UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
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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). 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 October 26, 2004, 2,986,578
shares of common stock, par value $2.50, were outstanding.
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Codorus Valley Bancorp, Inc.
FORM 10-Q INDEX
Page #
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PART I - FINANCIAL INFORMATION
Item 1. Financial statements:
Consolidated 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. Unregistered sales of equity securities and use of proceeds 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 23
SIGNATURES 25
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
September 30, December 31,
(dollars in thousands, except per share data) 2004 2003
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ASSETS
Interest bearing deposits with banks $ 110 $ 108
Cash and due from banks 12,260 12,300
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Total cash and cash equivalents 12,370 12,408
Securities available-for-sale 62,744 62,738
Securities held-to-maturity (fair value $10,240 for 2004 and $10,223 for 2003) 9,104 9,355
Restricted investment in bank stock, at cost 2,291 1,976
Loans held for sale 1,347 2,157
Loans (net of deferred fees of $498 in 2004 and $610 in 2003) 286,386 260,206
Less-allowance for loan losses (1,719) (1,694)
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Net loans 284,667 258,512
Premises and equipment 9,752 9,358
Other assets 16,633 16,043
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Total assets $ 398,908 $ 372,547
============= =============
LIABILITIES
Deposits
Noninterest bearing $ 39,541 $ 33,188
Interest bearing 285,363 271,094
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Total deposits 324,904 304,282
Short-term borrowings 12,331 6,795
Long-term debt 23,760 24,439
Other liabilities 2,537 3,242
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Total liabilities 363,532 338,758
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; 2,986,578 shares issued and
outstanding on 9/30/04 and 2,837,634 on 12/31/03 7,466 7,094
Additional paid-in capital 20,215 17,451
Retained earnings 7,215 8,498
Accumulated other comprehensive income 480 746
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Total shareholders' equity 35,376 33,789
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Total liabilities and shareholders' equity $ 398,908 $ 372,547
============= =============
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands, except per share data) 2004 2003 2004 2003
------------ ----------- ------------ ---------
INTEREST INCOME
Loans, including fees $ 4,418 $ 4,550 $ 12,788 $ 12,741
Investment securities
Taxable 592 605 1,774 1,900
Tax-exempt 110 103 319 336
Dividends 9 8 27 31
Other 12 18 36 63
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Total interest income 5,141 5,284 14,944 15,071
INTEREST EXPENSE
Deposits 1,333 1,425 3,927 4,459
Federal funds purchased and other short-term borrowings 10 2 14 7
Long-term debt 291 275 901 771
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Total interest expense 1,634 1,702 4,842 5,237
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Net interest income 3,507 3,582 10,102 9,834
PROVISION FOR LOAN LOSSES 30 254 205 478
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Net interest income after provision for loan losses 3,477 3,328 9,897 9,356
NONINTEREST INCOME
Trust and investment services fees 271 219 764 631
Service charges on deposit accounts 407 349 1,105 812
Mutual fund, annuity and insurance sales 239 190 665 529
Income from bank owned life insurance 72 91 198 240
Other income 128 113 368 304
Gain on sale of mortgages 44 155 219 637
Gain on sale of securities 31 0 38 266
------------ ----------- ------------ ---------
Total noninterest income 1,192 1,117 3,357 3,419
NONINTEREST EXPENSE
Personnel 1,762 1,590 5,153 4,866
Occupancy of premises, net 269 235 798 754
Furniture and equipment 288 288 902 843
Postage, stationery and supplies 97 84 299 304
Professional and legal 104 132 258 366
Marketing and advertising 107 78 348 243
Foreclosed real estate, net 15 (24) 24 80
Other 581 508 1,692 1,686
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Total noninterest expense 3,223 2,891 9,474 9,142
------------ ----------- ------------ ---------
Income before income taxes 1,446 1,554 3,780 3,633
PROVISION FOR INCOME TAXES 360 431 964 936
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Net income $ 1,086 $ 1,123 $ 2,816 $ 2,697
============ =========== ============ =========
Net income per share, basic $ 0.36 $ 0.38 $ 0.94 $ 0.91
Net income per share, diluted $ 0.36 $ 0.37 $ 0.93 $ 0.90
