UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ______________
COMMISSION FILE NUMBER: 0-15536
CODORUS VALLEY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405
(Address of principal executive offices) (Zip code)
717-747-1519
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since the last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On October 23, 2007, 3,738,950
shares of common stock, par value $2.50, were outstanding.
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Codorus Valley Bancorp, Inc.
FORM 10-Q INDEX
Page #
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PART I - FINANCIAL INFORMATION
Item 1. Financial statements:
Consolidated balance sheets 3
Consolidated statements of income 4
Consolidated statements of cash flows 5
Consolidated statements of changes in shareholders' equity 6
Notes to consolidated financial statements 7
Item 2. Management's discussion and analysis of financial condition
and results of operations 12
Item 3. Quantitative and qualitative disclosures about market risk 25
Item 4. Controls and procedures 25
PART II - OTHER INFORMATION
Item 1. Legal proceedings 25
Item 1A. Risk factors 25
Item 2. Unregistered sales of equity securities and use of proceeds 25
Item 3. Defaults upon senior securities 25
Item 4. Submission of matters to a vote of security holders 25
Item 5. Other information 25
Item 6. Exhibits 26
SIGNATURES 27
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
September 30, December 31,
(dollars in thousands, except per share data) 2007 2006
--------------------------------------------- ------------- ------------
ASSETS
Interest bearing deposits with banks $ 128 $ 118
Cash and due from banks 11,702 11,104
Federal funds sold 26,357 24,150
-------- --------
Total cash and cash equivalents 38,187 35,372
Securities available-for-sale 81,445 73,423
Securities held-to-maturity
(fair value $3,647 for 2007 and $7,840 for 2006) 3,448 7,503
Loans held for sale 636 1,687
Loans (net of deferred fees of $385 in 2007 and $534 in 2006) 441,548 405,573
Less-allowance for loan losses (3,048) (3,126)
-------- --------
Net loans 438,500 402,447
Premises and equipment, net 10,209 10,495
Other assets 17,328 17,285
-------- --------
Total assets $589,753 $548,212
======== ========
LIABILITIES
Deposits
Noninterest bearing $ 49,491 $ 49,190
Interest bearing 448,801 407,455
-------- --------
Total deposits 498,292 456,645
Long-term debt 30,634 35,029
Junior Subordinated debentures 10,310 10,310
Other liabilities 3,603 3,442
-------- --------
Total liabilities 542,839 505,426
SHAREHOLDERS' EQUITY
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; 0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 3,701,062 shares issued and
outstanding on 9/30/07 and 3,502,919 on 12/31/06 9,252 8,757
Additional paid-in capital 32,089 28,839
Retained earnings 5,640 5,434
Accumulated other comprehensive loss (67) (244)
-------- --------
Total shareholders' equity 46,914 42,786
-------- --------
Total liabilities and shareholders' equity $589,753 $548,212
======== ========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
(dollars in thousands, except per share data) 2007 2006 2007 2006
--------------------------------------------- ------- ------ ------- -------
INTEREST INCOME
Loans, including fees $ 8,778 $7,614 $25,221 $21,734
Investment securities
Taxable 639 613 2,002 1,818
Tax-exempt 307 195 895 494
Dividends 33 31 121 101
Federal funds sold 332 201 890 240
Other 1 4 5 8
------- ------ ------- -------
Total interest income 10,090 8,658 29,134 24,395
INTEREST EXPENSE
Deposits 4,205 3,511 12,406 9,015
Federal funds purchased and other
short-term borrowings 0 0 0 133
Long-term debt 536 612 1,664 1,571
------- ------ ------- -------
Total interest expense 4,741 4,123 14,070 10,719
------- ------ ------- -------
Net interest income 5,349 4,535 15,064 13,676
PROVISION FOR (RECOVERY OF) LOAN LOSSES (35) 145 (919) 500
------- ------ ------- -------
Net interest income after provision for
(recorvery of) loan losses 5,384 4,390 15,983 13,176
NONINTEREST INCOME
Trust and investment services fees 317 299 945 939
Service charges on deposit accounts 499 480 1,436 1,400
Mutual fund, annuity and insurance sales 410 278 1,092 923
Income from bank owned life insurance 71 70 204 197
Other income 102 110 324 389
Gain on sales of mortgages 51 61 208 210
Loss on sales of securities 0 0 (7) 0
------- ------ ------- -------
Total noninterest income 1,450 1,298 4,202 4,058
NONINTEREST EXPENSE
Personnel 2,741 2,208 7,845 6,487
Occupancy of premises, net 314 321 1,005 1,053
Furniture and equipment 347 299 1,032 1,043
Postage, stationery and supplies 101 79 341 318
Professional and legal 105 104 235 214
Marketing and advertising 247 138 474 391
Other 807 631 2,486 2,037
------- ------ ------- -------
Total noninterest expense 4,662 3,780 13,418 11,543
------- ------ ------- -------
Income before income taxes 2,172 1,908 6,767 5,691
PROVISION FOR INCOME TAXES 531 501 1,730 1,500
------- ------ ------- -------
Net income $ 1,641 $1,407 $ 5,037 $ 4,191
======= ====== ======= =======
Net income per share, basic $ 0.44 $ 0.38 $ 1.37 $ 1.15
Net income per share, diluted $ 0.43 $ 0.38 $ 1.34 $ 1.12
======= ====== ======= =======
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Nine months ended
September 30,
-------------------
(dollars in thousands) 2007 2006
---------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,037 $ 4,191
Adjustments to reconcile net income to net cash provided by operations
Depreciation 853 882
Provision for (recovery of) loan losses (919) 500
Deferred federal income tax expense 0 28
Amortization of investment in real estate partnership 378 363
Increase in cash surrender value of life insurance investment (204) (197)
Originations of held for sale mortgages (13,797) (16,546)
Proceeds from sales of held for sale mortgages 15,056 16,662
Gain on sales of held for sale mortgages (208) (210)
Loss on sales of securities 7 0
Loss on sales of foreclosed real estate 2 0
Stock-based compensation expense 36 39
Decrease (increase) in accrued interest receivable and other assets 75 (657)
Increase in accrued interest payable and other liabilities 161 493
Other, net 95 159
-------- --------
Net cash provided by operating activities 6,572 5,707
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (19,847) (15,187)
Maturities and calls 11,028 9,339
Sales 1,031 0
Securities, held-to-maturity, calls 4,172 490
Net increase in loans made to customers (35,861) (29,040)
Purchases of premises and equipment (570) (635)
Investment in unconsolidated subsidiary 0 (217)
Investment in life insurance (7) (7)
Purchase of insurance agency assets 0 (63)
