information regarding impaired commercial loans at December 31, is provided below. Commercial loans are predominately real estate collateral dependent; accordingly, impairment is based on the net realizable value of the collateral relative to recorded investment in the loan. The policy for recognizing interest income on impaired loans is provided under Loans within Note 1.

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(dollars in thousands)

 

2007

 

2006

 

2005

 

                   

Impaired loans without a related allowance

 

$

14,246

 

$

5,272

 

$

10,273

 

Impaired loans with a related allowance

 

 

212

 

 

530

 

 

203

 

 

 

               

 

Total impaired loans

 

$

14,458

 

$

5,802

 

$

10,476

 

 

 

               

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans

 

$

55

 

$

90

 

$

35

 

Average investment in impaired loans

 

 

8,195

 

 

7,632

 

 

8,308

 

Interest income recognized on impaired loans:

 

 

 

 

 

 

 

 

 

 

accrual basis

 

 

210

 

 

165

 

 

797

 

cash basis

 

 

47

 

 

150

 

 

-

 

                     

At December 31, 2007 and 2006, the loan portfolio included nonaccrual loans of $9,411,000 and $4,368,000, respectively. Loans contractually past due 90 days or more as to principal or interest, but still accruing interest totaled $222,000 at December 31, 2007, compared to $4,000 at December 31, 2006.

NOTE 6-Analysis of Allowance for Loan Losses

Changes in the allowance for loan losses for each of the three years ended December 31, were as follows:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

 

2007

 

 

2006

 

 

2005

 

                     

Balance at beginning of year

 

$

3,126

 

$

2,538

 

$

1,865

 

Provision (recoveries) charged to operating expense

 

 

(554

)

 

650

 

 

775

 

Loans charged off

 

 

(66

)

 

(150

)

 

(213

)

Recoveries

 

 

928

 

 

88

 

 

111

 

                     

Balance at end of year

 

$

3,434

 

$

3,126

 

$

2,538

 

                     

As reported on Form 8-K filed by Codorus Valley on February 13, 2007, PeoplesBank recovered $839,000 representing it’s portion of a $12 million restitution fund created in settlement of a claim by the U.S. Department of Justice against the Bank of New York. The funds substantially reimbursed PeoplesBank for loan losses that it 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 those contracts. Management recognized this recovery as a credit to the loan loss provision in the first quarter of 2007.

NOTE 7-Premises and Equipment

A summary of premises and equipment at December 31, is as follows:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

 

2007

 

 

2006

 

               

Land

 

$

1,139

 

$

1,139

 

Buildings and improvements

 

 

11,256

 

 

10,949

 

Capitalized leased premises

 

 

672

 

 

672

 

Equipment

 

 

8,974

 

 

8,886

 

               

 

 

 

22,041

 

 

21,646

 

Less-accumulated depreciation

 

 

(11,789

)

 

(11,151

)

               

Premises and equipment, net

 

$

10,252

 

$

10,495

 

               

PeoplesBank leases certain banking branches under capital and noncancellable operating leases. The terms include various renewal options and provide for rental increases based upon predetermined

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factors. Total lease expenses under operating leases amounted to $160,000 in 2007, $163,000 in 2006, and $137,000 in 2005. At December 31, 2007, future minimum lease payments for these leases and a capital lease are payable as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Capital
Lease

 

Operating
Leases

 

           

2008

 

$

95

 

$

201

 

2009

 

 

95

 

 

199

 

2010

 

 

95

 

 

187

 

2011

 

 

102

 

 

132

 

2012

 

 

102

 

 

135

 

Thereafter

 

 

306

 

 

143

 

               

Total future minimum lease payments

 

 

795

 

$

997

 

Less interest

 

 

(269

)

 

 

 

         

 

 

 

Present value of minimum lease payments

 

$

526

 

 

 

 

         

 

 

 

NOTE 8-Deposits

The composition of deposits at December 31, was as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

           

Noninterest bearing demand

 

$

46,719

 

$

49,190

 

NOW

 

 

44,086

 

 

43,864

 

Money market

 

 

148,832

 

 

144,292

 

Savings

 

 

18,191

 

 

17,533

 

Time deposits less than $100,000

 

 

173,674

 

 

145,849

 

Time deposits $100,000 or more

 

 

80,466

 

 

55,917

 

               

Total deposits

 

$

511,968

 

$

456,645

 

               

Scheduled maturities of time deposits as of December 31, were as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

       

2008

 

$

181,897

 

2009

 

 

52,939

 

2010

 

 

13,661

 

2011

 

 

2,912

 

2012

 

 

2,731

 

         

Total time deposits

 

$

254,140

 

         