============ =========== ============ =========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
Nine months ended
September 30,
(dollars in thousands) 2004 2003
- ------------------------------------------------------------------------ ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,816 $ 2,697
Adjustments to reconcile net income to net cash provided by operations
Depreciation 737 737
Provision for loan losses 205 478
Provision for losses on foreclosed real estate 19 55
Amortization of investment in real estate partnership 173 156
Increase in cash surrender value of life insurance investment (198) (240)
Originations of held for sale mortgages (20,454) (57,971)
Proceeds from sales of held for sale mortgages 21,515 61,688
Gain on sales of held for sale mortgages (251) (637)
Loss on sale of loans not held for sale 32 0
Gain on sales of securities (38) (266)
Gain on sales of foreclosed real estate 0 (81)
(Increase) decrease in accrued interest receivable and other assets (317) 310
Increase (decrease) in accrued interest payable and other liabilities 407 (42)
Other, net 398 526
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Net cash provided by operating activities 5,044 7,410
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (13,733) (31,300)
Maturities and calls 6,818 19,444
Sales 6,304 13,542
Securities held-to-maturity, calls 250 0
Net increase in restricted investment in bank stock (315) (278)
Net increase in loans made to customers (26,527) (18,210)
Purchases of premises and equipment (1,138) (659)
Investment in real estate partnership (1,107) (826)
Investment in life insurance (7) (7)
Purchase of insurance agency assets (130) (25)
Proceeds from sales of foreclosed real estate 87 663
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Net cash used in investing activities (29,498) (17,656)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 20,101 12,916
Net increase (decrease) in time deposits 521 (677)
Net increase (decrease) in short-term borrowings 5,536 (6,535)
Proceeds from issuance of long-term debt 1,800 5,000
Repayment of long-term debt (2,479) (1,503)
Dividends paid (1,083) (987)
Issuance of common stock 26 0
Cash paid in lieu of fractional shares (6) (5)
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Net cash provided by financing activities 24,416 8,209
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Net decrease in cash and cash equivalents (38) (2,037)
Cash and cash equivalents at beginning of year 12,408 11,120
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Cash and cash equivalents at end of period $ 12,370 $ 9,083
============= ==============
See accompanying notes.
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\
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 nine months ended September 30, 2004
Balance, December 31, 2003 $7,094 $17,451 $8,498 $ 746 $33,789
Comprehensive income:
Net income 2,816 2,816
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (266) (266)
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Total comprehensive income 2,550
Cash dividends ($.363 per share, adjusted) (1,083) (1,083)
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
5,618 shares for insurance agency purchase 14 86 100
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Balance, September 30, 2004 $7,466 $20,215 $7,215 $ 480 $35,376
====== ======= ====== ======= =======
For the nine months ended September 30, 2003
Balance, December 31, 2002 $6,743 $15,549 $8,551 $ 1,380 $32,223
Comprehensive income:
Net income 2,697 2,697
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (520) (520)
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Total comprehensive income 2,177
Cash dividends ($.332 per share, adjusted) (987) (987)
5% stock dividend - 134,564 shares at fair value 336 1,817 (2,158) (5)
------ ------- ------ ------- -------
Balance, September 30, 2003 $7,079 $17,366 $8,103 $ 860 $33,408
====== ======= ====== ======= =======
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 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 nine-month period ended September 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 Nine months ended
September 30, September 30,
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(In thousands) 2004 2003 2004 2003
- -------------- ----- ----- ----- ------
Basic 2,982 2,973 2,981 2,973
Diluted 3,036 2,998 3,043 2,998
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 Nine months ended
September 30, September 30,
(Dollars in thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------------- ------ ------ ------ ------
Reported net income $1,086 $1,123 $2,816 $2,697
Deduct total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects 101 5 121 22
------ ------ ------ ------