Proceeds from sales of premises and equipment 0 55
Proceeds from sales of foreclosed real estate 167 0
-------- --------
Net cash used in investing activities (39,887) (35,265)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 12,997 25,211
Net increase in time deposits 28,650 23,055
Net decrease in short-term borrowings 0 (9,781)
Proceeds from issuance of long-term debt 0 7,217
Repayment of long-term debt (4,395) (1,186)
Dividends paid (1,445) (1,254)
Issuance of common stock 329 187
Cash paid in lieu of fractional shares (6) (6)
-------- --------
Net cash provided by financing activities 36,130 43,443
-------- --------
Net increase in cash and cash equivalents 2,815 13,885
Cash and cash equivalents at beginning of year 35,372 12,085
-------- --------
Cash and cash equivalents at end of period $ 38,187 $ 25,970
======== ========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
(dollars in thousands, except share data) Stock Capital Earnings Loss Total
----------------------------------------- ------ ---------- -------- ------------- -------
For the nine months ended September 30, 2007
--------------------------------------------
Balance, December 31, 2006 $8,757 $28,839 $ 5,434 ($244) $42,786
Comprehensive income:
Net income 5,037 5,037
Other comprehensive income, net of tax:
Unrealized gains on securities, net 177 177
-------
Total comprehensive income 5,214
Cash dividends ($.393 per share, adjusted) (1,445) (1,445)
5% stock dividend - 175,148 shares at fair value 438 2,942 (3,386) (6)
Stock-based compensation 36 36
Issuance of common stock -
22,995 shares under stock option plan 57 272 329
------ ------- ------- ----- -------
Balance, September 30, 2007 $9,252 $32,089 $ 5,640 ($ 67) $46,914
====== ======= ======= ===== =======
For the nine months ended September 30, 2006
--------------------------------------------
Balance, December 31, 2005 $7,902 $23,035 $ 8,204 ($412) $38,729
Comprehensive income:
Net income 4,191 4,191
Other comprehensive income, net of tax:
Unrealized gains on securities, net 242 242
-------
Total comprehensive income 4,433
Cash dividends ($.342 per share, adjusted) (1,254) (1,254)
(2) 5% stock dividends - 324,372 shares at fair value 811 5,572 (6,389) (6)
Stock-based compensation 39 39
Issuance of common stock -
14,640 shares under stock option plan 37 150 187
------ ------- ------- ----- -------
Balance, September 30, 2006 $8,750 $28,796 $ 4,752 ($170) $42,128
====== ======= ======= ===== =======
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The interim financial statements reflect all adjustments that are, in the
opinion of management, necessary to present fairly the financial condition and
results of operations for the reported periods, and are of a normal and
recurring nature.
The following unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Corporation believes that the disclosures made are adequate to make the
information not misleading. These statements should be read in conjunction with
the notes to the audited financial statements contained in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2006.
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus
Valley Company (PeoplesBank), and its wholly owned nonbank subsidiary, SYC
Realty Company, Inc. (collectively referred to as Codorus Valley or the
Corporation). PeoplesBank has two wholly owned subsidiaries, Codorus Valley
Financial Advisors, Inc. and SYC Settlement Services, Inc. All significant
intercompany account balances and transactions have been eliminated in
consolidation. The combined results of operations of the nonbank subsidiaries
are not material to the consolidated financial statements.
The results of operations for the nine-month period ended September 30, 2007 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Stock dividend and per share computations
All per share computations include the effect of stock dividends distributed
through September 30, 2007. The weighted average number of shares of common
stock outstanding used for basic and diluted calculations are provided below.
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
(in thousands, except per share data) 2007 2006 2007 2006
------------------------------------- ------ ------ ------ ------
Net income $1,641 $1,407 $5,037 $4,191
------ ------ ------ ------
Weighted average shares outstanding (basic) 3,690 3,661 3,684 3,660
Effect of dilutive stock options 84 84 88 84
------ ------ ------ ------
Weighted average shares outstanding (diluted) 3,774 3,745 3,772 3,744
Basic earnings per share $ .44 $ .38 $ 1.37 $ 1.15
Diluted earnings per share $ .43 $ .38 $ 1.34 $ 1.12
-7-
Comprehensive income
Accounting principles generally accepted in the United States of America require
that recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The components of other comprehensive income
and related tax effects are presented in the following table:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 2007 2006 2007 2006
---------------------- ------ ------ ---- -----
Unrealized holding gains arising during the
period $1,016 $1,147 $261 $ 367
Reclassification adjustment for losses
included in income 0 0 7 0
------ ------ ---- -----
Net unrealized gains 1,016 1,147 268 367
Tax effect (345) (390) (91) (125)
------ ------ ---- -----
Net of tax amount $ 671 $ 757 $177 $ 242
====== ====== ==== =====
Income Taxes
The Corporation adopted FASB Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" in the first quarter of 2007 and, after evaluation, has
determined that it is immaterial to the consolidated financial statements.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities-Including
an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS
No. 159 is effective for Codorus Valley on January 1, 2008. The Corporation is
evaluating the impact that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
In September 2006, the Financial Accounting Standards Board issued FASB
Statement No. 157, "Fair Value Measurements," which defines fair value,
establishes a framework for measuring fair value under Generally Accepted
Accounting Principles, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. The Corporation is currently
evaluating the potential impact, if any, of the adoption of FASB Statement No.
157 on our consolidated financial position, results of operations and cash
flows.
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF 06-4").
EITF 06-4 requires the recognition of a liability
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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. The Corporation is evaluating the
impact that the adoption of EITF Issue No. 06-4 will have on its consolidated
financial statements.
