UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
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(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
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(Address of principal executive offices) (Zip code)
717-747-1519
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(Registrant's telephone number, including area code)
Not Applicable
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(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 checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. On July 22, 2003, 2,831,599
shares of common stock, par value $2.50, were outstanding.
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Codorus Valley Bancorp, Inc.
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION Page #
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Item 1. Financial statements:
Consolidated statements of financial condition 3
Consolidated statements of income 4
Consolidated statements of cash flows 5
Consolidated statements of changes in stockholders' equity 6
Notes to consolidated financial statements 7
Item 2. Management's discussion and analysis of financial condition and
results of operations 13
Item 3. Quantitative and qualitative disclosures about market risk 23
Item 4. Controls and procedures 23
PART II - OTHER INFORMATION
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Item 1. Legal proceedings 23
Item 2. Changes in securities and use of proceeds 24
Item 3. Defaults upon senior securities 24
Item 4. Submission of matters to a vote of security holders 24
Item 5. Other information 24
Item 6. Exhibits and reports on Form 8-K 25
SIGNATURES 27
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
June 30, December 31,
(dollars in thousands, except per share data) 2003 2002
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ASSETS
Interest bearing deposits with banks $ 108 $ 242
Cash and due from banks 8,854 10,878
Federal funds sold 18,321 0
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Total cash and cash equivalents 27,283 11,120
Securities, available-for-sale 61,233 70,366
Securities, held-to-maturity (fair value $10,542 for 2003 and $9,539 for 2002) 9,356 9,357
Loans, held for sale 2,311 4,586
Loans (net of deferred fees of $620 in 2003 and $645 in 2002) 242,541 233,960
Less-allowance for loan losses (1,539) (1,515)
- -------------------------------------------------------------------------------------------------------
Net loans 241,002 232,445
Premises and equipment 9,290 9,335
Other assets 15,275 12,688
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Total assets $ 365,750 $ 349,897
=======================================================================================================
LIABILITIES
Deposits
Noninterest bearing $ 35,232 $ 30,120
Interest bearing 273,197 262,507
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Total deposits 308,429 292,627
Short-term borrowings 0 7,089
Long-term debt 19,880 16,164
Other liabilities 4,222 1,794
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Total liabilities 332,531 317,674
STOCKHOLDERS' 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; 2,831,599 shares issued and
outstanding on 6/30/03 and 2,697,035 on 12/31/02 7,079 6,743
Additional paid-in capital 17,366 15,549
Retained earnings 7,320 8,551
Accumulated other comprehensive income 1,454 1,380
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Total stockholders' equity 33,219 32,223
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Total liabilities and stockholders' equity $ 365,750 $ 349,897
=======================================================================================================
See accompanying notes
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited
Three months ended Six months ended
June 30, June 30,
(dollars in thousands, except per share data) 2003 2002 2003 2002
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INTEREST INCOME
Loans, including fees $ 4,136 $ 4,253 $ 8,191 $ 8,659
Investment securities
Taxable 616 651 1,295 1,144
Tax-exempt 114 131 233 262
Dividends 8 7 23 20
Other 40 68 45 183
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Total interest income 4,914 5,110 9,787 10,268
INTEREST EXPENSE
Deposits 1,497 2,045 3,034 4,145
Federal funds purchased and other short-term borrowings 0 0 5 0
Long-term debt 255 297 496 613
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Total interest expense 1,752 2,342 3,535 4,758
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Net interest income 3,162 2,768 6,252 5,510
PROVISION FOR LOAN LOSSES 187 50 224 70
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Net interest income after provision for loan losses 2,975 2,718 6,028 5,440
NONINTEREST INCOME
Trust and investment services fees 197 192 412 399
Service charges on deposit accounts 248 194 463 369
Income from bank owned life insurance 77 73 149 148
Other income 265 152 530 304
Gain on sale of securities 99 0 266 72
Gain on sale of mortgages 245 82 482 324
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Total noninterest income 1,131 693 2,302 1,616
NONINTEREST EXPENSE
Salaries and benefits 1,623 1,415 3,276 2,853
Occupancy of premises, net 252 188 519 401
Furniture and equipment 271 264 555 537
Postage, stationery and supplies 113 109 220 201
Professional and legal 157 63 234 128
Marketing and advertising 112 150 165 247
Foreclosed real estate, net 37 11 104 46
Other 613 427 1,178 901
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Total noninterest expense 3,178 2,627 6,251 5,314
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Income before income taxes 928 784 2,079 1,742
PROVISION FOR INCOME TAXES 215 125 505 296
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Net income $ 713 $ 659 $ 1,574 $ 1,446
==================================================================================================
Net income per share, basic $ 0.25 $ 0.23 $ 0.56 $ 0.51
Net income per share, diluted $ 0.25 $ 0.23 $ 0.55 $ 0.51
==================================================================================================
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
Six months ended
June 30,
(dollars in thousands) 2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,574 $ 1,446
Adjustments to reconcile net income to net cash provided by operations
Depreciation 493 488
Provision for loan losses 224 70
Provision for losses on foreclosed real estate 55 30
Amortization of investment in real estate partnership 104 393
Increase in cash surrender value of life insurance investment (149) (148)
Originations of held for sale mortgages (32,116) (20,430)
Proceeds from sales of held for sale mortgages 34,873 31,852
Gain on sales of held for sale mortgages (482) (324)
Gain on sales of securities (266) (72)
Gain on sales of foreclosed real estate 6 (32)
Decrease (increase) in accrued interest receivable and other assets 34 (1,059)
Increase in accrued interest payable and other liabilities 328 186
Other, net 361 310
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Net cash provided by operating activities 5,039 12,710
CASH FLOWS FROM INVESTING ACTIVITIES
Securities, available-for-sale:
Purchases (13,423) (40,684)
Maturities and calls 8,769 13,949
Sales 13,859 1,095
Net increase in loans made to customers (8,968) (11,136)
Purchases of premises and equipment (457) (305)
Investment in real estate partnership (670) 0
Proceeds from sales of foreclosed real estate 237 150
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Net cash used in investing activities (653) (36,931)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 15,553 16,136
Net increase (decrease) in time deposits 249 (959)
Net decrease in short-term borrowings (7,089) 0
Proceeds from issuance of long-term debt 5,000 0
Repayment of long-term debt (1,284) (191)
Dividends paid (647) (615)
Cash paid in lieu of fractional shares (5) (4)
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Net cash provided by financing activities 11,777 14,367
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Net increase in cash and cash equivalents 16,163 (9,854)
Cash and cash equivalents at beginning of year 11,120 25,035