Pro forma net income $ 985 $1,118 $2,695 $2,675
------ ------ ------ ------
Reported basic earnings per share $ .36 $ .38 $ .94 $ .91
------ ------ ------ ------
Reported diluted earnings per share $ .36 $ .37 $ .93 $ .90
------ ------ ------ ------
Pro forma basic earnings per share $ .33 $ .37 $ .90 $ .90
------ ------ ------ ------
Pro forma diluted earnings per share $ .32 $ .37 $ .89 $ .89
====== ====== ====== ======
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 Nine months ended
September 30, September 30,
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------- ----- ----- ----- -----
Unrealized holding gains (losses) arising during the period $ 535 $(900) $(365) $(522)
Reclassification adjustment for gains included in income (31) 0 (38) (266)
----- ----- ----- -----
Net unrealized gains (losses) 504 (900) (403) (788)
Tax effect (171) 306 137 268
----- ----- ----- -----
Net of tax amount $ 333 $(594) $(266) $(520)
----- ----- ----- -----
Recently issued FASB Statements
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on Issue
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." EITF No. 03-01 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting guidance of EITF No. 03-01 is effective for fiscal
years beginning after June 15, 2004, while the disclosure requirements are
effective for fiscal years ending after June 15, 2004. The Corporation has not
yet determined the impact that adoption will have on its financial position or
results of operations as the impact is heavily dependent on the interest rate
environment at the date of adoption and pending implementation guidance from the
Financial Accounting Standards Board.
- 8 -
NOTE 3 -- DEPOSITS
The composition of deposits on September 30, 2004 and December 31, 2003, was as
follows:
September 30, December 31,
(Dollars in thousands) 2004 2003
- ---------------------- ------------- ------------
Noninterest bearing demand $ 39,541 $ 33,188
NOW 42,403 40,552
Money market 84,905 75,529
Savings 18,148 15,627
Time CDs less than $100,000 114,234 113,014
Time CDs $100,000 or more 25,673 26,372
-------- --------
Total deposits $324,904 $304,282
======== ========
NOTE 4 -- LONG-TERM DEBT
A summary of long-term debt at September 30, 2004 and December 31, 2003 follows:
September 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 958 1,256
Due 2009, 3.47%, convertible quarterly after
December 2006 5,000 5,000
Due 2013, 3.46%, amortizing 4,429 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 1,751 0
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23,138 23,802
Capital lease obligation 622 637
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Total long-term debt $23,760 $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.
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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 September 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 SEPTEMBER 30, 2004
Capital ratios:
Tier 1 risk based $34,363 10.93% > or = $12,579 > or = 4.0% n/a n/a
Total risk based 36,082 11.47 > or = 25,159 > or = 8.0 n/a n/a
Leverage 34,363 8.95 > or = 15,351 > 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 SEPTEMBER 30, 2004
Capital ratios:
Tier 1 risk based $30,219 9.79% > or = $12,344 > or = 4.0% > or = $18,516 > or = 6.0%
Total risk based 31,938 10.35 > or = 24,688 > or = 8.0 > or = 30,860 > or = 10.0
Leverage 30,219 8.00 > or = 15,106 > or = 4.0 > or = 18,882 > 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.
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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. This matter was settled on September 9, 2004. 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 $3,826,000 of standby letters of credit as of
September 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 September 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.
Management discussed the development and selection of critical accounting
estimates and related Management Discussion and Analysis disclosure with the
Audit Committee. There were no material changes made to the critical accounting
estimates during the periods presented within this report.
THREE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003
OVERVIEW
Net income for the three-month period ended September 30, 2004, was $1,086,000
or $.36 per diluted share, compared to $1,123,000 or $.37 per diluted share, for
the same period of 2003. The $37,000 or 3 percent decrease in net income was
caused primarily by a $332,000 or 11 percent increase in noninterest expense,
principally personnel, foreclosed real estate and other expenses. The third
quarter of 2003, was positively impacted by a $407,000 recovery of interest
income, fees and expenses from the payoff of a nonperforming business loan.
