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, 2004
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 checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On July 27, 2004, 2,980,960
shares of common stock, par value $2.50, were outstanding.
- 1 -
Codorus Valley Bancorp, Inc.
FORM 10-Q INDEX
Page #
------
PART I - FINANCIAL INFORMATION
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 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 22
Item 4. Controls and procedures 22
PART II - OTHER INFORMATION
Item 1. Legal proceedings 22
Item 2. Changes in securities, use of proceeds and issuer purchases of
equity securities 23
Item 3. Defaults upon senior securities 23
Item 4. Submission of matters to a vote of security holders 23
Item 5. Other information 23
Item 6. Exhibits and reports on Form 8-K 24
SIGNATURES 26
- 2 -
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) 2004 2003
--------- ------------
ASSETS
Interest bearing deposits with banks $ 109 $ 108
Cash and due from banks 10,812 12,300
Federal funds sold 6,059 0
--------- ---------
Total cash and cash equivalents 16,980 12,408
Securities available-for-sale 61,257 62,738
Securities held-to-maturity (fair value $10,074 for 2004 and $10,223 for 2003) 9,354 9,355
Restricted investment in bank stock, at cost 1,680 1,976
Loans held for sale 852 2,157
Loans (net of deferred fees of $536 in 2004 and $610 in 2003) 276,704 260,206
Less-allowance for loan losses (1,717) (1,694)
--------- ---------
Net loans 274,987 258,512
Premises and equipment 9,543 9,358
Other assets 16,851 16,043
--------- ---------
Total assets $ 391,504 $ 372,547
========= =========
LIABILITIES
Deposits
Noninterest bearing $ 42,509 $ 33,188
Interest bearing 288,134 271,094
--------- ---------
Total deposits 330,643 304,282
Short-term borrowings 0 6,795
Long-term debt 23,999 24,439
Other liabilities 2,632 3,242
--------- ---------
Total liabilities 357,274 338,758
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; 2,980,960 shares issued and
outstanding on 6/30/04 and 2,837,634 on 12/31/03 7,452 7,094
Additional paid-in capital 20,129 17,451
Retained earnings 6,502 8,498
Accumulated other comprehensive income 147 746
--------- ---------
Total shareholders' equity 34,230 33,789
--------- ---------
Total liabilities and shareholders' equity $ 391,504 $ 372,547
========= =========
See accompanying notes.
- 3 -
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) 2004 2003 2004 2003
------ ------ ------ ------
INTEREST INCOME
Loans, including fees $4,189 $4,136 $8,370 $8,191
Investment securities
Taxable 580 616 1,182 1,295
Tax-exempt 105 114 209 233
Dividends 5 8 18 23
Other 15 40 24 45
------ ------ ------ ------
Total interest income 4,894 4,914 9,803 9,787
INTEREST EXPENSE
Deposits 1,297 1,497 2,594 3,034
Federal funds purchased and other short-term borrowings 0 0 4 5
Long-term debt 288 255 610 496
------ ------ ------ ------
Total interest expense 1,585 1,752 3,208 3,535
------ ------ ------ ------
Net interest income 3,309 3,162 6,595 6,252
PROVISION FOR LOAN LOSSES 125 187 175 224
------ ------ ------ ------
Net interest income after provision for loan losses 3,184 2,975 6,420 6,028
NONINTEREST INCOME
Trust and investment services fees 250 197 493 412
Service charges on deposit accounts 358 248 698 463
Mutual fund, annuity and insurance sales 190 169 426 339
Income from bank owned life insurance 48 77 126 149
Other income 122 96 240 191
Gain on sale of mortgages 80 245 175 482
Gain on sale of securities 0 99 7 266
------ ------ ------ ------
Total noninterest income 1,048 1,131 2,165 2,302
NONINTEREST EXPENSE
Personnel 1,724 1,623 3,391 3,276
Occupancy of premises, net 257 252 529 519
Furniture and equipment 294 271 614 555
Postage, stationery and supplies 112 113 202 220
Professional and legal 69 157 154 234
Marketing and advertising 133 112 241 165
Foreclosed real estate, net 9 37 9 104
Other 546 613 1,111 1,178
------ ------ ------ ------
Total noninterest expense 3,144 3,178 6,251 6,251
Income before income taxes 1,088 928 2,334 2,079
PROVISION FOR INCOME TAXES 277 215 604 505
------ ------ ------ ------
Net income $ 811 $ 713 $1,730 $1,574
------ ------ ------ ------
Net income per share, basic $ 0.27 $ 0.24 $ 0.58 $ 0.53
Net income per share, diluted $ 0.27 $ 0.24 $ 0.57 $ 0.53
------ ------ ------ ------
See accompanying notes.