NOTE 9-Short-term Borrowings and Long-term Debt

The schedule below provides a summary of short-term borrowings that consist of federal funds purchased and other borrowings. Federal funds purchased from correspondent banks usually mature in one business day. Other short-term borrowings consist of credit available through the Federal Home Loan Bank of Pittsburgh (FHLBP) and the Atlantic Central Bankers Bank (ACBB). Based on the most recent analysis, total credit available from the FHLBP, for both short and long-term credit needs, is approximately $122 million. As of December 31, 2007, total unused credit with the FHLBP was approximately $102 million. Obligations to the FHLBP are secured by FHLB stock and qualifying

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collateral, principally the unpledged portion of PeoplesBank’s investment securities portfolio and qualifying mortgage loan receivables. The interest rate for short-term borrowings reprices daily based on the federal funds rate or the open repo market depending on the borrowing program. As of December, 31, 2007, the Corporation maintained an unsecured line of credit of $3 million with ACBB which is renewable annually. No funds were drawn on the ACBB line during 2007.

A summary of aggregate short-term borrowings on December 31, is as follows:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

Amount outstanding at end of year

 

$

 

$

 

$

9,781

 

Weighted average interest rate at end of year

 

 

0.00

%

 

0.00

%

 

4.22

%

Maximum amount outstanding at any month-end

 

$

 

$

16,714

 

$

12,048

 

Daily average amount outstanding

 

$

 

$

2,857

 

$

2,534

 

Approximate weighted average interest rate for the year

 

 

0.00

%

 

4.66

%

 

2.88

%

                     

A summary of long-term debt at December 31, is as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

           

PeoplesBank obligations to FHLBP

 

 

 

 

 

 

 

Due 2007, 4.68%

 

$

 

$

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

 

 

4,240

 

 

4,504

 

Due 2012, 4.25%, amortizing

 

 

1,663

 

 

1,998

 

Due 2013, 3.46%, amortizing

 

 

2,921

 

 

3,403

 

Due 2014, 6.43%, convertible quarterly after
July 2009

 

 

 

 

5,000

 

Codorus Valley Bancorp, Inc. obligations

 

 

 

 

 

 

 

Due 2011, floating rate based on 1 month
LIBOR plus 1.50%, amortizing

 

 

 

 

1,562

 

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

 

 

7,217

 

               

 

 

 

30,134

 

 

44,777

 

Capital lease obligation

 

 

526

 

 

562

 

               

Total long-term debt

 

$

30,660

 

$

45,339

 

               

PeoplesBank’s obligations to FHLBP are fixed rate and fixed/floating (convertible) rate instruments. The FHLBP has the 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 the conversion option, PeoplesBank may repay the converted loan, without a prepayment penalty.

To support planned growth, Codorus Valley issued trust preferred debt securities in the amount of $7,217,000 in June 2006 and $3,093,000 in November 2004, which are included in Tier 1 capital for regulatory capital purposes. These obligations have a 30-year maturity, but are callable at quarterly intervals after the fifth year. Maturities of total long-term debt over the next five years are as follows:

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$1,165,000 in 2008, $6,214,000 in 2009, $7,238,000 in 2010, $4,416,000 in 2011, $812,000 in 2012 and $10,815,000 thereafter.

NOTE 10-Regulatory Matters

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

The Corporation and PeoplesBank are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that, if imposed, could have a material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation 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 classification are also subject to qualitative judgments by the regulators.

Quantitative measures established by regulators to ensure capital adequacy require the Corporation and PeoplesBank to maintain minimum ratios to total and tier 1 capital as a percentage of risk-weighted assets, and of tier 1 capital to average assets (leverage ratio) as set forth below. In December 2007, PeoplesBank received the most recent notification from the Federal Deposit Insurance Corporation, which categorized PeoplesBank as well capitalized, as of September 30, 2007, under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change PeoplesBank’s well capitalized category.

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Actual

 

Minimum for
Capital Adequacy

 

Well Capitalized
Minimum*

 

 

 

           

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

                           

 

Codorus Valley Bancorp, Inc. (consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based

 

$

57,727

 

 

12.14

%

$

19,022

 

 

4.0

%

 

n/a

 

 

n/a

 

Total risk-based

 

 

61,161

 

 

12.86

 

 

38,043

 

 

8.0

 

 

n/a

 

 

n/a

 

Leverage

 

 

57,727

 

 

9.84

 

 

23,473

 

 

4.0

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based

 

$

53,759

 

 

11.39

%

$

18,885

 

 

4.0

%

$

28,328

 

 

6.0

%

Total risk-based

 

 

57,193

 

 

12.11

 

 

37,770

 

 

8.0

 

 

47,213

 

 

10.0

 

Leverage

 

 

53,759

 

 

9.22

 

 

23,324

 

 

4.0

 

 

29,155

 

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

                                       
* Under prompt corrective action provisions

NOTE 11-Benefit Plans

Defined Contribution Plan
The Corporation maintains a 401(k) savings and investment plan covering substantially all employees. Under the plan, employees can contribute a percentage of their gross salary. In 2007, 2006, and 2005, the Corporation matched 50 percent of the first 6 percent of an employee’s contribution. The Corporation’s expense for the 401(k) savings and investment plan was $154,000 for 2007, $140,000 for 2006, and $109,000 for 2005.