Current period provision for loan losses was $224,000 or 88 percent below the
third quarter of 2003 due to improved quality of the overall loan portfolio.
Total noninterest income for the current quarter increased $75,000 or 7 percent
due to increases in service charges on deposits, trust fees, and commissions
from mutual fund, annuity and insurance sales. While total noninterest income
increased, gains from the sale of mortgages decreased $111,000 or 72 percent in
response to rising market interest rates. The $71,000 or 16 percent decrease in
provision for federal income tax for the current quarter was attributable to a
decrease in pretax income and an increase 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 three-month period ended September 30, 2004, was
$3,507,000, a decrease of $75,000 or 2 percent below the third quarter of 2003.
The prior period was positively impacted by a $306,000 recovery of interest
income and loan fees from the payoff of a nonperforming business loan. Earning
assets averaged $356 million and yielded 5.56 percent (tax equivalent) for the
third quarter of 2004, compared to $328 million and 6.01 percent, respectively,
for 2003. The $28 million or 9 percent increase in average earning assets
occurred primarily in business and consumer loans. Interest bearing liabilities
averaged $318 million at an average rate of 2.04 percent for the third quarter
of 2004, compared to $295 million and 2.29 percent, respectively, for 2003. The
$23 million or 8 percent increase in interest bearing liabilities occurred
primarily in demand and money market deposits and secondarily in long-term debt.
- 13 -
PROVISION FOR LOAN LOSSES
A $30,000 provision expense for loan losses was recorded in the three-month
period ended September 30, 2004, compared to $254,000 for the same period in
2003. The smaller loss provision in the current period reflects improved asset
quality. 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 three-month period ended September 30, 2004,
was $1,192,000, an increase of $75,000 or 7 percent above the same period in
2003. The increase was primarily attributable to increases in service charges on
deposits, trust fees, and commissions from mutual fund, annuity and insurance
sales. Current period gains from the sale of mortgages decreased in response to
higher market interest rates. 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 three-month period ended September 30, 2004,
was $3,223,000, an increase of $332,000 or 11 percent above the same period in
2003. The increase was primarily attributable to increases in personnel,
foreclosed real estate and other expenses. The third quarter of 2003, was
positively impacted by a $101,000 recovery of expenses from the payoff of a
nonperforming loan. 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 $360,000 for the three-month period
ended September 30, 2004, compared to $431,000 for the same period in 2003. The
$71,000 or 16 percent decrease in tax reflects a decrease in pretax income and
an increase in tax credits. More information about the change in federal income
taxes is provided in the year-to-date section of this report.
NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the nine-month period ended September 30, 2004, was $2,816,000 or
$.93 per diluted share, compared to $2,697,000 or $.90 per diluted share, for
the same period of 2003. The $119,000 or 4 percent increase in net income was
the result of an increase in net interest income and a decrease in loan loss
provision, which more than offset an increase in noninterest expense and a
decrease in noninterest income. The $268,000 or 3 percent increase in net
interest income was attributable to lower funding costs (rate driven) and income
from a larger volume of loans. The $273,000 or 57 percent decrease in loan loss
provision was attributable to improved asset quality. The $332,000 or 4 percent
increase in noninterest expense was due primarily to increases in personnel and
marketing expenses. Noninterest income, including gains, was $62,000 or 2
percent below the prior year. The decrease in noninterest income was
attributable to a $418,000 or 66 percent decrease in gains from the sale of
- 14 -
mortgages and a $228,000 or 86 percent decrease in gains from the periodic sale
of investment securities. Income from gains in the current period was adversely
affected by rising market interest rates. With the exception of gains, most
other categories of noninterest income increased, particularly fees on deposits,
trust service fees, and commissions earned from the sale of mutual fund, annuity
and insurance products. Net income as a percentage of average total assets for
the first nine months (annualized) of 2004 was .98 percent, compared to 1.01
percent for the same period of 2003. Net income as a percentage of average
shareholders' equity for the first nine months (annualized) of 2004 was 10.87
percent, compared to 10.89 percent for the same period of 2003.