NOTE 3--DEPOSITS
The composition of deposits on September 30, 2007 and December 31, 2006, was as
follows:
September 30, December 31,
(Dollars in thousands) 2007 2006
---------------------- ------------- ------------
Noninterest bearing demand $ 49,491 $ 49,190
NOW 42,019 43,864
Money market 158,291 144,292
Savings 18,075 17,533
Time CDs less than $100,000 162,335 145,849
Time CDs $100,000 or more 68,081 55,917
-------- --------
Total deposits $498,292 $456,645
======== ========
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NOTE 4--LONG-TERM DEBT
A summary of long-term debt at September 30, 2007 and December 31, 2006 follows:
September 30, December 31,
(Dollars in thousands) 2007 2006
---------------------- ------------- ------------
Obligations of PeoplesBank to FHLBP
Due 2007, 4.68% $ 7,000 $ 7,000
Due 2009, 3.47%, convertible quarterly after
December 2006 5,000 5,000
Due 2010, 4.32% 6,000 6,000
Due 2011, 4.30%, amortizing 4,307 4,504
Due 2012, 4.25%, amortizing 1,748 1,998
Due 2013, 3.46%, amortizing 3,043 3,403
Due 2014, 6.43%, convertible quarterly after
July 2009 3,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2011, floating rate based on 1 month
LIBOR plus 1.50%, amortizing 0 1,562
------- -------
30,098 34,467
Capital lease obligation 536 562
------- -------
Total long-term debt $30,634 $35,029
======= =======
PeoplesBank's obligations to Federal Home Loan Bank of Pittsburgh (FHLBP) are
fixed rate and fixed/floating (convertible) rate instruments. The FHLBP has an
option on the convertible borrowings to convert the rate to a floating rate
after the expiration of a specified period. The floating rate is based on the
LIBOR index plus a spread. If the FHLBP elects to exercise its conversion
option, PeoplesBank may repay the converted loan without a prepayment penalty.
NOTE 5--REGULATORY MATTERS
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a material
effect on Codorus Valley's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Codorus
Valley and PeoplesBank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgments by the regulators.
Quantitative measures established by regulators to ensure capital adequacy
require Codorus Valley and PeoplesBank to maintain minimum ratios, as set forth
below, to total and Tier 1 capital as a percentage of risk-weighted assets, and
of Tier 1 capital to year-to-date average assets (leverage ratio). Management
believes that Codorus Valley and PeoplesBank were well capitalized on September
30, 2007, based on FDIC capital guidelines.
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MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
--------------- ---------------- ----------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------- ------- ----- ------- ----- ------- ------
CODORUS VALLEY BANCORP, INC. (CONSOLIDATED)
AT SEPTEMBER 30, 2007
Capital ratios:
Tier 1 risk based $56,568 11.95% $18,936 4.0% n/a n/a
Total risk based 59,616 12.59 37,872 8.0 n/a n/a
Leverage 56,568 9.69 23,351 4.0 n/a n/a
AT DECEMBER 31, 2006
Capital ratios:
Tier 1 risk based $52,587 11.99% $17,538 4.0% n/a n/a
Total risk based 55,713 12.71 35,076 8.0 n/a n/a
Leverage 52,587 9.83 21,401 4.0 n/a n/a
PEOPLESBANK, A CODORUS VALLEY COMPANY
AT SEPTEMBER 30, 2007
Capital ratios:
Tier 1 risk based $52,249 11.12% $18,793 4.0% $28,190 6.0%
Total risk based 55,297 11.77 37,586 8.0 46,983 10.0
Leverage 52,249 9.01 23,206 4.0 29,008 5.0
AT DECEMBER 31, 2006
Capital ratios:
Tier 1 risk based $48,130 11.12% $17,316 4.0% $25,973 6.0%
Total risk based 51,256 11.84 34,631 8.0 43,289 10.0
Leverage 48,130 9.09 21,168 4.0 26,460 5.0
* To be well capitalized under prompt corrective action provisions.
NOTE 6--STOCK-BASED COMPENSATION
During the 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. Actual shares purchased under the ESPP will be
determined at the end of the six month offering period, i.e., year end 2007.
No stock options were granted under the Corporation's three stock option plans
during the first nine months of 2007. A summary of options from the stock option
plans, adjusted for stock dividends distributed, is shown below.
WEIGHTED AVERAGE WEIGHTED AVERAGE AGGREGATE
EXERCISE PRICE REMAINING INTRINSIC VALUE
OPTIONS PER SHARE CONTRACTUAL TERM ($000)
------- ---------------- ---------------- ---------------
Outstanding at January 1, 2007 284,205 $12.70 4.0 years $1,884
Exercised (23,300) 11.87
------- ------ --------- ------
Outstanding at September 30, 2007 260,905 $12.78 3.1 years $1,362
======= ====== ========= ======
Exercisable at September 30, 2007 240,700 $12.50 2.9 years $1,324
======= ====== ========= ======
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Intrinsic value represents the amount by which the market price of the stock on
the measurement date exceeded the exercise price of the option. The intrinsic
value of options exercised during the first nine months of 2007 was $156,000 and
during the first nine months of 2006 was $149,000. Cash received from such
exercises in 2007 was $276,000 and the tax benefit recognized was $53,000 and
for the same period in 2006 was $136,000 and the tax benefit recognized was
$51,000.
As of September 30, 2007, total unrecognized compensation cost related to
nonvested options under all equity award plans was $62,000. The cost is expected
to be recognized over a weighted average period of 1.2 years.
NOTE 7--CONTINGENT LIABILITIES
Management was not aware of any material contingent liabilities on September 30,
2007.
NOTE 8--GUARANTEES
Codorus Valley does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit are conditional commitments issued by PeoplesBank to guarantee
the performance of a customer to a third party. Generally, all letters of
credit, when issued, have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation generally holds
collateral and/or personal guarantees supporting these commitments. The
Corporation had $3,229,000 of standby letters of credit outstanding on September
30, 2007, compared to $6,121,000 on December 31, 2006. Management believes that
the proceeds obtained through a liquidation of collateral and the enforcement of
guarantees would be sufficient to cover the potential amount of future payment
required under the corresponding letters of credit. The amount of the liability
as of September 30, 2007 and December 31, 2006, under standby letters of credit
issued, was not material.