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Cash and cash equivalents at end of period $ 27,283 $ 15,181
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SUPPLEMENTAL DISCLOSURES
Interest paid on deposits and borrowed funds $ 3,556 $ 4,844
Income taxes paid $ 500 $ 375
See accompanying notes
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
(dollars in thousands) Stock Capital Earnings Income Total
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For the six months ended June 30, 2003
Balance, December 31, 2002 $ 6,743 $ 15,549 $ 8,551 $ 1,380 $ 32,223
Comprehensive income:
Net income 1,574 1,574
Other comprehensive income, net of tax:
Unrealized gains on securities, net of reclassification
adjustment for gains included in net income 74 74
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Total comprehensive income 1,648
Cash dividends ($.228 per share, adjusted) (647) (647)
5% stock dividend - 134,564 shares at fair value 336 1,817 (2,158) (5)
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Balance, June 30, 2003 $ 7,079 $ 17,366 $ 7,320 $ 1,454 $ 33,219
======================================================================================================================
For the six months ended June 30, 2002
Balance, December 31, 2001 $ 6,411 $ 14,004 $ 8,526 $ 427 $ 29,368
Comprehensive income:
Net income 1,446 1,446
Other comprehensive income, net of tax:
Unrealized gains on securities, net 409 409
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Total comprehensive income 1,855
Cash dividends ($.217 per share, adjusted) (615) (615)
5% stock dividend - 127,927 shares at fair value 320 1,490 (1,814) (4)
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Balance, June 30, 2002 $ 6,731 $ 15,494 $ 7,543 $ 836 $ 30,604
======================================================================================================================
See accompanying notes
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The interim financial statements are unaudited. However, they reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial condition and results of operations for the reported periods, and
are of a normal and recurring nature.
These statements should be read in conjunction with the notes to the audited
financial statements contained in the 2002 Annual Report to Stockholders.
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus
Valley Company, and its wholly owned nonbank subsidiary, SYC Realty Company,
Inc. PeoplesBank has two wholly owned subsidiaries, SYC Insurance Services, Inc.
and SYC Settlement Services, Inc. All significant intercompany account balances
and transactions have been eliminated in consolidation. The combined results of
operations of the nonbank subsidiaries are not material to the consolidated
financial statements.
The results of operations for the six-month period ended June 30, 2003 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 declared,
including the 5 percent stock dividend declared April 8, 2003. The weighted
average number of shares of common stock outstanding, used for basic and diluted
calculations was as follows for the three months ended and year to date June 30,
(In thousands) 2003 2002
- ----------------------------------------------------------
Basic 2,832 2,827
Diluted 2,851 2,836
Stock-based compensation
Stock options issued under shareholder approved employee and director stock
option plans are accounted for under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Stock options are granted
at exercise prices not less that the fair value of the common stock on the date
of grant. Under APB 25, no compensation expense is recognized related to these
plans.
In accordance with Financial Accounting Standard No. 123, the Corporation has
elected to disclose the pro forma information regarding net income and net
income per share as if the stock options had been accounted for under the
recognition provisions of the Statement. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. Pro forma amounts are indicated below:
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Three months ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share data) 2003 2002 2003 2002
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Reported net income $713 $659 $1,574 $1,446
Deduct total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 6 49 11 86
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Pro forma net income $707 $610 $1,563 $1,360
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Reported basic earnings per share $.25 $.23 $ .56 $ .51
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Reported diluted earnings per share $.25 $.23 $ .55 $ .51
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Pro forma basic earnings per share $.25 $.22 $ .55 $ .48
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Pro forma diluted earnings per share $.25 $.22 $ .55 $ .48
=============================================================================================================
Comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance 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 Six months ended
June 30, June 30,
(Dollars in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during the period $523 $794 $378 $ 692
Reclassification adjustment for gains included in
income (99) 0 (266) (72)
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Net unrealized gains 424 794 112 620
Tax effect (144) (270) (38) (211)
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Net of tax amount $280 $524 $ 74 $ 409
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Reclassifications
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation format. These reclassifications had no impact
on the Corporation's net income.
Recently issued FASB Statements
In May 2003, the Financial Accounting Standards Board issued Statement No. 150
(Statement), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity." This Statement requires that an issuer classify
a financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003. The adoption of this Statement
did not have any significant impact on the Corporation's financial condition or
results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement No. 149
(Statement), "Amendment of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities". This Statement clarifies the definition of
a derivative and incorporates certain decisions made by the
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Board as part of the Derivatives Implementation Group process. The Statement is
effective for contracts entered into or modified, and for hedging relationships
designated after June 30, 2003 and should be applied prospectively. The
provisions of the Statement that relate to implementation issues addressed by
the Derivatives Implementation Group that have been effective should continue to
be applied in accordance with their respective effective dates. Adoption of this
Statement is not expected to have a significant impact on the Corporation's
financial condition or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This interpretation provides new guidance for the
consolidation of variable interest entities (VIEs) and requires such entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among parties involved. The interpretation also adds
disclosure requirements for investors that are involved with unconsolidated
VIEs. The disclosure requirements apply to all financial statements issued after
January 31, 2003. The consolidation requirements apply immediately to VIEs
created after January 31, 2003, and are effective for the first fiscal year or
interim period beginning after June 15, 2003, for VIEs acquired before February
1, 2003. The adoption of this interpretation did not have a significant impact
on the Corporation's financial condition or results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies." In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability or
equity security of the guaranteed party, which would include financial standby
letters of credit. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this Interpretation, including, among
others, guarantees related to commercial letters of credit and loan commitments.