Supplemental Benefit Plans
PeoplesBank maintains supplemental retirement plans for selected executives and supplemental life insurance for executive officers and directors. The supplemental life insurance plans replaced other insurance coverage. The expense associated with these plans was approximately $217,000 for 2007, $204,000 for 2006, and $167,000 for 2005. The accrued liability was $1,371,000 at December 31, 2007, $1,154,000 at December 31, 2006, and $951,000 at December 31, 2005. Investment in bank owned life insurance policies was used to finance the supplemental benefit plans, and provide a tax-exempt return to PeoplesBank.

Dividend Reinvestment and Stock Purchase Plan
The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan (Plan). Shareholders of common stock may participate in the Plan, which allows additional shares of common stock to be

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purchased with reinvested dividends at prevailing market prices. For 2007, 2006 and 2005 all shares were purchased from the open market. To the extent that shares are not available in the open market, 204,133 shares of common stock are reserved and available for issuance at December 31, 2007. Open market purchases were made by an independent purchasing agent retained to act as agent for Plan participants, and the purchase price to participants was the actual price paid, excluding brokerage commissions and other expenses which were paid by the Corporation. The Plan also permits participants to make additional voluntary cash payments to purchase shares of the Corporation’s common stock.

NOTE 12-Stock-Based Compensation

The Corporation adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (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 $55,000 net of $0 tax effect during 2007 and $54,000 net of $0 tax effect during 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:

 

 

 

 

 

(Dollars in thousands, except per share data)

 

2005

 

     

 

Reported net income

 

$

4,617

 

Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects of $0

 

 

(189

)

       

 

Pro forma net income

 

$

4,428

 

 

 

 

 

 

Reported basic earnings per share

 

$

1.27

 

Reported diluted earnings per share

 

$

1.24

 

Pro forma basic earnings per share

 

$

1.21

 

Pro forma diluted earnings per share

 

$

1.19

 

The Corporation’s equity awards are granted from the following plans: a 2000 Stock Incentive Plan (2000 Plan), a 1998 Independent Directors Stock Option Plan (1998 Plan) and a 1996 Stock Incentive Plan (1996 Plan), (collectively the Option Plans), a 2007 Long Term Incentive Plan (LTIP) and a 2007 Employee Stock Purchase Plan (ESPP).

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 December 31, 2007.

Shares reserved and available for issuance as of December 31, 2007, adjusted for stock dividends declared, were 141,093 for the 2000 Plan, 130,315 for the 1998 Plan, and 38,543 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

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period of six months and an expiration period of ten years. Upon exercise, the Corporation has historically issued authorized, but unissued, common stock to satisfy the options.

There were no options granted from the 2000 Plan in 2007. The grant-date fair value, adjusted for stock dividends declared, of options granted in 2006 was $6.62 compared to $6.22 for 2005. 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.

A summary of stock options activity from the Option Plans, adjusted for stock dividends declared, is shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

Weighted Average
Exercise Price
Per Share

 

Weighted Average
Remaining
Contractual Term

 

Aggregate
Intrinsic Value
($000)

 

                   

Outstanding at December 31, 2004

 

 

286,480

 

$

11.79

 

 

 

5.0 years

 

 

$

1,175

 

 

Granted

 

 

38,781

 

 

16.06

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(21,876

)

 

10.75

 

 

 

 

 

 

 

 

 

 

                                 

Outstanding at December 31, 2005

 

 

303,385

 

$

12.41

 

 

 

4.7 years

 

 

$

1,312

 

 

Granted

 

 

551

 

 

17.14

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(19,731

)

 

8.34

 

 

 

 

 

 

 

 

 

 

                                 

Outstanding at December 31, 2006

 

 

284,205

 

$

12.70

 

 

 

4.0 years

 

 

$

1,884

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(61,188

)

 

11.31

 

 

 

 

 

 

 

 

 

 

                                 

Outstanding at December 31, 2007

 

 

223,017

 

$

13.09

 

 

 

3.6 years

 

 

$

879

 

 

                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exerciseable at December 31, 2007

 

 

202,812

 

$

12.79

 

 

 

3.2 years

 

 

$

861

 

 

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 was $413,000 for 2007, $188,000 for 2006, and 119,000 for 2005. Cash received from such exercises during 2007 was $692,000 and the tax benefit recognized was $141,000. For 2006 cash received from exercises was $165,000 and the tax benefit recognized was $64,000, and for 2005 was $235,000 and the tax benefit recognized was $41,000.

As of December 31, 2007, total unrecognized compensation cost related to nonvested options was $43,000. The cost is expected to be recognized over a weighted average period of 1.3 years.

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During the second quarter of 2007, shareholders approved, and the Corporation adopted the 2007 Long Term Incentive Plan (LTIP), with 175,000 shares reserved for future issuance. No shares of stock were awarded or stock options granted under the LTIP since inception.

