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 MARCH 31, 2005
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 April 26, 2005, 3,147,587
shares of common stock, par value $2.50, were outstanding, which includes the
effect of the 5 percent stock dividend declared April 12, 2005.
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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 20
Item 4. Controls and procedures 20
PART II - OTHER INFORMATION
Item 1. Legal proceedings 20
Item 2. Unregistered sales of equity securities and use of proceeds 20
Item 3. Defaults upon senior securities 21
Item 4. Submission of matters to a vote of security holders 21
Item 5. Other information 21
Item 6. Exhibits 21
SIGNATURES 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
March 31, December 31,
(dollars in thousands, except per share data) 2005 2004
- --------------------------------------------- --------- ------------
ASSETS
Interest bearing deposits with banks $ 118 $ 119
Cash and due from banks 12,179 7,966
--------- ---------
Total cash and cash equivalents 12,297 8,085
Securities available-for-sale 60,444 62,587
Securities held-to-maturity (fair value $9,760 for 2005 and $10,240 for 2004) 9,103 9,103
Restricted investment in bank stock, at cost 2,008 2,450
Loans held for sale 1,149 1,589
Loans (net of deferred fees of $447 in 2005 and $481 in 2004) 310,485 298,671
Less-allowance for loan losses (2,064) (1,865)
--------- ---------
Net loans 308,421 296,806
Premises and equipment 10,698 9,909
Other assets 15,731 17,142
--------- ---------
Total assets $ 419,851 $ 407,671
========= =========
LIABILITIES
Deposits
Noninterest bearing $ 43,347 $ 40,897
Interest bearing 301,238 288,640
--------- ---------
Total deposits 344,585 329,537
Short-term borrowings 4,544 12,880
Long-term debt 31,311 26,613
Other liabilities 2,941 2,659
--------- ---------
Total liabilities 383,381 371,689
SHAREHOLDERS' EQUITY
Preferred stock, par value $2.50 per share;
1,000,000 shares authorized; 0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 3,147,587 shares issued and
outstanding on 3/31/05 and 2,992,590 on 12/31/04 7,869 7,481
Additional paid-in capital 22,873 20,293
Retained earnings 5,994 8,034
Accumulated other comprehensive (loss) income (266) 174
--------- ---------
Total shareholders' equity 36,470 35,982
--------- ---------
Total liabilities and shareholders' equity $ 419,851 $ 407,671
========= =========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited
Three months ended
March 31,
(dollars in thousands, except per share data) 2005 2004
- --------------------------------------------- ---------- ----------
INTEREST INCOME
Loans, including fees $ 5,144 $ 4,181
Investment securities
Taxable 599 602
Tax-exempt 101 104
Dividends 19 13
Other 2 9
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Total interest income 5,865 4,909
INTEREST EXPENSE
Deposits 1,465 1,297
Federal funds purchased and other short-term borrowings 51 4
Long-term debt 376 322
--------- ---------
Total interest expense 1,892 1,623
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Net interest income 3,973 3,286
PROVISION FOR LOAN LOSSES 200 50
--------- ---------
Net interest income after provision for loan losses 3,773 3,236
NONINTEREST INCOME
Trust and investment services fees 265 243
Service charges on deposit accounts 373 340
Mutual fund, annuity and insurance sales 283 236
Income from bank owned life insurance 65 78
Other income 113 118
Gain on sales of mortgages 66 95
Gain on sales of securities 0 7
--------- ---------
Total noninterest income 1,165 1,117
NONINTEREST EXPENSE
Personnel 1,834 1,667
Occupancy of premises, net 324 272
Furniture and equipment 317 320
Postage, stationery and supplies 102 90
Professional and legal 65 85
Marketing and advertising 89 108
Other 550 565
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Total noninterest expense 3,281 3,107
--------- ---------