The disclosure requirements of FIN 45 require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
accounting recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did
not have a significant impact on the Company's financial condition or results of
operations.
Outstanding letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. The Company had $2,404,000 of
standby letters of credit as of June 30, 2003. The Bank uses the same credit
policies in making conditional commitments as it does for on-balance sheet
instruments.
The majority of these standby letters of credit expire within the next twelve
months. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending other loan commitments. The Company requires
collateral and personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained through a liquidation
of such collateral and the enforcement of personal guarantees would be
sufficient to cover the maximum potential amount of future payments required
under the corresponding guarantees. The current amount of the liability as of
June 30, 2003 for guarantees under standby letters of credit issued after
December 31, 2002 is not material.
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NOTE 3--DEPOSITS
The composition of deposits on June 30, 2003 and December 31, 2002, was as
follows:
June 30, December 31,
(Dollars in thousands) 2003 2002
- -----------------------------------------------------------------------------------
Noninterest bearing demand $ 35,232 $ 30,120
NOW 38,060 34,851
Money market 79,954 73,938
Savings 14,239 13,023
Time CDs less that $100,000 114,827 114,808
Time CDs $100,000 or more 26,117 25,887
- -----------------------------------------------------------------------------------
Total deposits $308,429 $292,627
===================================================================================
NOTE 4--LONG-TERM DEBT
A summary of long-term debt at June 30, 2003 and December 31, 2002 follows:
June 30, December 31,
(Dollars in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------
Obligations of PeoplesBank to FHLBP
Due 2004, 5.12% $ 0 $ 1,025
Due 2005, 5.36%, convertible quarterly 6,000 6,000
Due 2007, 4.69%, amortizing 1,448 1,636
Due 2013, 3.46%, amortizing 4,965 0
Due 2014, 6.43%, convertible quarterly after
July 2009 5,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2009, 7.35%, amortizing 1,821 1,848
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19,234 15,509
Capital lease obligation 646 655
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Total long-term debt $19,880 $16,164
=======================================================================================================
PeoplesBank's obligations to 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, can repay
the converted loan without a prepayment penalty. The obligation of Codorus
Valley is secured by a mortgage on the Codorus Valley Corporate Center office
building at 105 Leader Heights Road, York, Pennsylvania.
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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 average assets (leverage ratio). Management believes that
Codorus Valley and PeoplesBank were well capitalized on June 30, 2003, based on
FDIC capital guidelines.
CODORUS VALLEY BANCORP, INC.
MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
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(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------
AT JUNE 30, 2003
Capital ratios:
Tier 1 risk based $31,414 11.35% > or = $11,068 > or = 4.0% n/a n/a
Total risk based 32,953 11.91 > or = 22,136 > or = 8.0 n/a n/a
Leverage 31,414 9.01 > or = 13,939 > or = 4.0 n/a n/a
- -----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
Capital ratios:
Tier 1 risk based $30,475 11.32% > or = $10,770 > or = 4.0% n/a n/a
Total risk based 31,990 11.88 > or = 21,539 > or = 8.0 n/a n/a
Leverage 30,475 8.93 > or = 13,650 > or = 4.0 n/a n/a
=================================================================================================================
PEOPLESBANK
MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
--------------------------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 2003
Capital ratios:
Tier 1 risk based $26,953 9.97% > or = $10,819 > or = 4.0% > or = $16,228 > or = 6.0%
Total risk based 28,492 10.53 > or = 21,637 > or = 8.0 > or = 27,046 > or = 10.0
Leverage 26,953 7.87 > or = 13,691 > or = 4.0 > or = 17,114 > or = 5.0
- ---------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
Capital ratios:
Tier 1 risk based $25,946 9.86% > or = $10,521 > or = 4.0% > or = $15,782 > or = 6.0%
Total risk based 27,461 10.44 > or = 21,042 > or = 8.0 > or = 26,303 > or = 10.0
Leverage 25,946 7.75 > or = 13,390 > or = 4.0 > or = 16,738 > or = 5.0
===========================================================================================================================
* To be well capitalized under prompt correction action provisions.
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NOTE 6--CONTINGENT LIABILITIES
During the first quarter of 2003, a business-banking client filed a counterclaim
against PeoplesBank, alleging, among other things, that PeoplesBank: breached an
implied-in-fact agreement to the claimants related to loans made to the
claimants. PeoplesBank's management believes there are substantial defenses to
this lawsuit and intends to defend it vigorously. Further information regarding
this claim is included in this Form 10-Q, on page 23, under Part II, Item 1.
Legal proceedings.
Also during the first quarter of 2003, PeoplesBank became aware of a civil
forfeiture action brought about by the United States Attorney's Office. The
forfeiture action involves real estate supporting a loan that PeoplesBank made
to a customer who was allegedly involved with criminal activity. PeoplesBank
intends to protect its mortgage interest in the real estate from forfeiture
through available defenses including the "innocent owner defense." Further
information regarding this forfeiture action is included in this Form 10-Q, on
page 20, under Forfeiture action related to mortgaged property.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of the significant changes in the results
of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for Codorus Valley Bancorp, Inc. (Codorus
Valley or Corporation), a bank holding company, and its wholly owned subsidiary,
PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided below. Codorus
Valley's consolidated financial condition and results of operations consist
almost entirely of PeoplesBank's financial condition and results of operations.
Current performance does not guarantee, and may not be indicative of, similar
performance in the future.