- 4 -
Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
Six months ended
June 30,
--------------------
(dollars in thousands) 2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,730 $ 1,574
Adjustments to reconcile net income to net cash provided by operations
Depreciation 495 493
Provision for loan losses 175 224
Provision for losses on foreclosed real estate 6 55
Amortization of investment in real estate partnership 109 104
Increase in cash surrender value of life insurance investment (126) (149)
Originations of held for sale mortgages (14,347) (32,116)
Proceeds from sales of held for sale mortgages 15,827 34,873
Gain on sales of held for sale mortgages (175) (482)
Gain on sales of securities (7) (266)
Loss on sales of foreclosed real estate 0 6
(Increase) decrease in accrued interest receivable and other assets (295) 34
Increase in accrued interest payable and other liabilities 377 328
Other, net 266 361
-------- --------
Net cash provided by operating activities 4,035 5,039
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (6,610) (13,102)
Maturities and calls 1,772 8,769
Sales 5,262 13,542
Net decrease (increase) in restricted investment in bank stock 296 (4)
Net increase in loans made to customers (16,720) (8,968)
Purchases of premises and equipment (687) (457)
Investment in real estate partnership (1,107) (670)
Purchase of insurance agency assets (105) 0
Proceeds from sales of foreclosed real estate 0 237
-------- --------
Net cash used in investing activities (17,899) (653)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 24,293 15,553
Net increase in time deposits 2,068 249
Net decrease in short-term borrowings (6,795) (7,089)
Proceeds from issuance of long-term debt 1,800 5,000
Repayment of long-term debt (2,240) (1,284)
Dividends paid (710) (647)
Issuance of common stock 26 0
Cash paid in lieu of fractional shares (6) (5)
-------- --------
Net cash provided by financing activities 18,436 11,777
-------- --------
Net increase in cash and cash equivalents 4,572 16,163
Cash and cash equivalents at beginning of year 12,408 11,120
-------- --------
Cash and cash equivalents at end of period $ 16,980 $ 27,283
======== ========
See accompanying notes.
- 5 -
Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Unaudited
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
(dollars in thousands, except per share data) Stock Capital Earnings Income Total
------ ------- ------- ------ -------
For the six months ended June 30, 2004
Balance, December 31, 2003 $7,094 $17,451 $ 8,498 $ 746 $33,789
Comprehensive income:
Net income 1,730 1,730
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (599) (599)
-------
Total comprehensive income 1,131
Cash dividends ($.238 per share, adjusted) (710) (710)
5% stock dividend - 141,672 shares at fair value 354 2,656 (3,016) (6)
Issuance of common stock - 1,654 shares
under stock option plan 4 22 26
------ ------- ------- ------ -------
Balance, June 30, 2004 $7,452 $20,129 $ 6,502 $ 147 $34,230
====== ======= ======= ====== =======
For the six months ended June 30, 2003
Balance, December 31, 2002 $6,743 $15,549 $ 8,551 $1,380 $32,223
Comprehensive income:
Net income 1,574 1,574
Other comprehensive income, net of tax:
Unrealized gains on securities, net 74 74
-------
Total comprehensive income 1,648
Cash dividends ($.218 per share, adjusted) (647) (647)
5% stock dividend - 134,564 shares at fair value 336 1,817 (2,158) (5)
------ ------- ------- ------ -------
Balance, June 30, 2003 $7,079 $17,366 $ 7,320 $1,454 $33,219
====== ======= ======= ====== =======
See accompanying notes.
- 6 -
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 2003 Annual Report to Shareholders.
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus
Valley Company (PeoplesBank), and its wholly owned nonbank subsidiary, SYC
Realty Company, Inc., collectively referred to as Codorus Valley or Corporation.
PeoplesBank has two wholly owned subsidiaries, 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, 2004 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 13, 2004. The weighted
average number of shares of common stock outstanding used for basic and diluted
calculations follows.
