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, 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 check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 November 8, 2005, 3,156,821
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 21
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 22
Item 3. Defaults upon senior securities 22
Item 4. Submission of matters to a vote of security holders 22
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) 2005 2004
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits with banks $ 108 $ 119
Cash and due from banks 13,080 7,966
Federal funds sold 1,090 0
- -----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 14,278 8,085
Securities available-for-sale 60,638 62,587
Securities held-to-maturity (fair value $9,740 for 2005 and $9,929 for 2004) 9,102 9,103
Restricted investment in bank stock, at cost 2,346 2,450
Loans held for sale 1,732 1,589
Loans (net of deferred fees of $489 in 2005 and $481 in 2004) 336,839 298,671
Less-allowance for loan losses (2,277) (1,865)
- -----------------------------------------------------------------------------------------------------------------
Net loans 334,562 296,806
Premises and equipment, net 10,888 9,909
Other assets 15,973 17,142
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 449,519 $ 407,671
=================================================================================================================
LIABILITIES
Deposits
Noninterest bearing $ 50,028 $ 40,897
Interest bearing 319,342 288,640
- -----------------------------------------------------------------------------------------------------------------
Total deposits 369,370 329,537
Short-term borrowings 543 12,880
Long-term debt 39,099 26,613
Other liabilities 2,257 2,659
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 411,269 371,689
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; 3,156,821 shares issued and
outstanding on 9/30/05 and 2,992,590 on 12/31/04 7,892 7,481
Additional paid-in capital 22,994 20,293
Retained earnings 7,594 8,034
Accumulated other comprehensive (loss) income (230) 174
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 38,250 35,982
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 449,519 $ 407,671
=================================================================================================================
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) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 5,748 $ 4,418 $ 16,137 $ 12,788
Investment securities
Taxable 627 592 1,841 1,774
Tax-exempt 118 110 321 319
Dividends 15 9 51 27
Other 35 12 64 36
- -------------------------------------------------------------------------------------------------------
Total interest income 6,543 5,141 18,414 14,944
INTEREST EXPENSE
Deposits 1,903 1,333 5,082 3,927
Short-term borrowings 5 10 62 14
Long-term debt 478 291 1,270 901
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Total interest expense 2,386 1,634 6,414 4,842
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Net interest income 4,157 3,507 12,000 10,102
PROVISION FOR LOAN LOSSES 150 30 525 205
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Net interest income after provision for loan losses 4,007 3,477 11,475 9,897
NONINTEREST INCOME
Trust and investment services fees 276 271 856 764
Service charges on deposit accounts 424 407 1,193 1,105
Mutual fund, annuity and insurance sales 252 239 898 665
Income from bank owned life insurance 70 72 201 198
Other income 136 128 387 368
Gain on sales of mortgages 136 44 278 219
Gain (loss) on sales of securities 0 31 (86) 38
- -------------------------------------------------------------------------------------------------------
Total noninterest income 1,294 1,192 3,727 3,357
NONINTEREST EXPENSE
Personnel 2,016 1,762 5,778 5,153
Occupancy of premises, net 340 269 991 798
Furniture and equipment 307 288 938 902
Postage, stationery and supplies 119 97 364 299
Professional and legal 97 104 238 258
Marketing and advertising 161 107 427 348
Other 527 596 1,642 1,716
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Total noninterest expense 3,567 3,223 10,378 9,474
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Income before income taxes 1,734 1,446 4,824 3,780
PROVISION FOR INCOME TAXES 451 360 1,228 964
- -------------------------------------------------------------------------------------------------------
Net income $ 1,283 $ 1,086 $ 3,596 $ 2,816
=======================================================================================================
Net income per share, basic $ 0.41 $ 0.35 $ 1.14 $ 0.90
Net income per share, diluted $ 0.40 $ 0.34 $ 1.12 $ 0.88
=======================================================================================================
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) 2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,596 $ 2,816
Adjustments to reconcile net income to net cash provided by operations
Depreciation 825 737
Provision for loan losses 525 205
Provision for losses on foreclosed real estate 17 19
Amortization of investment in real estate partnership 354 173
Increase in cash surrender value of life insurance investment (201) (198)
Originations of held for sale mortgages (21,831) (20,454)
Proceeds from sales of held for sale mortgages 21,966 21,515
Gain on sales of held for sale mortgages (278) (251)
Loss (gain) on sales of securities 86 (38)
Loss on sale of loans not held for sale 0 32
Gain on sales of foreclosed real estate (148) 0
Increase in accrued interest receivable and other assets (330) (317)
Increase in accrued interest payable and other liabilities 78 407
Other, net 225 398
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,884 5,044
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (13,862) (13,733)
Maturities and calls 11,003 6,818
Sales 3,918 6,304
Securities held-to-maturity, calls 0 250
Net decrease (increase) in restricted investment in bank stock 104 (315)
Net increase in loans made to customers (38,295) (26,527)