Also during the second quarter of 2007, shareholders approved, and the Corporation adopted the 2007 Employee Stock Purchase Plan (ESPP), with 175,000 shares reserved for future issuance. On July 1, 2007, the first offering commenced for the ESPP and, at the end of the offering period, 3,783 shares were purchased from the open market and were reissued to participants.

The Corporation also maintains an Employee Stock Bonus Plan, administered by nonemployee members of the Corporation’s Board of Directors, under which the Corporation may issue shares of its common stock to employees as performance based compensation. As of December 31, 2007, 13,689 shares of common stock were reserved for possible issuance under this plan, subject to future adjustment in the event of specified changes in the Corporation’s capital structure. Under the Employee Stock Bonus Plan, no shares of stock were issued during 2007, 53 shares were issued during 2006, and no shares of stock were issued during 2005.

NOTE 13-Income Taxes

The provision for income taxes for the years ended December 31, consists of the following:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

Current tax provision:

 

 

 

 

 

 

 

 

 

 

Federal

 

$

2,368

 

$

2,154

 

$

1,645

 

State

 

 

47

 

 

63

 

 

 

Deferred tax (benefit) provision

 

 

(235

)

 

(372

)

 

(93

)

                     

Total tax provision

 

$

2,180

 

$

1,845

 

$

1,552

 

                     

The differences between the effective income tax rate and the Federal statutory income tax rate are as follows:

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

 

Statutory tax rate

 

 

34.0

%

 

34.0

%

 

34.0

%

Increase (decrease) resulting from:

 

 

 

 

 

 

 

 

 

 

Tax-exempt interest income

 

 

(5.8

)

 

(4.5

)

 

(2.7

)

Low income housing credits

 

 

(3.6

)

 

(4.5

)

 

(5.3

)

Disallowed interest

 

 

0.9

 

 

0.6

 

 

0.2

 

Bank owned life insurance income

 

 

(1.1

)

 

(1.3

)

 

(1.5

)

State income taxes, net of federal tax benefit

 

 

0.5

 

 

0.7

 

 

 

Other, net

 

 

0.6

 

 

0.7

 

 

0.5

 

                     

Effective income tax rate

 

 

25.5

%

 

25.7

%

 

25.2

%

                     

The provision for income taxes includes ($2,000), ($27,000) and ($29,000) of applicable income tax benefit related to net investment security losses in 2007, 2006 and 2005, respectively.

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Significant components of the Corporation’s deferred tax asset, included in other assets as of December 31, were as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2007

 

2006

 

           

Deferred tax assets

 

 

 

 

 

 

 

Allowance for loan losses

 

$

1,056

 

$

919

 

Deferred compensation

 

 

466

 

 

393

 

Partnership investment amortization

 

 

905

 

 

734

 

Net unrealized losses on available-for-sale securities

 

 

 

 

125

 

               

Total deferred tax assets

 

 

2,427

 

 

2,171

 

               

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

Deferred loan fees

 

 

333

 

 

258

 

Depreciation

 

 

93

 

 

189

 

Net unrealized gains on available-for-sale securities

 

 

147

 

 

 

Other, net

 

 

778

 

 

610

 

               

Total deferred tax liabilities

 

 

1,351

 

 

1,057

 

               

Net deferred tax asset

 

$

1,076

 

$

1,114

 

               

NOTE 14-Commitments to Extend Credit

In the normal course of business, the Corporation is a party to various financial transactions that are not funded as of the balance sheet date. Off-balance sheet financial instruments, which enable bank customers to meet their financing needs, are comprised mainly of commitments to extend credit and standby letters of credit. Standby letters of credit written are conditional commitments issued by PeoplesBank to guarantee the performance of a customer to a third party. The credit and market risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. To manage these risks the Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments and requires collateral to support these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of December 31, 2007 and 2006, for guarantees under standby letters of credit issued was not material. Normally, commitments to extend credit and letters of credit have fixed expiration dates or termination clauses, have specific rates and are for specific purposes. Many of the commitments are expected to expire without being extended; therefore, total commitment amounts do not necessarily represent future cash requirements.

The following is a summary of outstanding commitments:

 

 

 

 

 

 

 

 

 

 

December 31,

 

(dollars in thousands)

 

2007

 

2006

 

           

Commitments to grant loans

 

 

 

 

 

 

 

Fixed rate

 

$

14,200

 

$

12,389

 

Variable rate

 

 

39,198

 

 

16,462

 

 

 

 

 

 

 

 

 

Unfunded commitments of existing loans

 

 

 

 

 

 

 

Fixed rate

 

$

18,046

 

$

21,696

 

Variable rate

 

 

86,543

 

 

65,665

 

 

 

 

 

 

 

 

 

Standby letters of credit

 

$

3,381

 

$

6,121

 

               

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Table of Contents


NOTE 15-Contingent Liabilities

Periodically, the Corporation and its subsidiary bank may be defendants in legal proceedings relating to the conduct of their banking business. Most of such legal proceedings are a normal part of the banking business and, in management’s opinion, do not materially affect the financial position or results of operations of the Corporation.