Income before income taxes 1,657 1,246
PROVISION FOR INCOME TAXES 429 327
--------- ---------
Net income $ 1,228 $ 919
========= =========
Net income per share, basic $ 0.39 $ 0.29
Net income per share, diluted $ 0.38 $ 0.29
========= =========
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
Three months ended
March 31,
(dollars in thousands) 2005 2004
- ---------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,228 $ 919
Adjustments to reconcile net income to net cash provided by operations
Depreciation 255 255
Provision for loan losses 200 50
Amortization of investment in real estate partnership 119 54
Increase in cash surrender value of life insurance investment (65) (78)
Originations of held for sale mortgages (5,108) (7,173)
Proceeds from sales of held for sale mortgages 5,614 7,931
Gain on sales of held for sale mortgages (66) (95)
Gain on sales of securities 0 (7)
Gain on sales of foreclosed real estate (27) 0
Decrease (increase) in accrued interest receivable and other assets 64 (305)
Increase in accrued interest payable and other liabilities 342 601
Other, net 117 133
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Net cash provided by operating activities 2,673 2,285
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (2,403) (2,634)
Maturities and calls 3,810 882
Sales 0 3,261
Net decrease in restricted investment in bank stock 442 294
Net increase in loans made to customers (11,872) (3,823)
Purchases of premises and equipment (1,047) (230)
Investment in real estate partnership 0 (443)
Purchase of insurance agency assets (60) 0
Proceeds from sales of foreclosed real estate 1,559 0
-------- --------
Net cash used in investing activities (9,571) (2,693)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 8,737 13,125
Net increase in time deposits 6,311 481
Net decrease in short-term borrowings (8,336) (6,795)
Proceeds from issuance of long-term debt 5,000 1,800
Repayment of long-term debt (302) (2,012)
Dividends paid (375) (355)
Issuance of common stock 75 26
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Net cash provided by financing activities 11,110 6,270
-------- --------
Net increase in cash and cash equivalents 4,212 5,862
Cash and cash equivalents at beginning of year 8,085 12,408
-------- --------
Cash and cash equivalents at end of period $ 12,297 $ 18,270
======== ========
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 three months ended March 31, 2005
Balance, December 31, 2004 $7,481 $20,293 $ 8,034 $ 174 $35,982
Comprehensive income:
Net income 1,228 1,228
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (440) (440)
-------
Total comprehensive income 788
Cash dividends ($.119 per share, adjusted) (375) (375)
5% stock dividend - 149,885 shares at fair value 375 2,518 (2,893) 0
Issuance of common stock -
5,112 shares under stock option plan 13 62 75
------ ------- -------- -------- -------
Balance, March 31, 2005 $7,869 $22,873 $ 5,994 ($ 266) $36,470
====== ======= ======== ======== =======
For the three months ended March 31, 2004
Balance, December 31, 2003 $7,094 $17,451 $ 8,498 $ 746 $33,789
Comprehensive income:
Net income 919 919
Other comprehensive income, net of tax:
Unrealized gains on securities, net 275 275
-------
Total comprehensive income 1,194
Cash dividends ($.113 per share, adjusted) (355) (355)
5% stock dividend - 141,964 shares at fair value 355 2,662 (3,017) 0
Issuance of common stock -
1,654 shares under stock option plan 4 22 26
------ ------- -------- -------- -------
Balance, March 31, 2004 $7,453 $20,135 $ 6,045 $ 1,021 $34,654
====== ======= ======== ======== =======
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 2004 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 three-month period ended March 31, 2005 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 12, 2005. The weighted
average number of shares of common stock outstanding used for basic and diluted
calculations follows.