FORWARD-LOOKING STATEMENTS:
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the Corporation and its subsidiaries. When words
such as "believes," "expects," "anticipates" or similar expressions occur in the
Form 10-Q, management is making forward-looking statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that management incorporates by reference,
could affect the future financial results of the Corporation and its
subsidiaries, both individually and collectively, and could cause those results
to differ materially from those expressed in the forward-looking statements
contained or incorporated by reference in this Form 10-Q. These factors include:
- - operating, legal and regulatory risks;
- - economic, political and competitive forces affecting banking,
securities, asset management and credit services businesses; and
- - the risk that management's analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that Codorus Valley files periodically with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING ESTIMATES:
Disclosure of Codorus Valley's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2002 Annual Report to
Stockholders, filed as Exhibit 13 to the Annual Report on Form 10-K for the
period ended December 31, 2002. Some of these policies are particularly
sensitive, requiring that management make significant judgments, estimates and
assumptions. Additional information is contained in Management's Discussion and
Analysis for the most sensitive of these issues, including the provision and
allowance for loan losses, located on pages 16 and 20 of this Form 10-Q.
Management makes significant estimates in determining the allowance for loan
losses. Consideration is given to a variety of factors in establishing this
estimate such as current economic conditions, diversification of the loan
portfolio, delinquency statistics, results of internal loan reviews, financial
and managerial strengths of borrowers, adequacy of collateral, if collateral
dependent, or present value of
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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. As described in Note
6--Contingent Liabilities, property collateralizing a loan on PeoplesBank's
books is subject to litigation. In establishing the loan loss allowance,
management presumed that the rights to the property would be protected. If,
however, PeoplesBank's property rights are not successfully protected the
allowance for loan losses will need to be increased through provision expense to
cover the loss.
As permitted by SFAS No. 123, the Corporation accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion (APB) No.
25. Under APB No. 25, no compensation expense is recognized in the income
statement related to any options granted under the Corporation's stock option
plans. The pro forma impact of net income and earnings per share that would
occur if compensation expense was recognized, based on the estimated fair value
of the options on the date of grant, is disclosed in Note 2 to the financial
statements under Stock-Based Compensation. The Corporation has no current plans
to change its method of accounting for stock-based compensation.
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.
THREE MONTHS ENDED JUNE 30, 2003
COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
OVERVIEW
Net income for the three-month period ended June 30, 2003, was $713,000 or $.25
per diluted share, compared to $659,000 or $.23 per diluted share, for the same
period of 2002. The $54,000 or 8 percent increase in net income was caused
primarily by an increase in net interest income and noninterest income, which
more than offset increases in noninterest expense, provision for loan losses and
federal income tax. Net interest income increased $394,000 or 14 percent over
the same period of 2002 due primarily to lower funding costs, which were rate
driven. Noninterest income increased $438,000 or 63 percent over 2002 due to
increases in gains from the sale of mortgages and investment securities, income
from an insurance agency acquired in the prior year and service charges on
deposit accounts. Noninterest expense increased $551,000 or 21 percent over 2002
due primarily to expansion, principally the acquisition of an insurance agency
in September of 2002 and the addition of a financial center in December 2002.
Legal and professional expense, principally consulting expense, and normal
business growth also contributed to the increase in noninterest expense. Current
period provision for loan losses increased $137,000 or 274 percent due to a loss
from a decline in the collateral value supporting a business loan. Current
period federal income tax increased $90,000 or 72 percent over 2002 due to an
increase in pretax earnings and a decrease in tax credits. An explanation of the
factors and trends that caused changes between the two periods, by earnings
category, is provided below.
NET INTEREST INCOME
Net interest income for the current three-month period ended June 30, 2003, was
$3,162,000, an increase of $394,000 or 14 percent above the same period in 2002.
Net interest income increased primarily as a result of lower funding costs.
Current period funding costs reflected a decrease in deposit rates, principally
CDs. Earning assets averaged $320 million and yielded 5.86 percent (tax
equivalent) for the second quarter of 2003, compared to $313 million and 6.42
percent, respectively, for 2002. Interest
- 14 -
bearing liabilities averaged $289 million at an average rate of 2.43 percent for
the second quarter of 2003, compared to $281 million and 3.35 percent,
respectively, for 2002.
PROVISION FOR LOAN LOSSES
A $187,000 provision expense for loan losses was recorded in the current
three-month period, compared to $50,000 for the same period in 2002. The
$137,000 increase in the provision was due primarily to a loss from a decline in
the collateral value supporting a business loan.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $1,131,000, an
increase of $438,000 or 63 percent above the same period in 2002. The increase
was caused primarily by increases in gains from the sale of mortgages and
investment securities, other income and service charges on deposit accounts.
Explanations for the increases are provided under noninterest income within the
year-to-date section of this report.
NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $3,178,000, an
increase of $551,000 or 21 percent above the same period in 2002. The increase
was caused primarily by increases in salaries and benefits, occupancy,
professional and legal, and other expense. Explanations for the increases are
provided under noninterest expense within the year-to-date section of this
report.
INCOME TAXES
The provision for federal income tax was $215,000 for the current three-month
period, compared to $125,000 for the same period in 2002. The $90,000 or 72
percent increase in tax reflects an increase in pretax income and a decrease in
federal tax credits. Information about the decrease in tax credits is provided
under income taxes within the year-to-date section of this report.
SIX MONTHS ENDED JUNE 30, 2003
COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the six-month period ended June 30, 2003, was $1,574,000 or $.55
per diluted share, compared to $1,446,000 or $.51 per diluted share, for the
same period of 2002. The $128,000 or 9 percent increase in net income was caused
primarily by an increase in net interest income and noninterest income, which
more than offset increases in noninterest expense, provision for loan losses and
federal income tax. Net interest income increased $742,000 or 13 percent over
the same period of 2002 due primarily to lower funding costs (rate driven) and
increased income from investment securities (volume driven). Noninterest income
increased $686,000 or 42 percent over 2002 due to increases in gains from the
sale of mortgages and investment securities, income from an acquired insurance
agency and service charges on deposit accounts. Noninterest expense increased
$937,000 or 18 percent over 2002 due primarily to expansion, resulting from the
acquisition of an insurance agency in September of 2002 and the addition of a
full service financial center in December 2002. The provision for loan losses
increased $154,000 or 220 percent over 2002 due to a loss from a decline in the
collateral value
- 15 -
supporting a business loan. Current period federal income tax increased $209,000
or 71 percent over 2002 due to an increase in pretax earnings and a decrease in
tax credits. Net income as a percentage of average total assets for the first
six months (annualized) of 2003 was 0.90 percent, compared to 0.86 percent for
the same period of 2002. Net income as a percentage of average stockholders'
equity for the first six months (annualized) of 2003 was 9.56 percent, compared
to 9.66 percent for the same period of 2002.