NOTE 16-Fair Values of Financial Instruments

FASB Statement No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value of expected future cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methodologies and assumptions were used by Codorus Valley to estimate its fair value disclosures.

Cash and cash equivalents—The fair value for total cash and cash equivalents is deemed to be the same as the carrying amount.

Investment securities—Fair values for investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Restricted investment in bank stocks—Fair values for Federal Home Loan Bank and Atlantic Central Bankers Bank stock approximate the carrying values based on the redemption provisions of the respective issuer.

Loans held for sale—Fair values for loans held for sale are based on quoted market prices.

Loans, net of allowance—For variable rate and adjustable rate loans that reprice frequently with no significant change in credit risk, fair value is deemed to be the same as the carrying amount. Fair values for all other loans in the portfolio are estimated by discounting estimated future cash flows using comparable current interest rates at which similar loans would be made to borrowers with similar credit risk.

Interest receivable and payable—The fair values for interest receivable and interest payable approximate their carrying amounts.

Noninterest bearing demand, NOW, money market and savings deposits—Fair values for noninterest bearing demand, NOW, money market and savings deposits approximate their carrying amounts.

Time deposits— The fair value for variable rate time deposits is deemed to approximate the carrying amount. The fair value for fixed rate time deposits is estimated by discounting expected future cash flows using rates offered for deposits of similar remaining maturities at the reporting date.

62


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Long-term debt and Junior subordinated debentures—The fair value of fixed rate long-term debt is estimated by discounting estimated future cash flows using rates available to Codorus Valley, at the reporting date, for similar types of borrowings. The fair value of variable rate long-term debt approximates carrying amount.

Off-balance sheet instruments—Fair values for off-balance sheet instruments, such as commitments to extend credit and standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. These amounts were not considered to be material at December 31, 2007 and 2006.

The following table summarizes the carrying amounts and fair values of financial instruments at December 31, 2007 and 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

(dollars in thousands)

 

Carrying
Amount

 

Estimated
Fair
Value

 

Carrying
Amount

 

Estimated
Fair
Value

 

                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

39,053

 

$

39,053

 

$

35,372

 

$

35,372

 

Securities, available-for-sale

 

 

80,921

 

 

80,921

 

 

73,423

 

 

73,423

 

Securities, held-to-maturity

 

 

3,448

 

 

3,624

 

 

7,503

 

 

7,840

 

Loans held for sale

 

 

1,778

 

 

1,803

 

 

1,687

 

 

1,714

 

Loans, net of allowance

 

 

442,285

 

 

440,456

 

 

402,447

 

 

396,770

 

Interest receivable

 

 

2,705

 

 

2,705

 

 

2,614

 

 

2,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand, NOW, money market and savings deposits

 

$

257,828

 

$

257,828

 

$

254,879

 

$

254,879

 

Time deposits

 

 

254,140

 

 

255,231

 

 

201,766

 

 

202,232

 

Long-term debt

 

 

20,350

 

 

20,191

 

 

35,029

 

 

34,846

 

Junior subordinated debentures

 

 

10,310

 

 

10,310

 

 

10,310

 

 

10,310

 

Interest payable

 

 

838

 

 

838

 

 

861

 

 

861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

                           

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NOTE 17-Condensed Financial Information-Parent Company Only

Condensed Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(dollars in thousands)

 

2007

 

2006

 

           

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

672

 

$

797

 

Securities, held-to-maturity

 

 

932

 

 

2,950

 

Investment in subsidiaries

 

 

54,760

 

 

48,641

 

Premises and equipment, net

 

 

3,700

 

 

3,834

 

Other assets

 

 

535

 

 

406

 

               

Total assets

 

$

60,599

 

$

56,628

 

               

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Long-term debt

 

$

10,310

 

$

11,872

 

Long-term debt with subsidiary, PeoplesBank

 

 

1,736

 

 

1,819

 

Other liabilities

 

 

138

 

 

151

 

               

Total liabilities

 

 

12,184

 

 

13,842

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

48,415

 

 

42,786

 

               

Total liabilities and shareholders’ equity

 

$

60,599

 

$

56,628

 

               

Condensed Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

               

Income

 

 

 

 

 

 

 

 

 

 

Interest from investment securities

 

$

240

 

$

390

 

$

327

 

Dividends from subsidiary, PeoplesBank

 

 

1,444

 

 

1,853

 

 

1,554

 

Other

 

 

 

 

26

 

 

 

                     

Total income

 

 

1,684

 

 

2,269

 

 

1,881

 

 

 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

Interest expense on long-term debt

 

 

910

 

 

741

 

 

405

 

Occupancy of premises, net

 