Total assets of the Corporation on September 30, 2004, were approximately $399
million, an increase of $26 million or 7 percent above December 31, 2003. Asset
growth occurred primarily in business loans and secondarily in consumer loans,
which were funded primarily 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
September 30, 2004. Management also believes that the Corporation and
PeoplesBank were well capitalized on September 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. The Federal Open Market Committee of
the Federal Reserve (Fed) raised its target federal funds rate 25 basis points
on three occasions this year, which moved the rate from 1 percent to 1.75
percent. The prime rate moved in lock-step and increased from 4 percent to 4.75
percent. In the period ahead, many economists expect the Fed to increase
short-term interest rates at a measured pace to allow for economic growth with
low inflation, but express concerns about terrorism, the war in Iraq and
escalating energy costs.
Net interest income for the nine-month period ended September 30, 2004, was
$10,102,000, an increase of $268,000 or 3 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. The prior period was positively impacted by a $306,000
recovery of interest income and loan fees from the payoff of a nonperforming
business loan. Earning assets averaged $350 million and yielded 5.77 percent
(tax equivalent) for 2004, compared to $319 million and 6.40 percent,
respectively, for 2003. The $31 million or 10 percent increase in average
earning assets occurred primarily in business loans and secondarily in consumer
loans. Interest bearing liabilities averaged $310 million at an average rate of
2.08 percent for 2004, compared to $288 million and 2.43 percent, respectively,
for 2003. The $22 million or 8 percent increase in interest bearing liabilities
occurred primarily in demand deposits, money market deposits and long-term debt.
PROVISION FOR LOAN LOSSES
A $205,000 provision expense for loan losses was recorded in the nine-month
period ended September 30, 2004, compared to $478,000 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. The decrease in
the provision is attributable to improved quality of the overall loan 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 nine-month period was $3,357,000, a
decrease of $62,000 or 2 percent below the same period in 2003. The decrease was
attributable to a $418,000 or 66 percent decrease in gains from the sale of
mortgages and a $228,000 or 86 percent decrease in gains from the periodic sale
of available-for-sale investment securities. Income from the sale of mortgages
was constrained primarily by rising market interest rates, which curtailed
mortgage refinancing. Staff turnover within the mortgage banking division also
adversely affected mortgage sales and revenue. 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
$293,000 or 36 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 $136,000 or 26 percent due to an increase
in sales volume. Trust and investment services fees increased $133,000 or 21
percent due to a fee increase, effective January 1, 2004, and business growth.
Other income increased $64,000 or 21 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 nine-month period was $9,474,000, an
increase of $332,000 or 4 percent above the same period in 2003. The increase
was primarily attributable to increases in personnel and marketing expenses. The
$287,000 or 6 percent increase in personnel expense was the result of increases
in wage and payroll tax expense, health insurance expense, recruiting expense
and decreased mortgage loan origination cost deferrals. Wage and payroll tax
expense increased approximately $102,000 or 2 percent above the prior period due
to planned staff additions, including staffing for a full service financial
center that was operational in October 2004. The small increase in wage and
payroll tax expense in the current period reflects staff reductions and
realignments, and improved operational efficiency that resulted from a company
wide performance evaluation conducted by a consulting firm in 2003. Health
insurance expense increased $54,000 or 17 percent due to rising health care
premiums. During the current period, management incurred recruiting expenses to
upgrade talent in accordance with corporate strategy. The decrease in mortgage
loan origination cost deferrals was the result of a significant decrease in
mortgage banking activity. The $105,000 or 43 percent increase in marketing
expense was attributable to a larger marketing budget, including market
research.