Total assets of the Corporation on June 30, 2003, were approximately $366
million, an increase of $16 million or 4.5 percent above December 31, 2002.
Asset growth occurred primarily in overnight investments and consumer loans,
which were funded by core deposits. 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 portfolio at June 30,
2003. Management also believes that the Corporation and PeoplesBank were well
capitalized on June 30, 2003, based on FDIC capital guidelines. An explanation
of the factors and trends that caused changes between the two periods, by
earnings category, is provided below.
NET INTEREST INCOME
To date, U.S. economic activity remains sluggish, the fed funds rate has
descended to a 45-year low and the rate of unemployment continues to creep up.
In June 2003, the Federal Open Market Committee lowered the fed funds rate 25
basis points, from 1.25 percent to 1 percent, in an effort to stimulate the
economy and preempt deflation. Within a couple days of the move, banks lowered
their prime rate 25 basis points, from 4.25 percent to 4 percent. The latest
rate cut is likely to decrease net interest margins in the period ahead for the
majority of commercial banks, including PeoplesBank, that have asset sensitive
balance sheets.
Net interest income for the current six-month period ended June 30, 2003, was
$6,252,000, an increase of $742,000 or 13 percent above the same period in 2002.
Net interest income increased primarily as a result of lower funding costs (rate
driven) and an increase in income from investment securities (volume driven).
Earning assets averaged $314 million and yielded 6.37 percent (tax equivalent)
for 2003, compared to $309 million and 6.80 percent, respectively, for 2002.
Interest bearing liabilities averaged $285 million at an average rate of 2.50
percent for 2003, compared to $277 million and 3.47 percent, respectively, for
2002.
PROVISION FOR LOAN LOSSES
A $224,000 provision expense for loan losses was recorded in the current
six-month period, compared to $70,000 for the same period in 2002. The $154,000
increase in the provision was due primarily to a loss from a decline in the
collateral value supporting a business loan in the second quarter. Information
regarding nonperforming assets and the allowance for loan losses can be found
within those sections of this report.
NONINTEREST INCOME
Total noninterest income for the current six-month period was $2,302,000, an
increase of $686,000 or 42 percent above the same period in 2002. The increase
was caused primarily by increases in other income, gains from the sale of
mortgages and investment securities, and service charges on deposit accounts.
The $226,000 or 74 percent increase in other income was primarily due to fees
from the sale of investment and insurance products by an insurance agency that
PeoplesBank acquired in September 2002. The $158,000 or 49 percent increase in
gains from the sale of mortgages was the result of unusually low market interest
rates, which continued to fuel mortgage refinances. Low market interest
- 16 -
rates also enabled management to realize a $194,000 increase in gains from the
sale of investment securities. The $94,000 or 25 percent increase in service
charges on deposit accounts also contributed to the increase in noninterest
income.
NONINTEREST EXPENSE
Total noninterest expense for the current six-month period was $6,251,000, an
increase of $937,000 or 18 percent above the same period in 2002. The increase
was caused primarily by increases in salaries and benefits, occupancy,
professional and legal, and other expense. Salaries and benefits increased
$423,000 or 15 percent due primarily to planned corporate expansion. The current
period included the expense of prior year initiatives such as the acquisition of
an insurance agency in September 2002 and the addition of a financial center in
December 2002. The $118,000 or 29 percent increase in occupancy expense was also
caused primarily by corporate expansion. The $106,000 or 83 percent increase in
professional and legal, principally consulting expense, is described below.
Other expense increased $277,000 or 31 percent due in part to an increase in
problem loan carrying costs and normal business growth.
In March 2003, management engaged a consulting firm to conduct a company wide
performance evaluation, including staffing and work processes. The consulting
engagement is expected to be completed by December 31, 2003, at an estimated
cost of $275,000. Management believes that the evaluation will reduce expense
and increase revenue and operating efficiency in the current and future periods.
Aggregate benefits are expected to exceed the one time consultant's fee.
INCOME TAXES
The provision for federal income tax was $505,000 for the current six-month
period, compared to $296,000 for the same period in 2002. The $209,000 or 71
percent increase in tax reflects an increase in pretax income and a $113,000
decrease in federal tax credits. Tax credits were maximized in 2002 because they
included historic rehabilitation tax credits from PeoplesBank's investment in a
low-income housing project; available only in the year the rehabilitation
construction is complete.
BALANCE SHEET REVIEW
FEDERAL FUNDS SOLD
On June 30, 2003, federal funds sold, i.e., overnight investments, was $18
million compared to $0 at year-end 2002. The increase in liquidity was the
result of deposit growth, $5 million in proceeds from long-term borrowing from
the Federal Home Loan Bank and cash inflows from investment securities.
INVESTMENT SECURITIES
On June 30, 2003, securities available-for-sale decreased approximately $9
million from year-end 2002, as the proceeds from maturities, calls and
prepayments on mortgage-backed instruments were deployed to loans or temporarily
invested in federal funds.
- 17 -
LOANS
On June 30, 2003, loans were $243 million, an increase of $9 million or 4
percent above year-end 2002. The increase occurred primarily in the consumer
loan portfolio, which grew in response to an aggressive marketing promotion.
OTHER ASSETS AND OTHER LIABILITIES
In March 2003, PeoplesBank committed to invest $2.8 million in a real estate
partnership whose purpose is to construct 60 new townhouses and rent them to
people who qualify for low-income housing. Actual disbursement is scheduled to
be made in installments throughout the year with project completion scheduled by
the end of 2003. PeoplesBank is a limited partner that holds a 73.5 percent
interest in the partnership. Its role in the partnership is solely as an
investor, whose return is in the form of federal tax credits, to be realized
over a ten-year period beginning in 2004.