Three months ended
March 31,
------------------
(In thousands) 2005 2004
- -------------- ---- ----
Basic 3,145 3,129
Diluted 3,212 3,200
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:
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Three months ended
March 31,
(Dollars in thousands, except per share data) 2005 2004
- --------------------------------------------- ---- ----
Reported net income $1,228 $919
Deduct total stock-based employee compensation expense determined under fair value based method for all
awards, net of related tax effects 14 5
------ ----
Pro forma net income $1,214 $914
Reported basic earnings per share $ .39 $.29
Reported diluted earnings per share $ .38 $.29
Pro forma basic earnings per share $ .39 $.29
Pro forma diluted earnings per share $ .38 $.29
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
March 31,
(Dollars in thousands) 2005 2004
- ---------------------- ---- ----
Unrealized holding (losses) gains arising during the period $ (667) $ 424
Reclassification adjustment for gains included in income 0 (7)
------ -----
Net unrealized (losses) gains (667) 417
Tax effect 227 (142)
------ -----
Net of tax amount $ (440) $ 275
------ -----
New Accounting Pronouncements
On April 14, 2005, the Securities and Exchange Commission announced a new rule
that allows companies to implement Statement No. 123(R), "Accounting for
Stock-Based Compensation" at the beginning of their next fiscal year, instead of
the next reporting period, that begins after June 15, 2005. This means that a
calendar year company, such as Codorus Valley, will need to comply with
Statement No. 123(R) when it files financial statements for first quarter 2006,
instead of third quarter 2005.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) revised
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. Statement No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). Public companies are required to adopt the
new standard using a modified
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prospective method. Under the modified prospective method, companies are
required to record compensation cost for new and modified awards over the
related vesting period of such awards prospectively and record compensation cost
prospectively for the unvested portion, at the date of adoption, of previously
issued and outstanding awards over the remaining vesting period of such awards.
The amount of compensation cost will be measured based on the grant-date fair
value of the equity or liability instruments issued. The Corporation is
currently evaluating the impact of this standard on its results of operations
and financial position.
NOTE 3 -- DEPOSITS
The composition of deposits on March 31, 2005 and December 31, 2004, was as
follows:
March 31, December 31,
(Dollars in thousands) 2005 2004
- ---------------------- --------- ------------
Noninterest bearing demand $ 43,347 $ 40,897
NOW 45,036 43,188
Money market 90,925 88,001
Savings 20,783 19,268
Time CDs less than $100,000 115,598 111,766
Time CDs $100,000 or more 28,896 26,417
-------- ----------
Total deposits $344,585 $ 329,537
======== ==========
NOTE 4 -- LONG-TERM DEBT
A summary of long-term debt at March 31, 2005 and December 31, 2004 follows:
March 31, December 31,
(Dollars in thousands) 2005 2004
- ---------------------- ------- -----------
Obligations of PeoplesBank to FHLBP
Due 2005, 5.36%, convertible quarterly $ 6,000 $ 6,000
Due 2007, 4.69%, amortizing 754 857
Due 2009, 3.47%, convertible quarterly after December 2006 5,000 5,000
Due 2011, 4.30%, amortizing 4,940 0
Due 2013, 3.46%, amortizing 4,208 4,318
Due 2014, 6.43%, convertible quarterly after July 2009 5,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2011, floating rate based on 1 month LIBOR plus 1.50%, amortizing 1,705 1,728
Due 2034, floating rate based on 3 month LIBOR plus 2.02%, callable quarterly after December 2009 3,093 3,093
------- ----------
30,700 25,996
Capital lease obligation 611 617
------- ----------
Total long-term debt $31,311 $ 26,613
------- ----------
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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 due in 2011 is secured by a mortgage on the
Codorus Valley Corporate Center office building at 105 Leader Heights Road,
York, Pennsylvania.
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 March 31, 2005, based on
FDIC capital guidelines.
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MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
--------------- -------------------------- ----------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------- ------- ------ ------------- ---------- -------------- ------------
CODORUS VALLEY BANCORP, INC.