NOTE 9--SUBSEQUENT EVENTS
During October 2007, management received court approval to distribute proceeds
from the sale of real estate that collateralized a $2,624,000 nonperforming
business loan. As a result, PeoplesBank recovered in full all unpaid principal,
interest and loan fees. In October 2007, PeoplesBank recorded accumulated
interest income and loan fees totaling $539,000 from the distribution of the
sale proceeds.
Also during October 2007, PeoplesBank paid off the remaining $3 million balance
of a $5 million Federal Home Loan Bank advance prior to maturity. The FHLB
advance had an above market interest rate of 6.43 percent and a maturity date of
July 2014. As a result of the early payoff, PeoplesBank incurred a $252,000
prepayment penalty expense that it recorded in October as other noninterest
expense. The reduction in long-term debt was made with excess liquidity and is
expected to lower interest expense in future periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of the significant changes in the results
of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for Codorus Valley Bancorp, Inc. (Codorus
Valley or the Corporation), a bank holding company, and its wholly owned
subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided
below. Codorus Valley's consolidated financial condition and results of
operations consist almost entirely of
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PeoplesBank's financial condition and results of operations. Current performance
does not guarantee, and may not be indicative of, similar performance in the
future.
FORWARD-LOOKING STATEMENTS:
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the Corporation and its subsidiaries. When words
such as "believes," "expects," "anticipates" or similar expressions occur in the
Form 10-Q, management is making forward-looking statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that are incorporated by reference, could
affect the future financial results of the Corporation and its subsidiaries,
both individually and collectively, and could cause those results to differ
materially from those expressed in the forward-looking statements contained or
incorporated by reference in this Form 10-Q. These factors include:
- operating, legal and regulatory risks;
- changes in market interest rates;
- economic, political and competitive forces affecting banking, securities,
asset management and credit services businesses; and
- the risk that management's analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that Codorus Valley files periodically with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING ESTIMATES:
Disclosure of Codorus Valley's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2006 Annual Report on
Form 10-K for the period ended December 31, 2006. Some of these policies require
management to make significant judgments, estimates and assumptions that have a
material impact on the carrying value of certain assets and liabilities.
Management makes significant estimates in determining the allowance for loan
losses. Management considers a variety of factors in establishing this estimate,
such as current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, financial and
managerial strengths of borrowers, adequacy of collateral, if collateral
dependent, and 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. Additional information is contained in
Management's Discussion and Analysis regarding critical accounting estimates,
including the provision and allowance for loan losses, located on pages 14 and
22 of this Form 10-Q.
The Corporation changed its method of accounting for stock-based compensation in
2006, in accordance with Financial Accounting Standard No. 123(R). Based on
stock options outstanding on September 30, 2007, approximately $62,000 will be
expensed over the weighted average period of 1.2 years.
-13-
Management discussed the development and selection of critical accounting
estimates and related Management Discussion and Analysis disclosure with the
Audit Committee. There were no material changes made to the critical accounting
estimates during the periods presented within this report.
THREE MONTHS ENDED SEPTEMBER 30, 2007,
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006
FINANCIAL HIGHLIGHTS
The Corporation earned $1,641,000 or $.44 per share ($.43 diluted), for the
three-month period ended September 30, 2007, compared to $1,407,000 or $.38 per
share ($.38 diluted), for the same period of 2006. The $234,000 or 17 percent
increase in net income for the current quarter was primarily the result of an
increase in net interest income. Net interest income increased 18 percent as a
result of an increase in the volume of interest earning assets, increased
business loan fees and a higher net interest margin. The $180,000 decrease in
the provision for loan losses for the current quarter, due to adequacy of the
allowance, also contributed to the improvement in earnings. Noninterest income
for the current quarter increased 12 percent compared to the third quarter of
2006, due primarily to increased income and sales of mutual fund, annuity and
insurance products. Noninterest expense for the current quarter increased 23
percent above the third quarter of 2006 due to increases in personnel expense,
marketing and other expense.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income for the three-month period ended September 30, 2007, was
$5,349,000, an increase of $814,000 or 18 percent above the same period in 2006.
The increase was due primarily to an increase in the volume of interest earning
assets and net interest margin. Interest earning assets averaged $542 million
for the current quarter, representing a $66 million or 14 percent increase above
the third quarter of 2006. The increase in interest earning assets occurred
primarily in business and home equity loans, and investment securities. The net
interest margin was 4.03 percent for the third quarter of 2007, compared to 3.88
percent for the same quarter in 2006. The increase in net interest margin was
due in part to an increase in business loan fees, principally pre-payment fees
associated with the early payoff of several large business loans. Current period
margin was also positively affected by the reclassification of a nonperforming
business loan to accruing status, which resulted in the recognition of $93,000
in accumulated interest income.
PROVISION FOR LOAN LOSSES
The provision for loan losses was reduced (credited) by $35,000 for the third
quarter of 2007, compared to a $145,000 expense for the same quarter in 2006.
The current quarter provision reflects management's judgment of loan quality and
of an appropriate level for the allowance for loan losses at September 30, 2007.
-14-
NONINTEREST INCOME
The following table presents the components of total noninterest income for the
third quarter of 2007, compared to the third quarter of 2006. The $152,000 or 12
percent increase in noninterest income was primarily attributable to an increase
in income and sales from mutual fund, annuity and insurance products.
TABLE 1 - NONINTEREST INCOME
Three months ended Change
September 30, Increase (Decrease)
------------------ -------------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- ---
Trust and investment services fees $ 317 $ 299 $ 18 6%
Service charges on deposit accounts 499 480 19 4
Mutual fund, annuity and insurance sales 410 278 132 47
Income from bank owned life insurance 71 70 1 1
Other income 102 110 (8) (7)
Gain on sales of mortgages 51 61 (10) (16)
------ ------ ---- ---
Total noninterest income $1,450 $1,298 $152 12%
====== ====== ==== ===
NONINTEREST EXPENSE
The following table presents the components of total noninterest expense for the
third quarter of 2007, compared to the third quarter of 2006. The $882,000 or 23
percent increase was primarily attributable to increases in personnel expense,
marketing and other expense. For the third quarter of 2007, personnel expense,
comprised of wages, payroll taxes and employee benefits, increased $533,000 or
24 percent due largely to performance incentives and staff additions associated
with normal business growth. The 79 percent increase in marketing expense for
the current quarter reflected increased costs associated with product and
promotional advertising, and sponsorships. The 28 percent increase in other
expense included increased processing expense for loans and bank cards, and
increased charitable donations.