DEPOSITS
On June 30, 2003, total deposits were approximately $308 million, an increase of
$16 million or 5 percent above year-end 2002. The increase occurred in core
deposits such as demand, money market and savings accounts. Relatively low CD
rates, heavily influenced by low market interest rates, and an improving stock
market may have caused customers to favor highly liquid core deposit accounts.
Other factors that contributed to deposit growth included the addition of a
financial center in December 2002 and normal business growth.
LONG-TERM DEBT
During the second quarter of 2003, PeoplesBank borrowed $5 million from the
Federal Home Loan Bank of Pittsburgh to secure low cost funding and to partially
match fund loan growth that resulted from a home equity loan promotion. The loan
will amortize over 10 years and has a 3.46 percent fixed rate of interest.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
Stockholders' equity or capital, as a source of funds, enables Codorus Valley to
maintain asset growth and absorb losses. Total stockholders' equity was
approximately $33,219,000 on June 30, 2003, an increase of $996,000 or 3 percent
above December 31, 2002. The increase was caused primarily by an increase in
retained net income from profitable operations.
On July 8, 2003, the board of directors declared a quarterly cash dividend of
$0.12 per share, payable on or before August 12, 2003, to shareholders of record
July 22, 2003. This follows $0.12 per share ($0.114 adjusted) cash dividends
paid in May and February. On June 5, 2003, Codorus Valley paid a 5 percent stock
dividend, which resulted in the issuance of 134,564 common shares.
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators that involve quantitative
guidelines and qualitative judgments. Quantitative measures established by
regulators pertain to minimum capital ratios, as set forth in Note 5--Regulatory
Matters, to the financial statements. Management believes that Codorus Valley
and PeoplesBank were well capitalized on June 30, 2003, based on FDIC capital
guidelines.
- 18 -
RISK MANAGEMENT
NONPERFORMING ASSETS
Table 1--Nonperforming Assets, provides a summary of nonperforming assets and
related ratios. The paragraphs below provide information for selected categories
for June 30, 2003, compared to December 31, 2002.
TABLE 1-NONPERFORMING ASSETS
June 30, December 31,
(dollars in thousands) 2003 2002
- ---------------------- -------- ------------
Nonaccrual loans $4,903 $5,051
Accruing loans that are contractually past due
90 days or more as to principal or interest 53 453
Foreclosed real estate, net of allowance 335 465
- ------------------------------------------------------------------------------
Total nonperforming assets $5,291 $5,969
==============================================================================
Ratios:
Nonaccrual loans as a % of total period-end loans 2.02% 2.16%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 2.18% 2.55%
Nonperforming assets as a % of total period-end 15.93% 18.52%
stockholders' equity
Allowance for loan losses as a multiple of
nonaccrual loans .3x .3x
Nonaccrual loans were principally comprised of collateral dependent business
loans. Accordingly, Codorus Valley recognized interest income on a cash basis
for these loans. On June 30, 2003, the nonaccrual loan portfolio was $4,903,000,
slightly below the $5,051,000 reported on December 31, 2002. On June 30, 2003,
nonaccrual loans were comprised of nineteen unrelated accounts, ranging in size
from $3,200 to $2,647,000. Two of the nineteen loans, for $2,647,000 and
$1,230,000, respectively, comprise 79 percent of the nonaccrual loan portfolio
and management believes that they are adequately collateralized. During March
2003, the borrowers responsible for the previously mentioned $1,230,000
nonaccrual loan filed a counterclaim against PeoplesBank described in the Legal
Proceedings section of this report (Part II--Other Information, Item 1).
Accounts within the nonaccrual loan portfolio vary by industry and are generally
collateralized with real estate assets. Management and the board of directors
evaluate the allowance for loan losses at least quarterly. Efforts to modify
contractual terms for individual accounts, based on prevailing market
conditions, or liquidate collateral assets, are proceeding as quickly as
potential buyers can be located and legal constraints permit.
Accruing loans that are contractually past due 90 days or more as to principal
or interest totaled $53,000 on June 30, 2003, compared to $453,000 on December
31, 2002. Generally, loans in the past due category are adequately
collateralized and in the process of collection.
- 19 -
Foreclosed real estate, net of allowance, was $335,000 on June 30, 2003,
compared to $465,000 on December 31, 2002. An allowance for losses, which is
evaluated at least quarterly, has been established for foreclosed real estate
assets where the estimated fair value, less selling expenses, is below the
financial carrying value. On June 30, 2003, the allowance was $35,000. For the
first six months of 2003, a $55,000 loss provision was recorded to reflect
losses associated with declines in net realizable value. Comparatively, a
$30,000 loss provision was recorded for the same period of 2002. Efforts to
liquidate foreclosed real estate are proceeding, as quickly as potential buyers
can be located.
FORFEITURE ACTION RELATED TO MORTGAGED PROPERTY
On March 26, 2003, the United States Attorney's Office began a property (in rem)
civil forfeiture action, by Complaint in the United States District Court for
the Middle District of Pennsylvania, titled United States of America v.
Approximately 83 Acres of Real Estate Located in Fairview Township, York County,
Pennsylvania, titled in the name of CCA Associates, Inc. The real property,
which is the subject of the forfeiture action, serves as the sole collateral for
a loan by PeoplesBank to CCA Associates, Inc. (CCA), the owner or reputed owner
of this property. The loan to CCA, which was guaranteed by a third party, has a
current principal balance of $1,500,000 plus accrued interest and other fees and
costs. The third party guarantor recently pled guilty and is awaiting sentencing
by the federal government for his involvement in criminal activity. PeoplesBank
intends to protect its mortgage interest in the real estate from forfeiture
through available defenses including the "innocent owner defense." As of the
date this report was filed, the loan was classified as a performing asset.
Management believes that the primary debt obligation to PeoplesBank will be
satisfied once the property is liquidated and the proceeds from the sale
distributed. Therefore, management does not believe that the forfeiture action
will have a material adverse impact on the Corporation.