AT MARCH 31, 2005
Capital ratios:
Tier 1 risk based $39,222 11.63% > or = $13,492 > or = 4.0% n/a n/a
Total risk based 41,286 12.24 > or = 26,985 > or = 8.0 n/a n/a
Leverage 39,222 9.46 > or = 16,582 > or = 4.0 n/a n/a
AT DECEMBER 31, 2004
Capital ratios:
Tier 1 risk based $38,285 11.77% > or = $13,012 > or = 4.0% n/a n/a
Total risk based 40,150 12.34 > or = 26,023 > or = 8.0 n/a n/a
Leverage 38,285 9.86 > or = 15,534 > or = 4.0 n/a n/a
PEOPLESBANK
AT MARCH 31, 2005
Capital ratios:
Tier 1 risk based $34,752 10.49% > or = $13,257 > or = 4.0% > or = $19,885 > or = 6.0%
Total risk based 36,816 11.11 > or = 26,513 > or = 8.0 > or = 33,142 > or = 10.0
Leverage 34,752 8.51 > or = 16,341 > or = 4.0 > or = 20,427 > or = 5.0
AT DECEMBER 31, 2004
Capital ratios:
Tier 1 risk based $33,837 10.60% > or = $12,774 > or = 4.0% > or = $19,161 > or = 6.0%
Total risk based 35,702 11.18 > or = 25,548 > or = 8.0 > or = 31,935 > or = 10.0
Leverage 33,837 8.85 > or = 15,291 > or = 4.0 > or = 19,114 > or = 5.0
* To be well capitalized under prompt corrective action provisions.
NOTE 6 -- CONTINGENT LIABILITIES
Management is not aware of any contingent liabilities on March 31, 2005.
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 $2,856,000 of standby letters of credit as of
March 31, 2005. 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 March 31, 2005, for
guarantees under standby letters of credit issued is not material.
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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 2004 Annual Report to
Shareholders, filed as Exhibit 13 to the Annual Report on Form 10-K for the
period ended December 31, 2004. 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 18 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
-12-
future cash flows and other relevant factors. Estimates related to the value of
collateral also have a significant impact on whether or not management continues
to accrue income on delinquent loans and on the amounts at which foreclosed real
estate is recorded on the statement of financial condition.
As permitted by SFAS No. 123, the Corporation accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion (APB) No.
25. Under APB No. 25, no compensation expense is recognized in the income
statement related to any options granted under the Corporation's stock option
plans. The pro forma impact of net income and earnings per share that would
occur if compensation expense was recognized, based on the estimated fair value
of the options on the date of the grant, is disclosed in Note 2 to the
consolidated financial statements under the subheading Stock-Based Compensation.
The Corporation plans to change its method of accounting for stock-based
compensation in 2006, in accordance with Financial Accounting Statement No.
123(R), which is described in Note 2 under the subheading New Accounting
Pronouncements. Based on stock options outstanding on December 31, 2004,
approximately $23,000 will be expensed for full year 2006 and $6,000 for 2007.
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 MARCH 31, 2005,
COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the three-month period ended March 31, 2005, was $1,228,000 or
$.38 per diluted share, compared to $919,000 or $.29 per diluted share, for the
same period of 2004. The $309,000 or 34 percent increase in net income was the
result of an increase in net interest income, which more than offset increases
in noninterest expense and loan loss provision. The $687,000 or 21 percent
increase in net interest income was attributable to an increase in interest
income and fees from a larger volume of business loans. The $174,000 or 6
percent increase in noninterest expense was attributable to increases in
personnel and occupancy expenses, primarily the result of financial center
additions, as described below, and normal business growth. The current period
loan loss provision was $200,000, an increase of $150,000 above the first
quarter of 2004 based on management's assessment of overall credit quality, loan
growth and macro-economic factors such as rising energy costs and interest
rates.
PeoplesBank opened two full-service financial centers during the quarter ended
March 31, 2005. The first, opened on February 23, is located at 1477 Carlisle
Road in West Manchester Township, PA. The second, opened on March 21, is located
at 26 East Main Street in the Borough of New Freedom, PA. Additionally, on
October 6, 2004, PeoplesBank opened a financial center at 2510 Delta Road,
Brogue, PA. As of March 31, 2005, PeoplesBank operated fourteen financial
centers located strategically throughout York County, Pennsylvania.
Net income as a percentage of average total assets for the first three months
(annualized) of 2005 was 1.18 percent, compared to 0.98 percent for the same
period of 2004. Net income as a percentage of average shareholders' equity for
the first three months (annualized) of 2005 was 13.43 percent, compared to 10.70
percent for the same period of 2004.