Three months ended Six months ended
June 30, June 30,
-------------- -------------
(In thousands) 2004 2003 2004 2003
- -------------- ------ ------ ---- -----
Basic 2,981 2,973 2,981 2,973
Diluted 3,046 2,993 3,047 2,993
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 than 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 Standard. 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:
- 7 -
Three months ended Six months ended
June 30, June 30,
---------------- -------------------
(Dollars in thousands, except per share data) 2004 2003 2004 2003
---- ---- ------ ------
Reported net income $811 $713 $1,730 $1,574
Deduct total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 15 6 20 11
---- ---- ------ ------
Pro forma net income $796 $707 $1,710 $1,563
---- ---- ------ ------
Reported basic earnings per share $.27 $.24 $ .58 $ .53
---- ---- ------ ------
Reported diluted earnings per share $.27 $.24 $ .57 $ .53
---- ---- ------ ------
Pro forma basic earnings per share $.27 $.24 $ .57 $ .53
---- ---- ------ ------
Pro forma diluted earnings per share $.26 $.24 $ .56 $ .52
---- ---- ------ ------
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 (loss) and
related tax effects are presented in the following table:
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Unrealized holding (losses) gains arising during
the period $(1,324) $ 523 $ (900) $ 378
Reclassification adjustment for gains included in
income 0 (99) (7) (266)
------- ------- ------- -------
Net unrealized gains (1,324) 424 (907) 112
Tax effect 450 (144) 308 (38)
------- ------- ------- -------
Net of tax amount $ (874) $ 280 $ (599) $ 74
------- ------- ------- -------
Reclassifications
Certain amounts in the 2003 financial statements may have been reclassified to
conform to the 2004 presentation format. These reclassifications had no impact
on the Corporation's net income.
- 8 -
NOTE 3 -- DEPOSITS
The composition of deposits on June 30, 2004 and December 31, 2003, was as
follows:
June 30, December 31,
(Dollars in thousands) 2004 2003
-------- --------
Noninterest bearing demand $ 42,509 $ 33,188
NOW 42,969 40,552
Money market 85,359 75,529
Savings 18,352 15,627
Time CDs less than $100,000 115,611 113,014
Time CDs $100,000 or more 25,843 26,372
-------- --------
Total deposits $330,643 $304,282
======== ========
NOTE 4 -- LONG-TERM DEBT
A summary of long-term debt at June 30, 2004 and December 31, 2003 follows:
June 30, December 31,
(Dollars in thousands) 2004 2003
------- -------
Obligations of PeoplesBank to FHLBP
Due 2005, 5.36%, convertible quarterly $ 6,000 $ 6,000
Due 2007, 4.69%, amortizing 1,058 1,256
Due 2009, 3.47%, convertible quarterly after
December 2006 5,000 5,000
Due 2013, 3.46%, amortizing 4,538 4,753
Due 2014, 6.43%, convertible quarterly after
July 2009 5,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2009, 7.35%, amortizing 0 1,793
Due 2011, floating rate based on 1 month
LIBOR plus 1.50%, amortizing 1,776 0
------- -------
23,372 23,802
Capital lease obligation 627 637
------- -------
Total long-term debt $23,999 $24,439
======= =======
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.
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.
In February 2004, the obligation that was due in 2009 was refinanced without
interest penalty.
- 9 -
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, 2004, based on
FDIC capital guidelines.
CODORUS VALLEY BANCORP, INC.
MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
----------------- ------------------------------ ----------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------------- ------------ ------ -----
AT JUNE 30, 2004
Capital ratios:
Tier 1 risk based $33,540 10.87% > or = $12,344 > or = 4.0% n/a n/a
Total risk based 35,257 11.42 > or = 24,688 > or = 8.0 n/a n/a
Leverage 33,540 8.85 > or = 15,155 > or = 4.0 n/a n/a
------- ----- -------------- ----------- --- ---
AT DECEMBER 31, 2003
Capital ratios:
Tier 1 risk based $32,702 11.13% > or = $11,751 > or = 4.0% n/a n/a
Total risk based 34,396 11.71 > or = 23,502 > or = 8.0 n/a n/a
Leverage 32,702 9.15 > or = 14,292 > 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, 2004
Capital ratios:
Tier 1 risk based $28,944 9.57% > or = $12,096 > or = 4.0% > or = $18,144 > or = 6.0%
Total risk based 30,661 10.14 > or = 24,192 > or = 8.0 > or = 30,240 > or = 10.0
Leverage 28,944 7.76 > or = 14,913 > or = 4.0 > or = 18,641 > or = 5.0
------- ----- -------------- ---------- -------------- -----------
AT DECEMBER 31, 2003
Capital ratios:
Tier 1 risk based $28,048 9.75% > or = $11,504 > or = 4.0% > or = $17,256 > or = 6.0%
Total risk based 29,742 10.34 > or = 23,008 > or = 8.0 > or = 28,760 > or = 10.0
Leverage 28,048 7.99 > or = 14,043 > or = 4.0 > or = 17,554 > or = 5.0
------- ----- -------------- ---------- -------------- -----------
* To be well capitalized under prompt correction action provisions.