 

65

 

 

88

 

 

92

 

Other

 

 

260

 

 

222

 

 

227

 

                     

Total expense

 

 

1,235

 

 

1,051

 

 

724

 

 

 

 

 

 

 

 

 

 

 

 

                     

Income before applicable income tax benefit and undistributed earnings of subsidiaries

 

 

449

 

 

1,218

 

 

1,157

 

Applicable income tax benefit

 

 

336

 

 

215

 

 

135

 

                     

Income before undistributed earnings of subsidiaries

 

 

785

 

 

1,433

 

 

1,292

 

Undistributed earnings of subsidiaries

 

 

5,589

 

 

3,889

 

 

3,325

 

                     

Net income

 

$

6,374

 

$

5,322

 

$

4,617

 

                     

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Table of Contents


Note 17-Condensed Financial Information-Parent Company Only (continued)

Condensed Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

(dollars in thousands)

 

2007

 

2006

 

2005

 

                     

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,374

 

$

5,322

 

$

4,617

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

156

 

 

165

 

 

171

 

Undistributed earnings of subsidiaries

 

 

(5,589

)

 

(3,889

)

 

(3,325

)

Gain on sales of premises and equipment

 

 

 

 

(26

)

 

 

Other, net

 

 

(161

)

 

6

 

 

(70

)

                     

Net cash provided by operating activities

 

 

780

 

 

1,578

 

 

1,393

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Calls of securities, held-to-maturity

 

 

2,092

 

 

636

 

 

 

Additional investment in subsidiary, PeoplesBank

 

 

 

 

(7,000

)

 

 

Investment in nonconsolidated subsidiary

 

 

 

 

(217

)

 

 

Purchases of premises and equipment

 

 

(23

)

 

(30

)

 

 

Proceeds from sales of premises and equipment

 

 

 

 

32

 

 

 

                     

Net cash provided by (used in) investing activities

 

 

2,069

 

 

(6,579

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

7,217

 

 

 

Repayments of long-term debt

 

 

(1,645

)

 

(156

)

 

(158

)

Dividends paid

 

 

(2,155

)

 

(1,703

)

 

(1,554

)

Issuance of common stock

 

 

832

 

 

229

 

 

276

 

Cash paid in lieu of fractional shares

 

 

(6

)

 

(13

)

 

(6

)

                     

Net cash provided by (used in) financing activities

 

 

(2,974

)

 

5,574

 

 

(1,442

)

 

 

 

 

 

 

 

 

 

 

 

                     

Net increase (decrease) in cash and cash equivalents

 

 

(125

)

 

573

 

 

(49

)

Cash and cash equivalents at beginning of year

 

 

797

 

 

224

 

 

273

 

                     

Cash and cash equivalents at end of year

 

$

672

 

$

797

 

$

224

 

                     

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Note 18-Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended December 31, 2007 and 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

 

 

       

(dollars in thousands,
  except per share data)

 

Quarter

 

Quarter

 

 

 

 

 

 

 

Fourth

 

Third

 

Second

 

First

 

Fourth

 

Third

 

Second

 

First

 

                                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

10,035

 

$

10,090

 

$

9,838

 

$

9,206

 

$

8,924

 

$

8,658

 

$

7,949

 

$

7,788

 

Interest expense

 

 

4,419

 

 

4,741

 

 

4,748

 

 

4,581

 

 

4,358

 

 

4,123

 

 

3,504

 

 

3,092

 

                                                   

Net interest income

 

 

5,616

 

 

5,349

 

 

5,090

 

 

4,625

 

 

4,566

 

 

4,535

 

 

4,445

 

 

4,696

 

Provision for loan losses

 

 

365

 

 

(35

)

 

35

 

 

(919

)

 

150

 

 

145

 

 

145

 

 

210

 

Noninterest income

 

 

1,446

 

 

1,399

 

 

1,375

 

 

1,227

 

 

1,374

 

 

1,237

 

 

1,416

 

 

1,195

 

Gain on sales of mortgages

 

 

40

 

 

51

 

 

63

 

 

94

 

 

113

 

 

61

 

 

61

 

 

88

 

Noninterest expense (1)

 

 

4,950

 

 

4,662

 

 

4,300

 

 

4,456

 

 

4,347

 

 

3,780

 

 

3,842

 

 

3,921

 

                                                   

Income before taxes and securities’ loss

 

 

1,787

 

 

2,172

 

 

2,193

 

 

2,409

 

 

1,556

 

 

1,908

 

 

1,935

 

 

1,848

 

Loss on sales of securities

 

 

 

 

 

 

(7

)

 

 

 

(80

)

 

 

 

 

 

 

                                                   

Income before income taxes

 

 

1,787

 

 

2,172

 

 

2,186

 

 

2,409

 

 

1,476

 

 

1,908

 

 

1,935

 

 

1,848

 

Provision for income taxes

 

 

450

 

 

531

 

 

559

 