TABLE 2 - NONINTEREST EXPENSE
Three months ended Change
September 30, Increase (Decrease)
------------------ -------------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- ---
Personnel $2,741 $2,208 $533 24%
Occupancy of premises, net 314 321 (7) (2)
Furniture and equipment 347 299 48 16
Postage, stationery and supplies 101 79 22 28
Professional and legal 105 104 1 1
Marketing and advertising 247 138 109 79
Other 807 631 176 28
------ ------ ---- ---
Total noninterest expense $4,662 $3,780 $882 23%
====== ====== ==== ===
-15-
INCOME TAXES
The provision for income tax was $531,000 for the third quarter of 2007,
compared to $501,000 for the same period in 2006. The $30,000 or 6 percent
increase in the tax provision was the result of a 14 percent increase in pretax
income. Codorus Valley's effective federal income tax and marginal tax rates
were 25 percent and 34 percent, respectively, for quarters ended September 30,
2007 and 2006.
NINE MONTHS ENDED SEPTEMBER 30, 2007,
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006
FINANCIAL HIGHLIGHTS
The Corporation earned $5,037,000 or $1.37 per share ($1.34 diluted) for the
nine-month period ended September 30, 2007, compared to $4,191,000 or $1.15 per
share ($1.12 diluted), for the same period of 2006. The $846,000 or 20 percent
increase in net income was due in part to an $839,000 (or $554,000 after-tax)
first quarter 2007 recovery of loan losses that were incurred by PeoplesBank
during 2002-2003. Due to the adequacy of the allowance for loan losses, the full
amount of the recovery was recorded as a reduction to the loan loss provision.
Earnings were also favorably impacted by a 10 percent increase in net interest
income largely the result of an increase in interest earning assets, principally
business loans, overnight investments and investment securities. An increase in
business loan fees (e.g., pre-payment fees), and a recovery of accumulated
interest income from the reclassification of a nonperforming business loan to
accrual status during the third quarter also contributed to the increase in net
interest income. Current period total noninterest income increased 4 percent
above 2006 due primarily to an increase in income from the sale of mutual fund,
annuity and insurance products. The positive effect on net income for 2007 from
the reduction in loan loss provision, the increase in interest earning assets,
and the increase in noninterest income more than offset an increase in
noninterest expense. Total noninterest expense increased 16 percent for the
first nine months of 2007 due primarily to increased personnel costs, caused by
the timing of performance incentives and staff additions associated with normal
business growth, increased marketing expense, and the recognition of a $185,000
($122,000 after-tax) prepayment penalty on the early pay-down of a $2 million
Federal Home Loan Bank advance. The Corporation paid down the advance, which had
an above market rate, to reduce interest expense in future periods. Total assets
were approximately $590 million on September 30, 2007, an increase of $65
million or 12 percent above September 30, 2006. Asset growth was funded by
strong deposit growth, primarily money market deposits and CDs.
Net income as a percentage of average shareholders' equity (ROE) was 14.94
percent for the first nine months (annualized) of 2007, compared to 13.85
percent for the same period of 2006. Net income as a percentage of average total
assets (ROA) was 1.18 percent for the first nine months (annualized) of 2007,
compared to 1.12 percent for the same period of 2006. The efficiency ratio,
computed as noninterest expense as a percentage of net interest income and
noninterest income (tax equivalent), was 67.3 percent for the first nine months
of 2007, compared to 63.6 percent for the same period of 2006.
On September 30, 2007, nonperforming assets as a percentage of total loans and
net foreclosed real estate were 1.02 percent, compared to 1.38 percent for
September 30, 2006. Information regarding nonperforming assets is provided in
the Risk Management section of this report, including Table 5--Nonperforming
Assets. Based on a recent evaluation of probable loan losses and the current
loan portfolio, management believes that the allowance is adequate to support
losses inherent in the loan portfolio on September 30, 2007. An analysis of the
allowance is provided in Table 6--Analysis of Allowance for Loan Losses.
-16-
Throughout the current period, Codorus Valley maintained a capital level well
above minimum regulatory quantitative requirements. Currently, there are three
federal regulatory definitions of capital that take the form of minimum ratios.
Note 5--Regulatory Matters, shows that the Corporation and PeoplesBank were well
capitalized on September 30, 2007.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income for the nine-month period ended September 30, 2007, was
$15,064,000, an increase of $1,388,000 or 10 percent above the same period in
2006. The increase was due primarily to an increase in the volume of interest
earning assets. Earning assets averaged $532 million and yielded 7.44 percent
(tax equivalent basis) for the first nine months of 2007, compared to $461
million and 7.17 percent, respectively, for the same period in 2006. The $71
million or 15 percent increase in average earning assets occurred primarily in
business loans, overnight investments and investment securities. An increase in
the volume of home equity loans also contributed to the growth in earning
assets. Net interest margin was 3.90 percent for the first nine months of
2007(annualized), compared to 4.06 percent for the same period in 2006. The
decrease in margin was primarily the result of an increase in interest expense
related to a larger volume of interest bearing liabilities and higher rates.
Interest bearing liabilities averaged $478 million at an average rate of 3.93
percent for the first nine months of 2007, compared to $410 million and 3.50
percent, respectively, for the same period in 2006. Current period deposit rates
were higher than the prior period and reflected the presence of the flat (or
slightly inverted) US treasury yield curve environment through June 2007, and
customer preference for deposit products with competitive rates, principally
money markets and CDs. The decline in short-term market interest rates during
the third quarter of 2007, which caused an upward slope in the US treasury yield
curve, are expected to result in lower future funding costs.
PROVISION FOR LOAN LOSSES
As a result of a large loan loss recovery during the current period and adequacy
of the allowance on September 30, 2007, the Corporation recorded a $919,000
credit to the provision for loan losses, compared to a $500,000 provision
expense for the same period in 2006. In February 2007, PeoplesBank recovered
approximately $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 materially
reimbursed PeoplesBank for loan losses that were incurred in 2002 and 2003 that
pertained to a group of related equipment leasing contracts that PeoplesBank
acquired from a third-party broker who designated Bank of New York as escrow
agent for payments under these contracts.