- 10 -
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 22, 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 guaranteed by a
customer who was incarcerated for criminal activity. PeoplesBank is actively
protecting 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 19,
under Forfeiture Action Related to Mortgaged Property.
NOTE 7 -- GUARANTEES
Codorus Valley does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the PeoplesBank
to guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The credit
risk involved in issuing letters of credit is essentially the same as those that
are involved in extending loan facilities to customers. The Corporation,
generally holds collateral and/or personal guarantees supporting these
commitments. The Corporation had $3,362,000 of standby letters of credit as of
June 30, 2004. Management believes that the proceeds obtained through a
liquidation of collateral and the enforcement of guarantees would be sufficient
to cover the potential amount of future payment required under the corresponding
guarantees. The current amount of the liability as of June 30, 2004, for
guarantees under standby letters of credit issued is not material.
- 11 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of the significant changes in the results
of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for Codorus Valley Bancorp, Inc. (Codorus
Valley or Corporation), a bank holding company, and its wholly owned subsidiary,
PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided below. Codorus
Valley's consolidated financial condition and results of operations consist
almost entirely of PeoplesBank's financial condition and results of operations.
Current performance does not guarantee and may not be indicative of similar
performance in the future.
FORWARD-LOOKING STATEMENTS:
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the Corporation and its subsidiaries. When words
such as "believes," "expects," "anticipates" or similar expressions occur in the
Form 10-Q, management is making forward-looking statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that management incorporates by reference,
could affect the future financial results of the Corporation and its
subsidiaries, both individually and collectively, and could cause those results
to differ materially from those expressed in the forward-looking statements
contained or incorporated by reference in this Form 10-Q. These factors include:
- - operating, legal and regulatory risks;
- - economic, political and competitive forces affecting banking, securities,
asset management and credit services businesses; and
- - the risk that management's analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that Codorus Valley files periodically with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING ESTIMATES:
Disclosure of Codorus Valley's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2003 Annual Report to
Shareholders, filed as Exhibit 13 to the Annual Report on Form 10-K for the
period ended December 31, 2003. Some of these policies are particularly
sensitive, requiring management to make significant judgments, estimates and
assumptions. Additional information is contained in Management's Discussion and
Analysis for the most sensitive of these issues, including the provision and
allowance for loan losses, located on pages 15 and 19 of this Form 10-Q.
Management makes significant estimates in determining the allowance for loan
losses. Management considers a variety of factors in establishing this estimate
such as current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, financial and
managerial strengths of borrowers, adequacy of collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Estimates related to the value of collateral also have a
- 12 -
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 on page 22, under Part II,
Item 1, Legal Proceedings, 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 to 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 this report.
THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
OVERVIEW
Net income for the three-month period ended June 30, 2004, was $811,000 or $.27
per diluted share, compared to $713,000 or $.24 per diluted share, for the same
period of 2003. The $98,000 or 14 percent increase in net income was caused
primarily by an increase in net interest income and a decrease in loan loss
provision. The $147,000 or 5 percent increase in net interest income was
attributable to lower funding costs (rate driven) and a larger volume of loans.
The $62,000 or 33 percent decrease in the provision for loan losses reflected
improved quality of the overall loan portfolio. Total noninterest income for the
second quarter decreased $83,000 or 7 percent below 2003 due to a $165,000
decrease in gains from the sale of mortgages and a $99,000 decrease in gains
from the periodic sale of available-for-sale investment securities. While gains
decreased, other categories of noninterest income increased, principally service
charges on deposit accounts and trust and investment service fees. Total
noninterest expense decreased $34,000 or 1 percent below 2003 due to decreases
in professional and legal, other and foreclosed real estate expenses. The
$62,000 or 29 percent increase in provision for federal income tax for the
second quarter was attributable to an increase in pretax income above the same
quarter in 2003. 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 three-month period ended June 30, 2004, was
$3,309,000, an increase of $147,000 or 5 percent above the same period in 2003.
Net interest income increased primarily as a result of lower deposit rates and a
larger volume of loans. Earning assets averaged $347 million and yielded 5.50
percent (tax equivalent) for the second quarter of 2004, compared to $320
million and 5.86 percent, respectively, for 2003. The $27 million or 8 percent
increase in average earning assets occurred primarily in business and
installment loans. Interest bearing liabilities averaged $311 million at an
average rate of 2.05 percent for the second quarter of 2004, compared to $290
million and 2.43 percent,
- 13 -
respectively, for 2003. The $21 million or 7 percent increase in interest
bearing liabilities occurred primarily in demand and money market deposits and
long-term debt.