ALLOWANCE FOR LOAN LOSSES
Table 2--Analysis of Allowance for Loan Losses, shows a $1,539,000 allowance on
June 30, 2003, representing a $407,000 or 21 percent decrease from June 30,
2002. The allowance for loan losses as a percentage of total loans was 0.63
percent on June 30, 2003, compared to 0.82 percent on June 30, 2002. The
decrease in the allowance was primarily the result of charge-offs relating to
equipment financing contracts amounting to $864,000 for calendar year 2002.
Management believes that the loss on these contracts was caused by external
fraud and is presently seeking legal redress, including the initiation of
lawsuits with other defrauded financial institutions. Additionally, in June 2003
management charged off $163,000 on a nonaccruing business loan to reflect a loss
from a decline in collateral value. Although the level of nonaccrual loans was
approximately the same for both periods, management decreased the allowance
based on the strength of the collateral position of the loans in this category
and its overall assessment of the condition of the loan portfolio. Based on a
recent evaluation of potential loan losses in the current portfolio, management
believes that the allowance is adequate to support losses inherent in the loan
portfolio on June 30, 2003.
- 20 -
TABLE 2-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2003 2002
- ---------------------- ------ ------
Balance-January 1, $1,515 $1,898
Provision charged to operating expense 224 70
Loans charged off:
Commercial 168 30
Real estate-mortgage 0 7
Consumer 69 26
- -----------------------------------------------------------------------
Total loans charged off 237 63
Recoveries:
Commercial 18 34
Real estate-mortgage 0 0
Consumer 19 7
- -----------------------------------------------------------------------
Total recoveries 37 41
- -----------------------------------------------------------------------
Net charge-offs 200 22
Balance-June 30, $1,539 $1,946
=======================================================================
Ratios:
Net charge-offs (annualized) to average total loans 0.17% 0.02%
Allowance for loan losses to total loans
at period-end 0.63% 0.82%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 31.1% 34.0%
LIQUIDITY
Codorus Valley's loan-to-deposit ratio, which is used as a broad measure of
liquidity, was approximately 79 percent on June 30, 2003, compared to 80 percent
on December 31, 2002. Liquidity for both periods was adequate based on
availability from many sources, including the potential liquidation of a $61
million portfolio of available-for-sale securities valued at June 30, 2003.
Another important source of liquidity for PeoplesBank is available credit
provided by the Federal Home Loan Bank of Pittsburgh (FHLBP). On March 31, 2003,
the latest available date, available funding from the FHLBP was approximately
$75 million. As a result of a sluggish U.S. economy and abnormally low market
interest rates, the financial services industry has experienced increased
liquidity, as deposit customers sought safe haven from depressed securities
markets, loan customers refinanced and bond issuers called bonds.
Codorus Valley's financial statements do not reflect various commitments that
are made in the normal course of business, which may involve some liquidity
risk. These commitments consist primarily of commitments to grant new loans,
unfunded commitments of existing loans, and letters of credit made under the
same standards as on-balance sheet instruments. Unused commitments on June 30,
2003, totaled $79,644,000 and consisted of $42,830,000 in unfunded commitments
of existing loans, $34,410,000 to grant new loans and $2,404,000 in letters of
credit. Due to fixed maturity dates and specified conditions within these
instruments, many will expire without being drawn upon. Management believes that
amounts actually drawn upon can be funded in the normal course of operations and
therefore do not present a significant liquidity risk to Codorus Valley.
Codorus Valley has various long-term contractual obligations outstanding at June
30, 2003, including long-term debt, time deposits and obligations under capital
and operating leases. With the exception of long-term debt, such obligations
have not changed significantly from those reported in Table 11 of the
- 21 -
Form 10-K for 2002. A schedule of long-term debt for period ended June 30, 2003,
compared to December 31, 2002, is provided in Note 4 of this report.
MARKET RISK MANAGEMENT
In the normal course of conducting business, Codorus Valley is exposed to market
risk, principally interest rate risk, through the operations of its banking
subsidiary. Interest rate risk arises from market driven fluctuations in
interest rates, which may affect cash flows, income, expense and values of
financial instruments. An asset-liability management committee comprised of
members of management manages interest rate risk.
Codorus Valley performed a simulation on its balance sheet at June 30, 2003 and
December 31, 2002. The results of the point-in-time analyses are shown in Table
3--Interest Rate Sensitivity. The analyses reveal that the Corporation's balance
sheet was asset sensitive for both periods. Asset sensitive means that loan and
investment assets will reprice to a greater and faster degree than the deposits
and debt that fund them. Therefore, the balance sheet is positioned to benefit
from economic growth and rising market interest rates. Conversely, if market
interest rates decline, earnings are expected to decline. Since year end 2002,
market interest rates have remained at abnormally low levels causing an increase
in liquidity and asset sensitivity for Codorus Valley and the banking industry
as deposit customers sought safe haven from depressed capital markets, loan
customers refinanced, bond issuers called bonds and mortgage-backed securities
prepaid faster than scheduled. A detailed discussion of market interest risk is
provided in the Corporation's annual report on Form 10-K for the period ended
December 31, 2002.
TABLE 3-INTEREST RATE SENSITIVITY
at June 30, 2003
- ------------------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- ------------------------------------------------------------------------------
+200 High 383 12.6
0 Flat (baseline) 0 0.0
-200 Low (504) (16.6)
0 Most likely 0 0.0
at December 31, 2002
- ------------------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- ------------------------------------------------------------------------------
+200 High 217 6.0
0 Flat (baseline) 0 0.0
-200 Low (393) (10.8)
+118 Most likely 94 2.6
OTHER RISKS
More grand acts of terrorism in the United States of America, or in other
countries, could erode consumer and business confidence and disrupt commerce,
resulting in a prolonged economic recession. A prolonged economic recession
could have a material adverse effect on the liquidity, capital resources or
results of operations of Codorus Valley.
- 22 -
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. Other than as discussed in the Corporation's Form 10-K for
period ended December 31, 2002, 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.