The current period provision reflected management's judgment of loan quality and
of an appropriate level for the allowance for loan losses at September 30, 2007.
The Corporation does not participate in the subprime lending market and
accordingly, it has no loss exposure to subprime lending.
-17-
NONINTEREST INCOME
The following table presents the components of total noninterest income for the
first nine months of 2007, compared to the same period of 2006. Current period
noninterest income increased $144,000 or 4 percent above 2006. Most of the
overall increase was attributable to PeoplesBank subsidiary Codorus Valley
Financial Advisors (CVFA), which increased income from the sale of mutual fund,
annuity and insurance products. CVFA was also the recipient of selected
accounts, principally IRAs and investment advisory accounts, from the Trust
Department. Management realigned accounts between these functions to leverage
off of CVFA's investment expertise and lower cost structure. The other income
component declined due in part to the recognition of a nonrecurring gain of
$45,000 in 2006 from the sale of two small parcels of land to the local township
for a road throughway.
TABLE 3 - NONINTEREST INCOME
Nine months ended Change
September 30, Increase (Decrease)
----------------- -------------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------ ------ ---- ---
Trust and investment services fees $ 945 $ 939 $ 6 1%
Service charges on deposit accounts 1,436 1,400 36 3
Mutual fund, annuity and insurance sales 1,092 923 169 18
Income from bank owned life insurance 204 197 7 4
Other income 324 389 (65) (17)
Gain on sales of mortgages 208 210 (2) (1)
Loss on sales of securities (7) 0 (7) 0.0
------ ------ ---- ---
Total noninterest income $4,202 $4,058 $144 4%
====== ====== ==== ===
NONINTEREST EXPENSE
The following table presents the components of total noninterest expense for the
first nine months of 2007, compared to the first nine months of 2006.
TABLE 4 - NONINTEREST EXPENSE
Nine months ended Change
September 30, Increase (Decrease)
----------------- -------------------
(dollars in thousands) 2007 2006 $ %
---------------------- ------- ------- ------ ---
Personnel $ 7,845 $ 6,487 $1,358 21%
Occupancy of premises, net 1,005 1,053 (48) (5)
Furniture and equipment 1,032 1,043 (11) (1)
Postage, stationery and supplies 341 318 23 7
Professional and legal 235 214 21 10
Marketing and advertising 474 391 83 21
Other 2,486 2,037 449 22
------- ------- ------ ---
Total noninterest expense $13,418 $11,543 $1,875 16%
======= ======= ====== ===
The discussion that follows addresses changes in selected categories of
noninterest expense.
-18-
Personnel--For the first nine months of 2007, personnel expense, comprised of
wages, payroll taxes and employee benefits, increased $1,358,000 or 21 percent
above 2006 levels due to performance incentives and staff additions associated
with normal business growth.
Professional and legal--For the first nine months of 2007, professional and
legal expense increased $21,000 or 10 percent above 2006. The first quarter of
2006 included a $35,000 reimbursement of legal expenses to PeoplesBank, which
resulted from the settlement of a lawsuit from routine bank business. There was
no comparable reimbursement for 2007. Years 2007 and 2006 included consulting
expense for assistance with section 404 of the Sarbanes-Oxley Act (SOX404)
compliance of approximately $27,000, and $30,000, respectively. CPA fees in the
current period increased as a result of SOX404 documentation review.
In the period ahead, management anticipates additional CPA and consulting fees
to comply with SOX404. Based on current compliance requirements for the
Corporation, the CEO and CFO must certify as to the adequacy of controls over
financial reporting on December 31, 2007, and thereafter. Effective December 31,
2008, and thereafter, the Corporation's public accounting firm is required to
audit and opine on the Corporation's controls over financial reporting.
Marketing and advertising--For the first nine months of 2007, marketing and
advertising expense increased $83,000 or 21 percent above the same period in
2006. The increase was due in part to advertising promotions (e.g., check card
rewards promotion), an increase in sponsorship expenses and normal business
growth.
Other--For the first nine months of 2007, other expense increased $449,000 or 22
percent due in part to the recognition of a $185,000 prepayment penalty on the
early pay-down of $2 million on a $5 million Federal Home Loan Bank advance. The
Corporation partially paid down the advance, which was due July 2014 and had an
above market interest rate of 6.43%, to reduce interest expense in future
periods. There was no comparable prepayment penalty in the prior year. (In
October 2007, the Corporation paid down the remaining $3 million balance of the
Federal Home Loan Bank advance and incurred a prepayment penalty of $252,000.)
Increases in miscellaneous loan expense (loan volume), Pennsylvania shares tax
(the prior period tax was reduced by education improvement tax credits),
ATM/point-of-sale processing costs (volume), and normal business growth also
contributed to the increase in other expense.
Effective January 1, 2007, the Federal Deposit Insurance Corporation (FDIC)
created a new risk framework of four risk categories and established assessment
rates to coincide with each category. Assessment rates for Risk Category I
institutions, which includes PeoplesBank, range from 5 to 7 basis points. The
FDIC also approved a one-time assessment credit for banks in existence on
December 31, 1996, that paid a deposit insurance assessment prior to that date.
Management believes that the one-time credit will more than offset the new FDIC
assessment cost for 2007; however, the credit is likely to be depleted in the
first quarter of 2008. Accordingly, PeoplesBank will begin to recognize the
assessment at that time. (Management's estimate of the FDIC assessment expense,
net of the credit, for 2008 is approximately $200,000.)
INCOME TAXES
The provision for income tax was $1,730,000 for the current nine-month period,
compared to $1,500,000 for the same period in 2006. The $230,000 or 15 percent
increase in the tax provision was the result of a 19 percent increase in pretax
income. Codorus Valley's effective federal income tax and marginal tax rates
were 26 percent and 34 percent, respectively, for the nine-month periods ended
-19-
September 30, 2007 and 2006. The effective tax rate reflects the impact of low
income housing credits and tax-exempt interest income, including income from
bank owned life insurance.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
On September 30, 2007, the securities available-for-sale portfolio was
approximately $81 million, compared to $73 million for year-end 2006. The
increase occurred primarily from the purchase of high quality US agency
mortgage-backed bonds and tax-exempt municipal bonds.