PROVISION FOR LOAN LOSSES
A $125,000 provision expense for loan losses was recorded in the three-month
period ended June 30, 2004, compared to $187,000 for the same period in 2003.
The current period provision was primarily the result of growth in the business
loan portfolio. Information regarding nonperforming assets and the allowance for
loan losses can be found in those sections of this report.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $1,048,000, a
decrease of $83,000 or 7 percent below the same period in 2003. The decrease was
attributable to a $165,000 decrease in gains from the sale of mortgages and a
$99,000 decrease in gains from the periodic sale of available-for-sale
investment securities. While gains decreased, other categories of noninterest
income increased such as service charges on deposits and trust and investment
services fees. Explanations for the changes in noninterest income are provided
within the year-to-date section of this report.
NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $3,144,000, a
decrease of $34,000 or 1 percent below the same period in 2003. The decrease was
due primarily to decreases in professional and legal, other and foreclosed real
estate. Explanations for the changes in noninterest expense are provided within
the year-to-date section of this report.
INCOME TAXES
The provision for federal income tax was $227,000 for the current three-month
period, compared to $215,000 for the same period in 2003. The $62,000 or 29
percent increase in tax reflects an increase in pretax income.
SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the six-month period ended June 30, 2004, was $1,730,000 or $.57
per diluted share, compared to $1,574,000 or $.53 per diluted share, for the
same period of 2003. The $156,000 or 10 percent increase in net income was
caused primarily by an increase in net interest income, which more than offset a
decrease in noninterest income and an increase in federal income taxes. The
$343,000 or 5 percent increase in net interest income was attributable to lower
funding costs (rate driven) and a larger volume of loans. The provision for loan
losses decreased $49,000 or 22 percent due to improved quality of the overall
loan portfolio. Total noninterest income decreased $137,000 or 6 percent due to
decreases in gains from the sale of mortgages and investment securities. Gains
from the periodic sale of investment securities were $7,000 for the current
period, compared to $266,000 for 2003. While gains decreased, most of the other
noninterest income categories increased above the prior year, principally
service charges on deposit accounts, commission income from mutual fund, annuity
and insurance sales,
- 14 -
and trust and investment services fees. Total noninterest expense for the
current six-month period was $6,251,000, the same as the first six months in
2003. Increases in personnel, furniture and equipment, and marketing were
largely offset by decreases in professional and legal, foreclosed real estate
and other expenses. Current period wages and payroll taxes increased only
slightly above the prior period due to staff reductions and realignments, and
improved operational efficiency that resulted from a company wide performance
evaluation conducted by a consulting firm in 2003. The provision for federal
income taxes increased $99,000 or 20 percent due to an increase in pretax
income. Net income as a percentage of average total assets for the first six
months (annualized) of 2004 was .91 percent, compared to .90 percent for the
same period of 2003. Net income as a percentage of average shareholders' equity
for the first six months (annualized) of 2004 was 10.05 percent, compared to
9.56 percent for the same period of 2003.
Total assets of the Corporation on June 30, 2004, were approximately $392
million, an increase of $19 million or 5 percent above December 31, 2003. Asset
growth occurred primarily in business 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, 2004. Management also
believes that the Corporation and PeoplesBank were well capitalized on June 30,
2004, 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
In response to US economic growth and price increases, market interest rates
have increased since the beginning of 2004. On June 30, 2004, the Federal Open
Market Committee of the Federal Reserve (Fed) raised the target federal funds
rate 25 basis points from 1 percent to 1.25 percent. The prime rate moved in
lock-step and increased from 4 percent to 4.25 percent. In the period ahead,
most economists expect the Fed to increase short-term interest rates at a
measured pace to allow for economic growth with low inflation, but acknowledge
that the Fed will move aggressively if inflation accelerates.
Net interest income for the six-month period ended June 30, 2004, was
$6,595,000, an increase of $343,000 or 5 percent above the same period in 2003.
Net interest income increased primarily as a result of lower deposit rates and a
larger volume of loans. Earning assets averaged $345 million and yielded 5.79
percent (tax equivalent) for 2004, compared to $314 million and 6.37 percent,
respectively, for 2003. The $31 million or 10 percent increase in average
earning assets occurred primarily in business and installment loans. Interest
bearing liabilities averaged $308 million at an average rate of 2.10 percent for
2004, compared to $285 million and 2.50 percent, respectively, for 2003. The $23
million or 8 percent increase in interest bearing liabilities occurred primarily
in demand and money market deposits and long-term debt.