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Total assets of the Corporation on March 31, 2005, were approximately $420
million, an increase of $40 million or 10 percent above March 31, 2004. Asset
growth occurred primarily in business 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 March 31, 2005. Management also believes
that the Corporation and PeoplesBank were well capitalized on March 31, 2005,
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 trended upward since early 2004. The Federal Open Market Committee of the
Federal Reserve (Fed) raised its target federal funds rate 25 basis points on
two occasions this year, which moved the rate from 2.25 percent to 2.75 percent.
The prime rate moved in lock-step and increased from 5.25 percent to 5.75
percent. In the period ahead, many economists expect the Fed to continue to
increase short-term interest rates at a measured pace.
Net interest income for the three-month period ended March 31, 2005, was
$3,973,000, an increase of $687,000 or 21 percent above the same period in 2004.
Net interest income increased primarily as a result of an increase in interest
income and fees from a larger volume of business loans. Earning assets averaged
$380 million and yielded 6.37 percent (tax equivalent) for 2005, compared to
$341 million and 5.91 percent, respectively, for 2004. The $39 million or 11
percent increase in average earning assets occurred primarily in business loans
and secondarily in consumer loans. Interest bearing liabilities averaged $335
million at an average rate of 2.29 percent for 2005, compared to $305 million
and 2.14 percent, respectively, for 2004. The $30 million or 10 percent increase
in the average balance of interest bearing liabilities occurred primarily in
core or non-CD deposits and secondarily in overnight borrowings and long-term
debt. In the period ahead, growth in net interest income is expected to be
constrained by increased funding costs, which are predicted to increase in
response to rising market interest rates and competition.
PROVISION FOR LOAN LOSSES
A $200,000 provision expense for loan losses was recorded in the three-month
period ended March 31, 2005, compared to $50,000 for the same period in 2004.
The current period provision was based on management's estimate to bring the
allowance to a level reflective of risk in the portfolio, loan growth and
macro-economic factors such as rising energy costs and interest rates.
Information regarding nonperforming assets and the allowance for loan losses can
be found within those sections of this report.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $1,165,000, an
increase of $48,000 or 4 percent above the same period in 2004. The increase was
attributable to increases in commission income from the sale of mutual fund,
annuity and insurance products, trust fees and service charges on deposit
accounts from normal business growth. Current period income from the sale of
mortgages was below the first quarter of 2004 due primarily to rising market
interest rates.
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NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $3,281,000, an
increase of $174,000 or 6 percent above the same period in 2004. The increase
was primarily attributable to increases in personnel and occupancy expenses,
which resulted from franchise expansion described in the overview of this
section. An increase in health insurance expense (rate driven) also contributed
to the increase in personnel expense. In the period ahead, it is probable that
noninterest expense will increase due to recent and planned expansion of the
banking franchise. Marketing expense is also likely to increase as management
implements a planned brand image campaign in the second quarter of 2005.
INCOME TAXES
The provision for federal income tax was $429,000 for the current three-month
period, compared to $327,000 for the same period in 2004. The $102,000 or 31
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 investments in low income housing partnerships. For the current period, tax
credits totaled $83,000, compared to $37,000 for the first quarter of 2004.
BALANCE SHEET REVIEW
LOANS
On March 31, 2005, loans were approximately $310 million, an increase of $12
million or 4 percent above year-end 2004. The increase was attributable to
growth in the business loan portfolio, principally fixed rate loans.
DEPOSITS
On March 31, 2005, total deposits were approximately $345 million, an increase
of $15 million or 5 percent above year-end 2004. The increase was attributable
in part to the addition of three financial centers. Two were opened in the first
quarter of 2005 and one was opened in the fourth quarter of 2004. The increase
in deposits occurred across all deposits categories.
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 $36,470,000 on March 31, 2005, an increase of $488,000 or 1
percent above December 31, 2004. 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 resulted in unrealized losses
on investment securities, i.e., accumulated other comprehensive loss.
On April 12, 2005, the Board of Directors declared a quarterly cash dividend of
$.125 per common share ($.119 adjusted), payable on or before May 10, 2005, to
shareholders of record April 26, 2005. This follows a $.125 per common share
($.119 adjusted) dividend paid in February. Also on April 12, 2005, the Board
declared a 5 percent stock dividend payable on or before June 9, 2005, to
shareholders of record April 26, 2005. Distribution of the stock dividend will
result in the issuance of approximately 149,885 common shares, as reflected in
the enclosed financial statements.