On September 30, 2007, the securities held-to-maturity portfolio, recorded at
amortized cost, was approximately $3.4 million, compared to approximately $7.5
million for year-end 2006. The decrease in the portfolio was the result of six
bonds being called by issuers exercising their call options. The
held-to-maturity portfolio for both periods consisted of fixed rate, junior
subordinated debt instruments issued by commercial bank holding companies. These
investments are callable in 2007 and thereafter, and mature in years 2026-2028.
In the period ahead, it is probable that more of these high yielding investments
will be called by issuers based on the current level of market interest rates.
If such calls occur, the calls will be at a premium; however, reinvestment
yields are expected to be much lower.
LOANS
On September 30, 2007, total loans were approximately $442 million, an increase
of $36 million or 9 percent above year-end 2006. The increase was primarily
attributable to an increase in business and home equity loans. The average yield
(tax-equivalent basis) earned on total loans was 7.95 percent for the first nine
months of 2007, compared to 7.61 percent for the same period of 2006.
DEPOSITS
On September 30, 2007, total deposits were approximately $498 million, an
increase of $42 million or 9 percent above year-end 2006. The increase in
deposits, which reflected the continuation of a long trend of successful sales
efforts, occurred primarily within the money market and CD categories, as shown
in Note 3--Deposits. The average rate paid on interest-bearing deposits was 3.81
percent for the first nine months of 2007, compared to 3.31 percent for the same
period of 2006. The higher average rate reflected the lingering effects of a
flat US treasury yield curve through June 2007, and competitive pricing
pressures.
LONG-TERM DEBT
On September 30, 2007, long-term debt was approximately $31 million, compared to
$35 million outstanding at year-end 2006. During the second quarter of 2007,
Codorus Valley paid in full a $1.5 million mortgage on the corporate center
office building without prepayment penalty. In March 2007, PeoplesBank paid down
$2 million on a $5 million Federal Home Loan Bank advance (FHLB advance), 6.43%
rate, and incurred a $185,000 prepayment penalty included in other noninterest
expense. The reduction in long-term debt was made with excess liquidity and is
expected to lower interest expense in future periods. A listing of outstanding
long-term debt obligations is provided in Note 4--Long-term Debt.
-20-
(During October 2007, PeoplesBank paid off the remaining $3 million balance of
the aforementioned FHLB advance with the 6.43% interest rate prior to maturity
and incurred a prepayment penalty of $252,000. These transactions will be
reported on Form 10-K for year-end 2007.)
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Shareholders' equity or capital enables Codorus Valley to maintain asset growth
and absorb losses. Total shareholders' equity was approximately $47 million on
September 30, 2007, an increase of $4 million, or approximately 10 percent,
above December 31, 2006. The increase was caused primarily by retained earnings
from profitable operations.
On October 9, 2007, the Board of Directors declared two cash dividends payable
on or before November 13, 2007, to shareholders of record October 23, 2007. The
first was a regular quarterly cash dividend of $.14 per common share. The second
was a special cash dividend of $.05 per common share. The special cash divided
was declared solely as a result of the recovery the company realized from loan
losses experienced in a prior period. These dividends follow $.135 per share
cash dividends paid in August, May ($.129 adjusted) and February ($.129
adjusted). The Board also distributed a 5 percent stock dividend in June 2007,
which resulted in the issuance of 175,148 common shares.
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators that involve quantitative
guidelines and qualitative judgments. Quantitative measures established by
regulators pertain to minimum capital ratios, as set forth in Note 5--Regulatory
Matters, to the financial statements. Management believes that Codorus Valley
and PeoplesBank were well capitalized on September 30, 2007, based on FDIC
capital guidelines.
RISK MANAGEMENT
NONPERFORMING ASSETS
Table 5--Nonperforming Assets, provides a summary of nonperforming assets and
related ratios. The paragraphs below provide information for selected categories
for September 30, 2007, compared to December 31, 2006.
-21-
TABLE 5-NONPERFORMING ASSETS
September 30, December 31,
(dollars in thousands) 2007 2006
---------------------- ------------- ------------
Nonaccrual loans $3,632 $4,368
Accruing loans that are contractually past due
90 days or more as to principal or interest 461 4
Foreclosed real estate, net of allowance 403 38
------ ------
Total nonperforming assets $4,496 $4,410
------ ------
Ratios:
Nonaccrual loans as a % of total period-end loans 0.82% 1.08%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 1.02% 1.09%
Nonperforming assets as a % of total period-end
shareholders' equity 9.58% 10.31%
Allowance for loan losses as a multiple of
nonaccrual loans .8x .7x
On September 30, 2007, nonaccrual loans consisted of collateralized business and
mortgage loans, and consumer loans. The Corporation recognizes interest income
on a cash basis for nonaccrual loans. On September 30, 2007, the nonaccrual
loans portfolio balance totaled $3,632,000 and was comprised of 9 unrelated
accounts ranging in size from $9,000 to $2,624,000. The underlying real estate
collateral for the largest account, totaling $2,624,000, has been sold at public
auction, and management is awaiting court approval for the distribution of the
proceeds. (Subsequent to September 30, 2007, management received court approval
to distribute the sale proceeds, which resulted in the full recovery of all
unpaid principal, interest and fees. Income from interest and fees, which
totaled $539,000, was recorded in October 2007.)
On September 30, 2007, foreclosed real estate, net of allowance, totaled
$403,000, compared to $38,000 on December 31, 2006. The current period portfolio
contains one property that management is trying to liquidate.
On September 30, 2007, loans contractually past due 90 days or more as to
principal or interest totaled $461,000, representing two accounts. One account,
a business loan totaling $446,000, collateralized by real estate, makes up most
of the balance. (Subsequent to September 30, 2007, this account was paid off in
full, including unpaid interest.)
ALLOWANCE FOR LOAN LOSSES
Table 6--Analysis of Allowance for Loan Losses, shows the allowance was
$3,048,000 or .69 percent of total loans on September 30, 2007, compared to
$2,969,000 or .75 percent of total loans on September 30, 2006. The current
period allowance was based on management's estimate to bring the allowance to a
level reflective of risk in the portfolio, loan growth, and macro-economic
factors such as the heightened level of energy costs and the slow down in the
real estate market. The large recovery of prior period commercial loan losses
was discussed in the provision for loan loss section of this report. Based on a
-22-
recent evaluation of probable loan losses in the current portfolio, management
believes that the allowance is adequate to support losses inherent in the loan
portfolio on September 30, 2007.