PROVISION FOR LOAN LOSSES
A $175,000 provision expense for loan losses was recorded in the six-month
period ended June 30, 2004, compared to $224,000 for the same period in 2003.
The current period provision was based on management's estimate to bring the
allowance to a level reflective of risk in the portfolio. Information regarding
nonperforming assets and the allowance for loan losses can be found within those
sections of this report.
- 15 -
NONINTEREST INCOME
Total noninterest income for the current six-month period was $2,165,000, a
decrease of $137,000 or 6 percent below the same period in 2003. The decrease
was attributable to a $307,000 decrease in gains from the sale of mortgages and
a $259,000 decrease in gains from the periodic sale of available-for-sale
investment securities. Income from the sale of mortgages was constrained by
rising market interest rates which curtailed mortgage refinancing, escalating
home prices, and staff turnover within the mortgage banking division. While
gains decreased, most of the other noninterest income categories increased above
the prior year. Service charges on deposit accounts, principally insufficient
funds fees, increased $235,000 or 51 percent as a result of a discretionary
overdraft service, implemented by PeoplesBank in June 2003. Commission income
from mutual fund, annuity and insurance sales increased $87,000 or 26 percent
due to an increase in sales volume. Trust and investment services fees increased
$81,000 or 20 percent due to a fee increase, effective January 1, 2004, and
business growth. Other income increased $49,000 or 26 percent due primarily to
increases in ATM fees, consumer loan insurance fees and credit card merchant
fees, which reflected a greater volume of transactions.
NONINTEREST EXPENSE
Total noninterest expense for the current six-month period was $6,251,000, the
same as the first six months in 2003. Increases in personnel, furniture and
equipment and marketing were largely offset by decreases in professional and
legal, foreclosed real estate and other expenses. The $115,000 or 4 percent
increase in personnel expense in the current period was primarily attributable
to increased recruiting expense and decreased mortgage loan origination cost
deferrals. The former reflected corporate strategy to upgrade talent, while the
latter reflected a significant decrease in mortgage banking activity. Current
period wages and payroll taxes increased only slightly above the prior period
due to staff reductions and realignments, and improved operational efficiency
that resulted from a company wide performance evaluation conducted by a
consulting firm in 2003. The $59,000 or 11 percent increase in furniture and
equipment expense was attributable to the addition of, and price increases on,
software maintenance contracts. The $76,000 or 46 percent increase in marketing
expense was attributable to a larger marketing budget, including market
research. Current period professional and legal expense decreased $80,000 or 34
percent from the prior period. During 2003, the Corporation paid a consulting
firm approximately $275,000 over the course of that year to conduct a company
wide performance evaluation of staffing and work processes. The $95,000 or 91
percent decrease in foreclosed real estate expense for the current period is
attributable to a smaller portfolio and cost recoveries. The $67,000 or 6
percent decrease in other expense is primarily attributable to a decrease in
problem loan carrying costs, which reflected improved asset quality. In the
period ahead, it is probable that noninterest expense will increase due to
planned expansion of the banking franchise as described below.
Planned Franchise Expansion
PeoplesBank plans to open its twelfth financial center at 2510 Delta Road,
Brogue, Pennsylvania. Construction is well underway and management anticipates
that this location will be open for business in October. In accordance with the
Corporation's strategic plan, management plans to expand the banking franchise
more aggressively than in the past. Plans call for the opening of two or three
financial centers per year over the next two years.
- 16 -
INCOME TAXES
The provision for federal income tax was $604,000 for the current six-month
period, compared to $505,000 for the same period in 2003. The $99,000 or 20
percent increase in tax reflects an increase in pretax income.
Management anticipates a reduction in the provision for federal income tax for
2004, which is expected to result from the recognition of low-income housing tax
credits from PeoplesBank's investment in a real estate joint venture.
PeoplesBank holds a 73.47 percent interest, as a limited partner, representing a
$2.8 million investment. The joint venture involves the construction and lease
of 60 new townhouses in Dover, PA. The project is well underway and management
anticipates that it will be complete and fully operational by the end of 2004,
based on a projection provided by the general partner.
BALANCE SHEET REVIEW
LOANS
On June 30, 2004, loans were approximately $277 million, an increase of $16
million or 6 percent above year-end 2003. The increase was attributable to
growth in business and consumer loan portfolios.