While personnel and marketing expenses increased in the current period,
professional and legal, and foreclosed real estate expenses decreased and other
expense was flat. Current period professional and legal expense decreased
$108,000 or 30 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. Acting
upon the consultant's recommendations, management realigned staffing to move
toward industry standards and improved operating efficiency. These benefits, on
an annualized basis, far exceeded the one time consultant's fee. The $56,000 or
70 percent decrease in foreclosed real estate expense for the current period is
attributable to a smaller portfolio and cost recoveries. The relatively small
$6,000 or .4 percent increase in other expense reflects a $101,000 recovery of
expenses (i.e., problem loan carrying costs) from the payoff of a nonperforming
business loan in the prior period. 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
On October 6, 2004, PeoplesBank opened its twelfth financial center at 2510
Delta Road, Brogue, Pennsylvania. Application has been made with appropriate
regulatory authorities to establish a financial
- 16 -
center in the Borough of New Freedom, Pennsylvania. Construction should soon
begin with completion scheduled for March 2005. In accordance with the
Corporation's retail expansion strategy, PeoplesBank plans to add another
financial center during the second quarter of 2005.
INCOME TAXES
The provision for federal income tax was $964,000 for the current nine-month
period, compared to $936,000 for the same period in 2003. The $28,000 or 3
percent increase in tax was the result of an increase in pretax income. The tax
increase in the current period was reduced by the recognition of tax credits
from an investment in a low income housing partnership described below.
In June 2004, the Corporation began to recognize pro-rated tax credits on a
monthly basis as rental units in a low income housing partnership are
constructed and leased to qualified tenants. PeoplesBank holds a 73.47 percent
interest, as a limited partner, representing a $2.8 million investment. The
mission of the joint venture partnership is to construct and lease 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 September 30, 2004, loans were approximately $286 million, an increase of $26
million or 10 percent above year-end 2003. The increase was attributable to
growth in business and consumer loan portfolios.
DEPOSITS
On September 30, 2004, total deposits were approximately $325 million, an
increase of $21 million or 7 percent above year-end 2003. The increase occurred
primarily in core deposits such as demand, money market and savings accounts.
During the first quarter, PeoplesBank began offering a money market deposit
product 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 $35,376,000 on September 30, 2004, an increase of $1,587,000 or 5
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 October 12, 2004, the board of directors declared a quarterly cash dividend
of $.125 per common share, payable on or before November 9, 2004, to
shareholders of record October 26, 2004. The following cash dividends per share
were paid in 2004: $.125 in August; $.125 ($.119 adjusted) in May; and $.125
($.119 adjusted) in February. On June 10, 2004, the Corporation distributed a 5
percent stock dividend, which resulted in the issuance of 141,672 common shares.
- 17 -
On October 14, 2004, the Corporation issued a press release, which it also filed
on Form 8-K, announcing that its board of directors authorized the purchase, in
open market and privately negotiated transactions, of up to 4.9 percent or
approximately 146,000 shares of its currently outstanding common stock.
On October 26, 2004, the board of directors approved a $3 million capital
acquisition strategy to support planned growth, which was subsequently approved
by the Federal Reserve Bank of Philadelphia. Codorus Valley plans to issue $3
million in trust preferred debt with a 30-year maturity, but callable after the
fifth year. Trust preferred debt is included as Tier I capital, subject to
limitations, for regulatory capital ratio purposes. Interest expense on trust
preferred debt is tax deductible. Funding is expected in December 2004.
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators that involve quantitative
guidelines and qualitative judgments. Quantitative measures established by
regulators pertain to minimum capital ratios, as set forth in Note 5 --
Regulatory Matters, to the financial statements. Management believes that
Codorus Valley and PeoplesBank were well capitalized on September 30, 2004,
based on FDIC capital guidelines.
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 September 30, 2004, compared to December 31, 2003.