TABLE 6-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2007 2006
---------------------- ------ ------
Balance-January 1, $3,126 $2,538
Provision charged (credited) to operating expense (919) 500
Loans charged off:
Commercial 7 104
Real estate-mortgage 31 17
Consumer 22 22
------ ------
Total loans charged off 60 143
Recoveries:
Commercial 874 45
Real estate-mortgage 2 2
Consumer 25 27
------ ------
Total recoveries 901 74
------ ------
Net (recoveries) charge-offs (841) 69
------ ------
Balance-September 30, $3,048 $2,969
------ ------
Ratios:
Net (recoveries) charge-offs (annualized) to
average total loans (0.26)% 0.02%
Allowance for loan losses to total loans
at period-end 0.69% 0.75%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 74.5% 54.1%
LIQUIDITY
At September 30, 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 September 30,
2007, and available credit from the Federal Home Loan Bank of Pittsburgh (FHLB).
Available funding from the FHLB was approximately $100 million based on the
latest available information from the FHLB. The Consolidated Statements of Cash
Flows, included in this report, present the changes in cash from operating,
investing and financing activities. Codorus Valley's loan-to-deposit ratio,
which is used as a broad measure of liquidity, was approximately 89 percent and
92 percent, respectively, as of September 30, 2007 and 2006.
Off-Balance Sheet Arrangements
Codorus Valley's financial statements do not reflect various commitments that
are made in the normal course of business, which may involve some liquidity
risk. These commitments consist primarily of commitments to grant new loans,
unfunded commitments under existing loan facilities, and letters of credit made
under the same standards as on-balance sheet instruments. Unused commitments on
September 30, 2007, totaled $139,545,000 and consisted of $109,660,000 in
unfunded commitments under existing loan facilities, $26,656,000 to grant new
loans and $3,229,000 in letters of credit. Due to
-23-
fixed maturity dates and specified conditions within these instruments, many
commitments will expire without being drawn upon. Management believes that
amounts actually drawn upon can be funded in the normal course of operations and
therefore do not present a significant liquidity risk to Codorus Valley.
Contractual Obligations
Codorus Valley has various long-term contractual obligations outstanding at
September 30, 2007, including long-term debt, time deposits and obligations
under capital and operating leases, which were reported in Table 13 of the
Annual Report on Form 10-K for the year ended 2006. A comparative schedule of
deposits, which includes time deposits, is provided in Note 3 of this Form 10-Q
report. A comparative schedule of long-term debt is provided in Note 4.
MARKET RISK MANAGEMENT
In the normal course of conducting business, Codorus Valley is exposed to market
risk, principally interest rate risk, through the operations of its banking
subsidiary. Interest rate risk arises from market driven fluctuations in
interest rates, which may affect cash flows, income, expense and values of
financial instruments. An asset-liability management committee, comprised of
members of management, manages interest rate risk.
Codorus Valley performed financial simulations on its balance sheet for
September 30, 2007 and December 31, 2006 to determine its sensitivity to market
interest rate risk. The results of the point-in-time analyses are shown in Table
7--Interest Rate Sensitivity. For both periods, the asset-liability management
model portrayed a balance sheet that was liability sensitive. Liability
sensitivity means that deposits and corporate debt are likely to re-price to a
greater and faster degree than the loans and investments that they fund. This
asset-liability position suggests that net income may increase if market
interest rates decrease significantly. Conversely, net income would be expected
to decrease if short-term market interest rates increase significantly. For both
periods, management presumed that trust preferred investment securities held by
the Corporation and PeoplesBank, which are callable at a premium, would be
called and would result in a one time increase in interest income. A detailed
discussion of market interest rate risk is provided in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2006.
TABLE 7-INTEREST RATE SENSITIVITY
Change in
Forecasted Change in interest rates net income
interest rate ramped over 12 months ---------------
scenario (basis points) $000's %
--------------- ------------------------ ------ ------
AT SEPTEMBER 30, 2007
Most likely -50 (491) (7.2)
High +200 (746) (10.9)
Flat (baseline) 0 0 0.0
Low -200 (249) (3.6)
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
-24-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the section entitled "Market risk management" within Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations on page 24 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Codorus Valley maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Corporation
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Pursuant to
compliance with Section 404 of the Sarbanes-Oxley Act, management strengthened
controls over the financial reporting process during the third quarter of 2007
by adopting companywide policies that require two individuals to post
transactions or to authorize disbursements over a specified dollar amount.
Management also began an initiative, which will be completed by year end 2007,
to better segregate processing responsibilities and to limit access to critical
software applications and information. Based upon their evaluation of disclosure
controls and procedures performed as of September 30, 2007, the chief executive
and chief financial officers of Codorus Valley concluded that Codorus Valley's
disclosure controls and procedures were adequate.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no known legal proceedings pending against Codorus Valley Bancorp,
Inc. or any of its subsidiaries which are expected to have a material impact
upon the financial position and/or operating results of the Corporation.
Management is not aware of any proceedings known or contemplated by government
authorities.
ITEM 1A. RISK FACTORS
Management is not aware of any material changes in the risk factors previously
disclosed in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Codorus Valley made no sales or repurchases of equity securities during the
quarter ended September 30, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
ITEM 5. OTHER INFORMATION
Nothing to report.
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ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3(i) Amended Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to the Registrant's Current Report on Form 8-K, filed
with the Commission on October 14, 2005.)
3(ii) Amended By-laws (Incorporated by reference to Exhibit 3(ii) to the
Registrant's Current Report on Form 8-K, filed with the Commission on
May 10, 2007.)
4 Rights Agreement dated as of November 4, 2005 (Incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form 8-K,
filed with the Commission on November 8, 2005.)
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the authorized
undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
November 8, 2007 /s/ Larry J. Miller
Date --------------------------------------------
Larry J. Miller
President & CEO
(Principal executive officer)
November 8, 2007 /s/ Jann A. Weaver
Date --------------------------------------------
Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting officer)
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