DEPOSITS
On June 30, 2004, total deposits were approximately $331 million, an increase of
$26 million or 9 percent above year-end 2003. The increase occurred primarily in
core deposits such as money market, demand and savings accounts. During the
first quarter, PeoplesBank began offering a money market deposit vehicle called
the Index Fund whose rate is linked to the published federal funds rate. The
Index Fund, which has a minimum balance of $2.5 million, was targeted at
PeoplesBank's wealth management customers. To date, the Index Fund has generated
approximately $8 million in average deposits.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Shareholders' equity or capital, as a source of funds, enables Codorus Valley to
maintain asset growth and absorb losses. Total shareholders' equity was
approximately $34,230,000 on June 30, 2004, an increase of $441,000 or 1 percent
above December 31, 2003. The increase was caused primarily by an increase in
retained net income from profitable operations. Growth in equity was constrained
by rising market interest rates, which decreased unrealized gains on investment
securities, i.e., accumulated other comprehensive income.
On July 13, 2004, the board of directors declared a quarterly cash dividend of
$.125 per common share, payable on or before August 10, 2004, to shareholders of
record July 27, 2004. This follows $.125 per share ($.119 adjusted) cash
dividends paid in May and February. On June 10, 2004, the Corporation
distributed a 5 percent stock dividend, which resulted in the issuance of
141,672 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, 2004, based on
FDIC capital guidelines.
In the period ahead, management plans to evaluate capital acquisition strategies
to support planned corporate growth.
- 17 -
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, 2004, compared to December 31, 2003.
TABLE 1-NONPERFORMING ASSETS
June 30, December 31,
(dollars in thousands) 2004 2003
------ ------
Nonaccrual loans $ 976 $ 516
Accruing loans that are contractually past due
90 days or more as to principal or interest 196 49
Foreclosed real estate, net of allowance 1,348 1,326
------ ------
Total nonperforming assets $2,520 $1,891
====== ======
Ratios:
Nonaccrual loans as a % of total period-end loans 0.35% 0.20%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 0.91% 0.72%
Nonperforming assets as a % of total period-end
stockholders' equity 7.36% 5.60%
Allowance for loan losses as a multiple of
nonaccrual loans 1.8x 3.3x
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, 2004, the nonaccrual loan portfolio was $976,000,
compared to $516,000 on December 31, 2003. The level of nonperforming loans was
relatively low for both periods. On June 30, 2004, the portfolio was comprised
of 16 unrelated accounts ranging in size from $9,000 to $449,000. Management
recently began legal action against the $449,000 account, which made up 46
percent of the nonaccrual loan portfolio. An allowance was not established for
this account because in management's judgment it is adequately secured by
collateral and guarantors. 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.
The level of accruing loans that are contractually past due 90 days or more as
to principal or interest was not significant for the periods presented.
Generally, loans in the past due category are adequately collateralized and in
the process of collection.
Foreclosed real estate, net of allowance, was $1,348,000 on June 30, 2004,
approximately the same as year end 2003. One account for $1,247,000 represented
most of the portfolio balance. This account is currently in litigation with the
borrower and described on page 22, under Part II, Item 1, Legal Proceedings. As
of June 30, 2004, management established a $6,000 allowance for the foreclosed
real estate assets portfolio. For the first six months of 2004, a $6,000 loss
provision was recorded to reflect losses associated with declines in net
realizable value. Comparatively, a $55,000 loss provision was
- 18 -
recorded in the first six months of 2003. 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 $1,300,000 plus accrued interest and other fees and
costs. The third party guarantor pled guilty and was recently sentenced to serve
eight years 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 current and 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 the allowance was
$1,717,000 or .62 percent of total loans on June 30, 2004, compared to
$1,539,000 or .63 percent of total loans, respectively, for June 30, 2003. The
$178,000 or 12 percent increase in the allowance was attributable to loan growth
and management's 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, 2004.
- 19 -
TABLE 2-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2004 2003
------ ------
Balance-January 1, $1,694 $1,515
Provision charged to operating expense 175 224
Loans charged off:
Commercial 215 168
Real estate-mortgage 8 0
Consumer 98 69
------ ------
Total loans charged off 321 237
Recoveries:
Commercial 162 18
Real estate-mortgage 0 0
Consumer 7 19
------ ------
Total recoveries 169 37
------ ------
Net charge-offs 152 200
------ ------
Balance-June 30, $1,717 $1,539
====== ======
Ratios:
Net charge-offs (annualized) to average total loans 0.11% 0.17%
Allowance for loan losses to total loans
at period-end 0.62% 0.63%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 146.5% 31.1%
LIQUIDITY
Codorus Valley's loan-to-deposit ratio, which is used as a broad measure of
liquidity, was approximately 84 percent on June 30, 2004, compared to 86 percent
on December 31, 2003. 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, 2004.