Management is not aware of any other 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. Although 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.
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.
ITEM 4. CONTROLS AND PROCEDURES
Codorus Valley maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of June 30, 2003, the chief executive and
chief financial officers of Codorus Valley concluded that Codorus Valley's
disclosure controls and procedures were adequate.
Codorus Valley made no significant changes in its internal controls or in other
factors that could significantly affect these controls in the quarter ended June
30, 2003, as evaluated by the chief executive and chief financial officers.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In conjunction with an $864,000 loss recognized by Codorus Valley in 2002
associated with a group of related equipment financing contracts, suit has been
filed in the United States District Court for the Eastern District of New York
on behalf of PeoplesBank, A Codorus Valley Company and for other similarly
situated financial institutions against Professional Leasing Services, Inc., its
principals and Bank of New York. The suit alleges claims under section 1962 (a),
(b), (c) and (d) of the Racketeering Influenced and Corrupt Organizations Act
and for common law fraud. The suit is in its early stages, and while PeoplesBank
believes that its claims are meritorious, neither the prospect of nor the amount
of recovery can be ascertained at this time.
On March 19, 2003, In the Net Sports, LLC, James B. Murphy and Barbara S. Murphy
filed a counterclaim against PeoplesBank in the Court of Common Pleas of Dauphin
County, Pennsylvania, alleging, among other things, that PeoplesBank: breached
an implied-in-fact agreement to the claimants related to loans made to the
claimants; intentionally interfered with the claimants' existing contracts and
prospective business relations; and made certain misrepresentations to the
claimants. The claimants allege to have incurred unliquidated losses and other
damages in excess of $3.9 million and exemplary damages in excess of $35,000.
The counterclaim was filed in response to a complaint filed by
- 23 -
PeoplesBank whereby PeoplesBank alleges that the claimants defaulted on a
promissory note resulting in damages to PeoplesBank in excess of $1.2 million.
Management believes there are substantial defenses to this lawsuit and intends
to defend it vigorously. The impact of the final disposition of this lawsuit
cannot be assessed at this time. Counsel believes that the claim may qualify as
a "covered claim" under PeoplesBank's lender liability insurance policy, which
provides coverage for losses in excess of $100,000, and which should cover the
defense and indemnification of PeoplesBank for said claim. The factual discovery
process has not been completed. Although Codorus Valley expects to incur costs
in defending these claims, based on the results of its investigation thus far
and preliminary discussions with its lawyers, Codorus Valley currently does not
believe the ultimate resolution of the claims will have a material impact on its
financial condition or results of operations.
Management of Codorus Valley and PeoplesBank is not aware of any other material
litigation other than routine litigation incident to the nature of its business,
nor any material proceedings pending, threatened or contemplated against Codorus
Valley and PeoplesBank by government authorities
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Nothing to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) An annual meeting of shareholders was held on May 20, 2003, at 9:00 am,
Codorus Valley Corporate Center, 105 Leader Heights Road, York, Pennsylvania
17403.
(b), (c) Three directors were re-elected at the May 20, 2003, meeting. Votes
were as follows:
Votes
Term Votes Against or
Re-elected Expires For Withheld*
- ---------- ------- --------- ---------
Class A:
Rodney L. Krebs 2006 2,260,074 36,182
Dallas L. Smith 2006 2,285,278 10,978
George A. Trout, D.D.S. 2006 2,284,028 12,228
*Includes broker nonvotes
Directors whose term continued after the meeting:
Term Expires
------------
Class B:
M. Carol Druck 2004
Donald H. Warner 2004
Michael L. Waugh 2004
Class C:
D. Reed Anderson, Esquire 2005
MacGregor S. Jones 2005
Larry J. Miller 2005
ITEM 5. OTHER INFORMATION
Nothing to report.
- 24 -
ITEM 6. (A) EXHIBITS
Exhibit
Number Description of Exhibit
- ------ -------------------------------------------------------------
3(i) Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to Current Report on Form 8-K, filed with the
Commission on March 29, 2001.)
3(ii) By-laws (Incorporated by reference to Exhibit 3(ii) to Current
Report on Form 8-K, filed with the Commission on March 29,
2001.)
4 Rights Agreement dated as of November 4, 1995 (Incorporated by
reference to Current Report on Form 8-K, filed with the
Commission on March 29, 2001.)
10.1 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 99 of Registration Statement No. 333-9277 on Form S-8,
filed with the Commission on July 31, 1996.)
10.2 Amendments to the Employment Agreement by and among
PeoplesBank, A Codorus Valley Company, Codorus Valley Bancorp,
Inc., and Larry J. Miller dated October 1, 1997, including
Executive Employment Agreement dated January 1, 1993 between
Codorus Valley Bancorp, Inc., Peoples Bank of Glen Rock and
Larry J. Miller. (Incor- porated by reference to Exhibit 10.1
to Registrant's Current Report on Form 8-K, dated and filed
with the Commission on March 20, 2003.)
10.3 Change of Control Agreement between PeoplesBank, A Codorus
Valley Company, Codorus Valley Bancorp, Inc. and Jann A.
Weaver, dated October 1, 1997. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K,
dated and filed with the Commission March 20, 2003.)
10.4 Change of Control Agreement between PeoplesBank, A Codorus
Valley Company, Codorus Valley Bancorp, Inc. and Harry R.
Swift, dated October 1, 1997. (Incorporated by reference to
Exhibit 10.4 to the Registrant's Current Report on Form 8-K,
filed with the Commission on March 20, 2003.)
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.)
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
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32.1 Certification of Principal Executive Officer, pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002
32.2 Certification of Principal Financial Officer, pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002
ITEM 6. (B) REPORTS ON FORM 8-K
Nothing to report.
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SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Registrant
has caused this report to be signed on its behalf by the authorized undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
August 11, 2003 /s/ Larry J. Miller
- --------------- -------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
August 11, 2003 /s/ Jann A. Weaver
- --------------- ------------------
Date Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting officer)
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