Purchases of premises and equipment (1,810) (1,138)
Investment in real estate partnership (420) (1,107)
Investment in life insurance (7) (7)
Purchase of insurance agency assets (60) (130)
Proceeds from sales of foreclosed real estate 1,680 87
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (37,749) (29,498)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 22,835 20,101
Net increase in time deposits 16,998 521
Net (decrease) increase in short-term borrowings (12,337) 5,536
Proceeds from issuance of long-term debt 13,500 1,800
Repayment of long-term debt (1,014) (2,479)
Dividends paid (1,143) (1,083)
Issuance of common stock 225 26
Cash paid in lieu of fractional shares (6) (6)
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Net cash provided by financing activities 39,058 24,416
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Net increase in cash and cash equivalents 6,193 (38)
Cash and cash equivalents at beginning of year 8,085 12,408
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Cash and cash equivalents at end of period $ 14,278 $ 12,370
==================================================================================================================
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 (Loss) Total
- ---------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 2005
Balance, December 31, 2004 $7,481 $ 20,293 $ 8,034 $ 174 $ 35,982
Comprehensive income:
Net income 3,596 3,596
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (404) (404)
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Total comprehensive income 3,192
Cash dividends ($.363 per share, adjusted) (1,143) (1,143)
5% stock dividend - 149,593 shares at fair value 374 2,513 (2,893) (6)
Issuance of common stock -
14,638 shares under stock option plan 37 188 225
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 $7,892 $ 22,994 $ 7,594 ($ 230) $ 38,250
=========================================================================================================
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 ($.345 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
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 $7,466 $ 20,215 $ 7,215 $ 480 $ 35,376
=========================================================================================================
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 nine-month period ended September 30, 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 Nine months ended
September 30, September 30,
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(In thousands) 2005 2004 2005 2004
- -------------------------------------------------------
Basic 3,156 3,131 3,150 3,130
Diluted 3,213 3,188 3,212 3,196
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 in the following table:
-7-
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share data) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Reported net income $1,283 $1,086 $3,596 $2,816
Deduct total stock-based compensation expense determined under fair value
based method for all awards, net of related tax effects 79 101 117 121
- ------------------------------------------------------------------------------------------------------------------
Pro forma net income $1,204 $ 985 $3,479 $2,695
- ------------------------------------------------------------------------------------------------------------------
Reported basic earnings per share $ .41 $ .35 $ 1.14 $ .90
- ------------------------------------------------------------------------------------------------------------------
Reported diluted earnings per share $ .40 $ .34 $ 1.12 $ .88
- ------------------------------------------------------------------------------------------------------------------
Pro forma basic earnings per share $ .38 $ .31 $ 1.10 $ .86
- ------------------------------------------------------------------------------------------------------------------
Pro forma diluted earnings per share $ .37 $ .31 $ 1.08 $ .84
==================================================================================================================
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) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Unrealized holding (losses) gains arising
during the period $(477) $535 $(698) $(365)
Reclassification adjustment for (gains) losses included in income 0 (31) 86 (38)
- ------------------------------------------------------------------------------------------------------------------
Net unrealized (losses) gains (477) 504 (612) (403)
Tax effect 162 (171) 208 137
- ------------------------------------------------------------------------------------------------------------------
Net of tax amount $(315) $333 $(404) $(266)
==================================================================================================================
New accounting pronouncements
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) requires 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 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.
On April 14, 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for FASB's Statement No. 123(R), Share-Based
Payment. Under the new rule, Codorus Valley is required to adopt Statement No.
123(R) in the first annual period beginning after June
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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. The impact to Codorus Valley will be dependent upon the
nature and extent of options granted in the future.
In March 2005, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 107 (SAB No. 107), "Share Based Payment," providing guidance on
option valuation methods, the accounting for income tax effects of share-based
payment arrangements upon adoption of Statement of Financial Accounting Standard
No. 123(R), and the disclosures in management's discussion and analysis
subsequent to adoption. The Corporation will provide SAB No. 107 required
disclosures upon adoption of Statement No. 123(R).