Another important source of liquidity for PeoplesBank is available credit from
the Federal Home Loan Bank of Pittsburgh (FHLBP). On March 31, 2004, the latest
available date, available funding from the FHLBP was approximately $73 million.
Off-Balance Sheet Arrangements
Codorus Valley's financial statements do not reflect various commitments that
are made in the normal course of business, which may involve some liquidity
risk. These commitments consist primarily of commitments to grant new loans,
unfunded commitments of existing loans, and letters of credit made under the
same standards as on-balance sheet instruments. Unused commitments on June 30,
2004, totaled $67,065,000 and consisted of $45,308,000 in unfunded commitments
of existing loans, $18,395,000 to grant new loans and $3,362,000 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.
- 20 -
Contractual Obligations
Codorus Valley has various long-term contractual obligations outstanding at June
30, 2004, including long-term debt, time deposits and obligations under capital
and operating leases. These obligations have not changed significantly from
those reported in Table 11 of the Form 10-K for 2003. A schedule of long-term
debt for the period ended June 30, 2004, compared to December 31, 2003, is
provided in Note 4 to the financial statements.
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, 2004 and
December 31, 2003. 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. 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, 2003.
TABLE 3-INTEREST RATE SENSITIVITY
at June 30, 2004
- -------------------------------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- -------------------------- ------------------- --------- ---
+200 High 268 6.4
0 Flat (baseline) 0 0.0
-200 Low (348) (8.3)
+150 Most likely 203 4.9
at December 31, 2003
- -------------------------------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- -------------------------- ------------------- --------- ---
+200 High 241 5.8
0 Flat (baseline) 0 0.0
-200 Low (438) (10.6)
+88 Most likely 17 0.4
OTHER RISKS
Additional 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.
- 21 -
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 the
year ended December 31, 2003, 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
federal and state laws and regulations has, 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 on page 21 of this Form 10-Q.
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 Corporation files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of June 30, 2004, 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, 2004, as evaluated by the chief executive and chief financial officers.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 19, 2003, a former bank client 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 the complaint filed by 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 the claim. The factual discovery process has not been completed. Although
PeoplesBank expects to incur costs in defending these claims, based on the
results of its investigation thus far and preliminary discussions with its
lawyers, PeoplesBank currently does not
- 22 -
believe the ultimate resolution of the claims will have a material impact on its
financial condition or results of operations.
Another legal proceeding appears on page 19 under the caption, Forfeiture Action
Related to Mortgaged Property.
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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Codorus Valley made no repurchases of equity securities during the quarter ended
June 30, 2004.
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 18, 2004, 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 18, 2004, meeting. Votes
were as follows:
Votes
Term Votes Against or
Re-elected Expires For Withheld*
- ------------------ ------- --- ---------
Class B:
M. Carol Druck 2007 2,287,643 107,609
Donald H. Warner 2007 2,212,045 183,207
Michael L. Waugh 2007 2,227,222 168,030
*Includes broker nonvotes
Directors whose term continued after the meeting:
Term Expires
------------
Class A:
Rodney L. Krebs 2006
Dallas L. Smith 2006
George A. Trout, D.D.S. 2006
Class C:
D. Reed Anderson, Esquire 2005
MacGregor S. Jones 2005
Larry J. Miller 2005
ITEM 5. OTHER INFORMATION
Effective July 26, 2004, George A. Trout, D.D.S., resigned as Chairman of
Codorus Valley Bancorp, Inc. as a result of reaching mandatory retirement age.
- 23 -
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. (Incorporated by reference to Exhibit 10.1
to Registrant's Current Report on Form 8-K, 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,
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.)
10.8 Dividend Reinvestment and Stock Purchase Plan (Incorporated by
reference to Exhibit 4 (a) Registration Statement no. 33-46171
on Amendment no. 4 to Form S-3, filed with the Commission on
July 23, 2004.)
- 24 -
31a Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31b Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ITEM 6. (b) REPORTS ON FORM 8-K
On April 22, 2004, Codorus Valley Bancorp, Inc. filed a report on Form 8-K, Item
12, dated April 21, 2004. The Form 8-K disclosed that Codorus Valley Bancorp,
Inc. issued a Press Release dated April 20, 2004, announcing the declaration of
a quarterly cash dividend, a 5% stock dividend, and the results of operations,
in summary form, for the period ended March 31, 2004, compared to the period
ended March 31, 2003.
- 25 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the authorized
undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
August 10, 2004 /s/ Larry J. Miller
- --------------- ---------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
August 10, 2004 /s/ Jann A. Weaver
- --------------- ---------------------
Date Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting
officer)
- 26 -