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On October 14, 2004, the Corporation issued a press release, which was filed on
Form 8-K, announcing that the 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 then outstanding common stock. As of March
31, 2005, the Corporation has not acquired any of its common stock under the
authorization reported in October 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 March 31, 2005, 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 March 31, 2005, compared to December 31, 2004.
TABLE 1-NONPERFORMING ASSETS
March 31, December 31,
(dollars in thousands) 2005 2004
- ---------------------- --------- ------------
Nonaccrual loans $ 593 $ 622
Accruing loans that are contractually past due
90 days or more as to principal or interest 187 19
Foreclosed real estate, net of allowance 31 1,535
--------- ---------
Total nonperforming assets $ 811 $ 2,176
========= =========
Ratios:
Nonaccrual loans as a % of total period-end loans 0.19% 0.21%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 0.26% 0.72%
Nonperforming assets as a % of total period-end
stockholders' equity 2.22% 6.05%
Allowance for loan losses as a multiple of
nonaccrual loans 3.5x 3.0x
Nonaccrual loans were principally comprised of collateral dependent business
loans. Accordingly, Codorus Valley recognized interest income on a cash basis
for these loans. On March 31, 2005, the nonaccrual loan portfolio was $593,000,
compared to $622,000 on December 31, 2004. The level of nonperforming loans was
relatively low for both periods. On March 31, 2005, the portfolio was comprised
of 11 unrelated accounts ranging in size from $2,000 to $198,000. Accounts
within the
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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 $31,000 on March 31, 2005,
compared to $1,535,000 on December 31, 2004. The decrease was attributable to
the sale of real estate from one account, which totaled $1,522,000. Management
fully recovered the carrying value of this property in February 2005. In
management's judgment, a loss provision was unnecessary for periods ended March
31, 2005 and 2004, because the net realizable value of foreclosed real estate
exceeded its carrying value. Efforts to liquidate foreclosed real estate are
proceeding as quickly as potential buyers can be located.
ALLOWANCE FOR LOAN LOSSES
Table 2 -- Analysis of Allowance for Loan Losses, shows the allowance was
$2,064,000 or .66 percent of total loans on March 31, 2005, compared to
$1,768,000 or .67 percent of total loans, respectively, on March 31, 2004. The
$296,000 or 17 percent increase in the allowance was based on management's
estimate to bring the allowance to a level reflective of risk in the portfolio,
loan growth and macro-economic factors such as rising energy costs and interest
rates. 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 March 31, 2005.
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TABLE 2-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2005 2004
- ---------------------- -------- --------
Balance-January 1, $ 1,865 $ 1,694
Provision charged to operating expense 200 50
Loans charged off:
Commercial 1 50
Real estate-mortgage 9 0
Consumer 18 13
-------- --------
Total loans charged off 28 63
Recoveries:
Commercial 12 87
Real estate-mortgage 0 0
Consumer 15 0
-------- --------
Total recoveries 27 87
-------- --------
Net charge-offs 1 (24)
-------- --------
Balance-March 31, $ 2,064 $ 1,768
-------- --------
Ratios:
Net charge-offs (annualized) to average total loans 0.00% -0.04%
Allowance for loan losses to total loans
at period-end 0.66% 0.67%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 264.6% 148.6%
LIQUIDITY
Codorus Valley's loan-to-deposit ratio, which is used as a broad measure of
liquidity, was approximately 90 percent on March 31, 2005, compared to 91
percent on December 31, 2004. Liquidity for both periods was adequate based on
availability from many sources, including the potential liquidation of a $60
million portfolio of available-for-sale securities, valued at March 31, 2005.
Another important source of liquidity for PeoplesBank is available credit from
the Federal Home Loan Bank of Pittsburgh (FHLBP). On December 31, 2004, the
latest available date, available funding from the FHLBP was approximately $93
million. The recent addition of three financial centers is expected to increase
liquidity in the form of deposit growth.