NOTE 3 -- DEPOSITS
The composition of deposits on September 30, 2005 and December 31, 2004, was as
follows:
September 30, December 31,
(Dollars in thousands) 2005 2004
- ---------------------------------------------------------
Noninterest bearing demand $ 50,028 $ 40,897
NOW 48,930 43,188
Money market 94,601 88,001
Savings 20,630 19,268
Time CDs less than $100,000 120,837 111,766
Time CDs $100,000 or more 34,344 26,417
- ---------------------------------------------------------
Total deposits $ 369,370 $329,537
=========================================================
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NOTE 4 -- LONG-TERM DEBT
A summary of long-term debt at September 30, 2005 and December 31, 2004 follows:
September 30, 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 545 857
Due 2009, 3.47%, convertible quarterly after
December 2006 5,000 5,000
Due 2010, 4.32% 6,000 0
Due 2011, 4.30%, amortizing 4,819 0
Due 2012, 4.25%, amortizing 2,397 0
Due 2013, 3.46%, amortizing 3,983 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 1,662 1,728
Due 2034, floating rate based on 3 month
LIBOR plus 2.02%, callable quarterly after
December 2009 3,093 3,093
- --------------------------------------------------------------------------------
38,499 25,996
Capital lease obligation 600 617
- --------------------------------------------------------------------------------
Total long-term debt $39,099 $26,613
================================================================================
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.
Codorus Valley has two long-term obligations. The first is due 2011 and is
secured by a mortgage on the Codorus Valley Corporate Center office building at
105 Leader Heights Road, York, Pennsylvania. The second obligation is due 2034
and represents the issuance of trust preferred debt securities. Trust preferred
debt securities were issued to support planned growth and are included in Tier 1
capital for regulatory capital purposes.
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.
-10-
Quantitative measures established by regulators to ensure capital adequacy
require Codorus Valley and PeoplesBank to maintain minimum ratios, as set forth
below, to total and Tier 1 capital as a percentage of risk-weighted assets, and
of Tier 1 capital to year-to-date average assets (leverage ratio). Management
believes that Codorus Valley and PeoplesBank were well capitalized on September
30, 2005, based on FDIC capital guidelines.
MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
-----------------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------- -----------------------------------------------------------------------------
CODORUS VALLEY BANCORP, INC.
AT SEPTEMBER 30, 2005
Capital ratios:
Tier 1 risk based $40,987 11.32% > or = $14,486 > or = 4.0% n/a n/a
Total risk based 43,264 11.95 > or = 28,972 > or = 8.0 n/a n/a
Leverage 40,987 9.62 > or = 17,038 > 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 SEPTEMBER 30, 2005
Capital ratios:
Tier 1 risk based $36,521 10.25% > or = $14,250 > or = 4.0% > or = $21,374 > or = 6.0%
Total risk based 38,798 10.89 > or = 28,499 > or = 8.0 > or = 35,624 > or = 10.0
Leverage 36,521 8.69 > or = 16,801 > or = 4.0 > or = 21,001 > 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 material contingent liabilities on September 30,
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 $3,255,000 of standby letters of credit on
September 30, 2005, compared to $2,857,000 on December 31, 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
-11-
the liability as of September 30, 2005, and December 31, 2004, for guarantees
under standby letters of credit issued is not material.
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 16 and 19 of this Form 10-Q.
-12-
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 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 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 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 September 30, 2005,
approximately $50,000 will be expensed for full year 2006 and $34,000 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 SEPTEMBER 30, 2005,
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004
OVERVIEW
Net income for the three-month period ended September 30, 2005, was $1,283,000
or $.41 per share ($.40 diluted), compared to $1,086,000 or $.35 per share ($.34
diluted), for the same period of 2004. The $197,000 or 18 percent increase in
net income was the result of increases in net interest income and noninterest
income, which more than offset increases in noninterest expense and loan loss
provision. The $650,000 or 19 percent increase in net interest income was
primarily attributable to an increase in interest income from a larger volume of
business loans and loan fees. The $102,000 or 9 percent increase in noninterest
income was primarily attributable to an increase in gains from the sale of a
larger volume of mortgages. The $344,000 or 11 percent increase in noninterest
expense resulted primarily from increases in personnel and occupancy expenses
from franchise expansion described in the Income Statement Analysis, Overview
section of this report and normal business growth. The $120,000 or 400 percent
increase in the current quarter loan loss provision reflected management's
assessment of overall credit quality, loan growth, local employment and
macro-economic factors such as rising energy costs and interest rates.
NET INTEREST INCOME
Net interest income for the three-month period ended September 30, 2005, was
$4,157,000, an increase of $650,000 or 19 percent above the same period in 2004.