 

640

 

 

345

 

 

501

 

 

512

 

 

487

 

                                                   

Net income

 

$

1,337

 

$

1,641

 

$

1,627

 

$

1,769

 

$

1,131

 

$

1,407

 

$

1,423

 

$

1,361

 

                                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

$

0.44

 

$

0.44

 

$

0.48

 

$

0.31

 

$

0.38

 

$

0.39

 

$

0.37

 

Diluted

 

$

0.35

 

$

0.43

 

$

0.43

 

$

0.47

 

$

0.30

 

$

0.38

 

$

0.38

 

$

0.36

 

(1) Noninterest expense for the fourth quarter of 2007 increased $603,000 or 14 percent above the same quarter for 2006. The fourth quarter included an infrequent prepayment penalty expense for $252,000, which resulted from paying off the remaining $3 million balance of a Federal Home Loan Bank advance prior to maturity. A $308,000 or 15 percent increase in wage expense due to staff additions to support business growth also contributed to the increase in noninterest expense for the fourth quarter of 2007.

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Table of Contents


 

 

(BMC LOGO)

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Codorus Valley Bancorp, Inc.
York, Pennsylvania

          We have audited the accompanying consolidated balance sheets of Codorus Valley Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. Codorus Valley Bancorp, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

          We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Codorus Valley Bancorp, Inc. and its subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

           As discussed in Note 12 to the consolidated financial statements, Codorus Valley Bancorp, Inc. changed its method of accounting for share-based payments in 2006.

-s- Beard Miller Company LLP

Beard Miller Company LLP
Harrisburg, Pennsylvania
March 11, 2008

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Table of Contents


 

 

Item 9:

 Changes in and disagreements with accountants on accounting and financial disclosure

None.

 

 

Item 9A(T):

 Controls and procedures

The Corporation maintains controls and procedures designed to ensure that information required to be disclosed in the reports that it 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 SEC. Based upon their evaluation of those controls and procedures performed as of December 31, 2007, the Chief Executive and Chief Financial Officers of the Corporation concluded that the Corporation’s disclosure controls and procedures were adequate. The Chief Executive and Chief Financial Officers are not aware of any changes in internal controls over financial reporting or in other factors that has materially affected these controls subsequent to December 31, 2007, the date of their evaluation.

A Report of Management’s Assessment of Internal Control Over Financial Reporting is located on page 38 of this Annual Report.

 

 

Item 9B:

 Other Information

None.

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Table of Contents


PART III

 

 

Item 10:

 Directors, executive officers and corporate governance of Codorus Valley Bancorp, Inc.

Information appearing in the Proxy Statement relating to the 2008 Annual Meeting of Shareholders to be held May 20, 2008 (Proxy Statement), under the captions “Information about Nominees and Continuing Directors,” “Executive Officers,” and “Governance of the Corporation” is incorporated by reference in response to this item.

The Corporation has adopted a Code of Business Conduct and Ethics (Code of Ethics) as defined in Item 406 of Regulation S-K. The Code of Ethics was filed as Exhibit 14 to a Form 8-K, filed with the SEC on March 3, 2008, and is incorporated by reference in response to this item. The Code of Ethics is also published on PeoplesBank’s website at www.peoplesbanknet.com, under the Investor Relations tab.

Information regarding Section 16(a) Beneficial Ownership Reporting Compliance follows. Section 16(a) of the Securities Exchange Act of 1934, requires that the Corporation’s officers and directors, and persons who own more than 10% of the registered class of the Corporation’s equity securities, file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of Forms 3, 4 and 5 and amendments thereto received by it, or written representations from certain reporting persons that no Form 5 was required for that reporting person, the Corporation believes that during the period from January 1, 2007 through December 31, 2007, its officers and directors were in compliance with all filing requirements applicable to them except for Rodney L. Krebs who filed a Form 4 one day late as disclosed in the 2008 Proxy Statement.

 

 

Item 11:

 Executive compensation

Information appearing in the Proxy Statement, under the captions “Executive Compensation,” “Director Compensation” and “Compensation Committee Report” is incorporated by reference in response to this item.

 

 

Item 12:

 Security ownership of certain beneficial owners and management and related shareholder matters

Information appearing in the Proxy Statement, under the caption “Share Ownership,” “Outstanding Equity Awards at Fiscal Year End” and “Potential Payments Upon Termination or Change of Control” is incorporated by reference in response to this item.

 

 

Item 13:

 Certain relationships and related transactions, and director independence

Information appearing in the Proxy Statement, under the captions “Related Person Transactions” and “Governance of the Corporation” is incorporated by reference in response to this item.

 

 

Item 14:

 Principal accountant fees and services

Information appearing in the Proxy Statement, under the caption “Independent Registered Public Accounting Firm,” is incorporated by reference in response to this item.

69


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PART IV

Item 15:    Exhibits and financial statement schedules

          (a) Documents filed as part of this Form 10-K report.