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 March 31,
2005, totaled $75,938,000 and consisted of $54,962,000 in unfunded commitments
of existing loans, $18,120,000 to grant new loans and $2,856,000 in letters of
credit. Due to fixed maturity dates and specified conditions within these
instruments, many will expire without being drawn upon.
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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
March 31, 2005, including long-term debt, time deposits and obligations under
capital and operating leases. These obligations have not changed significantly,
with one exception, from those reported in Table 11 of the Form 10-K for the
year ended 2004. In January 2005, PeoplesBank borrowed $5 million from the
Federal Home Loan Bank of Pittsburgh. This debt instrument has a 4.3 percent
fixed rate of interest, amortizes over 15-years, and matures in January 2011.
PeoplesBank used the proceeds from the debt to match-fund a business loan with a
similar structure. A schedule of long-term debt for the period ended March 31,
2005, compared to December 31, 2004, 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 March 31, 2005 and
December 31, 2004. 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, 2004.
TABLE 3-INTEREST RATE SENSITIVITY
at March 31, 2005
- --------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- --------------------------------------------------------------------
+150 Most likely 81 1.9
+200 High 89 2.1
0 Flat (baseline) 0 0.0
-200 Low (155) (3.7)
at December 31, 2004
- --------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- --------------------------------------------------------------------
+125 Most likely 141 3.4
+200 High 161 3.9
0 Flat (baseline) 0 0.0
-200 Low (145) (3.5)
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OTHER RISKS
Future 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.
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, 2004, 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 19 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Codorus Valley maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Corporation
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Based upon their
evaluation of those controls and procedures performed as of March 31, 2005, 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
March 31, 2005, as evaluated by the chief executive and chief financial
officers.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Management of Codorus Valley and PeoplesBank is not aware of any 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
March 31, 2005.
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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. 333-09277 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-
prorated 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 on 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.)
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10.7 2001 Employee Stock Bonus Plan (Incorporated by reference to
Exhibit 99.1 of Registration Statement No. 333-68410 on Form S-8,
filed with the Commission on August 27, 2001.)
10.8 Dividend Reinvestment and Stock Purchase Plan (Incorporated by
reference to Exhibit 4 (a) Registration Statement no. 33-46171 on
Amendment no. 4 to Form S-3, filed with the Commission on July
23, 2004.)
10.9 Salary Continuation Agreement dated October 1, 1998 between
PeoplesBank, A Codorus Valley Company and Larry J. Miller
(Incorporated by reference to Exhibit 10.9 of the Registrant's
2004 Form 10-K filed with the Commission on March 29, 2005.)
10.10 Salary Continuation Agreement dated October 1, 1998 between
PeoplesBank, A Codorus Valley Company and Harry R. Swift
(Incorporated by reference to Exhibit 10.10 of the Registrant's
2004 Form 10-K filed with the Commission on March 29, 2005.)
10.11 Salary Continuation Agreement dated October 1, 1998 between
PeoplesBank, A Codorus Valley Company and Jann Allen Weaver
(Incorporated by reference to Exhibit 10.11 of the Registrant's
2004 Form 10-K filed with the Commission on March 29, 2005.)
10.12 Form of Group Term Replacement Plan dated December 1, 1998, as
amended, including Split Dollar Policy Endorsements pertaining to
senior officers of the Corporation's subsidiary, PeoplesBank, A
Codorus Valley Company (Incorporated by reference to Exhibit
10.12 of the Registrant's 2004 Form 10-K filed with the
Commission on March 29, 2005.)
10.13 Sample form Director Group Term Replacement Plan, dated December
1, 1998, including Split Dollar Policy Endorsements pertaining to
non-employee directors of the Corporation's subsidiary,
PeoplesBank, A Codorus Valley Company (Incorporated by reference
to Exhibit 10.13 of the Registrant's 2004 Form 10-K filed with
the Commission on March 29, 2005.)
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the authorized
undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
May 10, 2005 /s/ Larry J. Miller
- ------------ ----------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
May 10, 2005 /s/ Jann A. Weaver
- ------------ ----------------------
Date Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting officer)
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