TABLE 1-NONPERFORMING ASSETS
September 30, December 31,
(dollars in thousands) 2004 2003
- --------------------- ------------ -----------
Nonaccrual loans $ 677 $ 516
Accruing loans that are contractually past due
90 days or more as to principal or interest 150 49
Foreclosed real estate, net of allowance 1,336 1,326
------ ------
Total nonperforming assets $2,163 $1,891
====== ======
Ratios:
Nonaccrual loans as a % of total period-end loans 0.24% 0.20%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 0.75% 0.72%
Nonperforming assets as a % of total period-end
stockholders' equity 6.11% 5.60%
Allowance for loan losses as a multiple of
nonaccrual loans 2.5x 3.3x
- 18 -
Nonaccrual loans were principally comprised of collateral dependent business
loans. Accordingly, Codorus Valley recognized interest income on a cash basis
for these loans. On September 30, 2004, the nonaccrual loan portfolio was
$677,000, compared to $516,000 on December 31, 2003. The level of nonperforming
loans was relatively low for both periods. On September 30, 2004, the portfolio
was comprised of 15 unrelated accounts ranging in size from $6,000 to $198,000.
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 $1,336,000 on September 30, 2004,
approximately the same as year end 2003. One account for $1,308,000 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 September 30, 2004, management established an $18,500 allowance for the
foreclosed real estate assets portfolio. For the first nine months of 2004, an
$18,500 loss provision was recorded to reflect losses associated with declines
in net realizable value. Comparatively, a $55,000 loss provision was recorded in
the first nine 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 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
$1,719,000 or .60 percent of total loans on September 30, 2004, compared to
$1,775,000 or .71 percent of total loans, respectively, on September 30, 2003.
The $56,000 or 3 percent decrease in the allowance was attributable to
management's assessment of improved quality of the overall 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 September 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 205 478
Loans charged off:
Commercial 215 193
Real estate-mortgage 30 0
Consumer 111 69
------ ------
Total loans charged off 356 262
Recoveries:
Commercial 166 19
Real estate-mortgage 1 0
Consumer 9 25
------ ------
Total recoveries 176 44
------ ------
Net charge-offs 180 218
------ ------
Balance-September 30, $1,719 $1,775
------ ------
Ratios:
Net charge-offs (annualized) to average total loans 0.09% 0.12%
Allowance for loan losses to total loans
at period-end 0.60% 0.71%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 207.9% 82.3%
LIQUIDITY
Codorus Valley's loan-to-deposit ratio, which is used as a broad measure of
liquidity, was approximately 88 percent on September 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 $63
million portfolio of available-for-sale securities, valued at September 30,
2004. Another important source of liquidity for PeoplesBank is available credit
from the Federal Home Loan Bank of Pittsburgh (FHLBP). On June 30, 2004, the
latest available date, available funding from the FHLBP was approximately $74
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 September
30, 2004, totaled $75,806,000 and consisted of $42,549,000 in unfunded
commitments of existing loans, $29,431,000 to grant new loans and $3,826,000 in
letters of credit. Due to fixed maturity dates and specified conditions within
these instruments, many will expire without being drawn upon.
- 20 -
Management believes that amounts actually drawn upon can be funded in the normal
course of operations and therefore do not present a significant liquidity risk
to Codorus Valley.
Contractual Obligations
Codorus Valley has various long-term contractual obligations outstanding at
September 30, 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 September 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 September 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 September 30, 2004
---------------------- ------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- -------------------------- ---------------------- ------------
+200 High 53 1.3
0 Flat (baseline) 0 0.0
-200 Low (263) (6.3)
+108 Most likely 6 0.2
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.
- 21 -
A prolonged economic recession could have a material adverse effect on the
liquidity, capital resources or results of operations of Codorus Valley.
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 September 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
September 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 alleged 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 alleged that the
claimants defaulted on a promissory note resulting in damages to PeoplesBank in
excess of $1.2 million. A settlement agreement was executed on September 9,
2004. The settlement of the client's claims did not have a material adverse
impact on PeoplesBank's financial condition or results of operations.
- 22 -
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Codorus Valley made no repurchases of equity securities during the quarter ended
September 30, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
ITEM 5. OTHER INFORMATION
Nothing to report.
ITEM 6. 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, 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,
- 23 -
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.)
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
- 24 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the authorized
undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
November 10, 2004 /s/ Larry J. Miller
------------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
November 10, 2004 /s/ Jann A. Weaver
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Date Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and
accounting officer)
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