 

 

 

 

1.

Financial Statements

 

 

 

 

 

The following consolidated statements of Codorus Valley Bancorp, Inc. are incorporated by reference to Part II, Item 8 hereof:

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Income

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

 

Consolidated Statements of Cash Flows

 

 

Notes to Consolidated Financial Statements

 

 

 

 

2.

Financial Statement Schedules

 

 

 

 

 

Required financial statement schedules are omitted. This information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.

 

 

 

 

3.

Exhibits filed as part of 10-K pursuant to Item 601 of Regulation S-K.


 

 

 

 

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 November 15, 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

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.)

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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.)

 

 

 

 

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.)

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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 as of June 28, 2006, among Codorus Valley Bancorp, Inc., as sponsor, the Delaware and institutional trustee named therein, and the administrators named therein. (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 as of June 28, 2006, between Codorus Valley Bancorp, Inc. and 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.)

 

 

 

 

10.19

2007 Long-Term Incentive Plan of Codorus Valley Bancorp, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 20, 2007.)

 

 

 

 

10.20

Leadership Cash Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 20, 2007.)

 

 

 

 

14

Code of Ethics (Incorporated by reference to Exhibit 14 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 3, 2008.)

 

 

 

 

21

List of subsidiaries of Codorus Valley Bancorp, Inc.

 

 

 

 

23

Consent of Independent Registered Public Accounting Firm

 

 

 

 

24

Power of Attorney

 

 

 

 

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

Under the requirements of Section 13 or 15(d) 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)

 

 

 

/s/ Larry J. Miller

 

 

 

 

Larry J. Miller, Vice-Chairman,

Date: March 11, 2008

President and Chief Executive Officer

 

Under the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated.

Signature and Capacity

 

 

 

 

/s/ Rodney L. Krebs

Chairman of the Board of

3/11/08

 

 

 

 

Rodney L. Krebs

Directors and Director

 

 

 

 

/s/ Larry J. Miller

President, Chief Executive Officer,

3/11/08

 

 

 

 

Larry J. Miller

Vice-Chairman of the Board of

 

(Principal Executive Officer)

Directors and Director

 

 

 

 

 

Director

3/11/08

 

 

 

 

D. Reed Anderson, Esq.

 

 

 

 

 

/s/ MacGregor S. Jones

Director

3/11/08

 

 

 

 

MacGregor S. Jones

 

 

 

 

 

/s/ William H. Simpson

Director

3/11/08

 

 

 

 

William H. Simpson

 

 

 

 

 

 

Director

3/11/08

 

 

 

 

Dallas L. Smith

 

 

 

 

 

/s/ Donald H. Warner

Director

3/11/08

 

 

 

 

Donald H. Warner

 

 

 

 

 

/s/ Michael L. Waugh

Director

3/11/08

 

 

 

 

Michael L. Waugh

 

 

 

 

 

/s/ Jann A. Weaver

Treasurer and Assistant Secretary

3/11/08

 

 

 

 

Jann A. Weaver

 

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

/s/ Harry R. Swift

Vice President and Secretary

3/11/08

 

 

 

 

Harry R. Swift, Esq.

 

 

 

 

 

/s/ Diane E. Hill

Vice President

3/11/08

 

 

 

 

Diane E. Hill

 

 

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Exhibit Index

 

 

 

 

 

 

Exhibit
Number

 

Description of Exhibit

 

original
Form 10-K

 

 

 

 

 

 

 

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 November 15, 2007.)

 

 

 

 

 

 

 

 

4

 

 

Rights Agreement dated as of November 4, 2005 (Incorporated by reference to Exhibit 4 of 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 Registration 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.)

 

 

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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.)

 

 

 

 

 

 

 

 

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 with the Commission on March 29, 2005.)

 

 

 

 

 

 

 

 

10.13

 

 

Sample form 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 with the Commission 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 as of June 28, 2006, among Codorus Valley Bancorp, Inc., as sponsor, the Delaware and institutional trustee named therein, and the administrators named therein. (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.)

 

 

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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 as of June 28, 2006, between Codorus Valley Bancorp, Inc. and 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.)

 

 

 

 

 

 

 

10.19

 

2007 Long-Term Incentive Plan of Codorus Valley Bancorp, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 20, 2007.)

 

 

 

 

 

 

 

10.20

 

Leadership Cash Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 20, 2007.)

 

 

 

 

 

 

 

14

 

Code of Ethics (Incorporated by reference to Exhibit 14 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 3, 2008.)

 

 

 

 

 

 

 

21

 

List of subsidiaries of the Codorus Valley Bancorp, Inc.

 

77

 

 

 

 

 

23

 

Consent of Independent Registered Public Accounting Firm

 

78

 

 

 

 

 

24

 

Power of Attorney

 

79- 80

 

 

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

81

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

82

 

 

 

 

 

 

 

 

 

 

32

 

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

 

83

 

 

 

 

 

76