The increase reflected an increase in average earning assets, principally
business loans and to a lesser degree, consumer installment loans. Earning
assets averaged $405 million and yielded 6.48 percent (tax equivalent) for the
third quarter of 2005, compared to $358 million and 5.77 percent, respectively,
for the third quarter of 2004. The average
-13-
balance of investment securities for both quarters was approximately $73
million; however the yield for the current quarter averaged 4.48 percent (tax
equivalent) or 29 basis points above 2004. Interest bearing liabilities averaged
$354 million at an average rate of 2.67 percent for 2005, compared to $318
million and 2.04 percent, respectively, for the third quarter of 2004. The $36
million or 11 percent increase in the average balance of interest bearing
liabilities occurred somewhat evenly between core deposits (NOW, savings and
money market accounts), certificates of deposit (principally variable rate CDs)
and borrowings (principally long-term debt).
PROVISION FOR LOAN LOSSES
A $150,000 provision expense for loan losses was recorded for the three-month
period ended September 30, 2005, compared to $30,000 for the same period in
2004. The current period provision was based on management's assessment of
overall credit quality, loan growth, local employment and macro-economic factors
such as rising energy costs and interest rates.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $1,294,000, an
increase of $102,000 or 9 percent above the third quarter of 2004. The increase
was primarily attributable to a $92,000 increase in gains from the sale of a
larger volume of mortgages. Additionally, the prior period contained a $31,000
gain from the infrequent sale of securities.
NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $3,567,000, an
increase of $344,000 or 11 percent above the same period in 2004. The increase
was primarily attributable to increases in personnel, occupancy, equipment,
supplies and marketing expenses, which resulted from expansion of the banking
franchise described in the Income Statement Analysis, Overview section of this
report. Current period personnel expense was also impacted by a 20 percent
increase in premiums for employee health insurance, effective September 1, 2005.
INCOME TAXES
The provision for federal income tax was $451,000 for the current three-month
period, compared to $360,000 for the same period in 2004. The $91,000 or 25
percent increase in tax provision was the result of a 20 percent increase in
pretax income.
NINE MONTHS ENDED SEPTEMBER 30, 2005,
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the nine-month period ended September 30, 2005, was $3,596,000 or
$1.14 per share ($1.12 diluted), compared to $2,816,000 or $.90 per share ($.88
diluted), for the same period of 2004. The $780,000 or 28 percent increase in
net income was the result of increases in net interest income and noninterest
income, which more than offset increases in noninterest expense and loan loss
provision. The $1,898,000 or 19 percent increase in net interest income was
attributable to an increase in interest
-14-
income and fees from a larger volume of business and consumer loans. The net
interest margin was 4.16 percent for the current period, compared to 3.92
percent for the first nine months of 2004. The $370,000 or 11 percent increase
in noninterest income was attributable to increases in commissions and fees,
which resulted from increased sales and business growth. The $904,000 or 10
percent increase in noninterest expense was attributable to increases in
personnel and occupancy expenses associated with corporate expansion, as
described below, and normal business growth. The loan loss provision was
$525,000 for the current nine-month period, an increase of $320,000 or 156
percent above the same period of 2004 based on management's assessment of
overall credit quality, loan growth, local employment and uncontrollable
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 was opened on February 23 and is located at 1477
Carlisle Road in West Manchester Township, PA. The second was opened on March 21
and 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 September 30, 2005, PeoplesBank operates fourteen
financial centers located strategically throughout York County, Pennsylvania.
The return on average assets (ROA) for the first nine months (annualized) of
2005 was 1.12 percent, compared to 0.98 percent for the same period of 2004. The
return on average equity (ROE) for the first nine months (annualized) of 2005
was 12.85 percent, compared to 10.87 percent for the same period of 2004. The
efficiency ratio (noninterest expense as a percentage of net operating revenue)
for the current period was 64.5 percent, compared to 69.2 percent for the first
nine months of 2004.
Total assets of the Corporation on September 30, 2005, were approximately $450
million, an increase of $42 million or 10 percent above December 31, 2004. Asset
growth occurred primarily in business loans, which were funded by growth in core
deposits, CDs and long-term debt. 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, 2005.
Management also believes that the Corporation and PeoplesBank were well
capitalized on September 30, 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
Since early 2004, short-term interest rates in the United States (US) have
trended upward in response to monetary policy by the Federal Open Market
Committee of the Federal Reserve (Fed), which was influenced by economic growth,
price increases and other factors. During the first nine months of 2005, the Fed
raised its target federal funds rate 25 basis points on six occasions, which
moved the rate from 2.25 percent to 3.75 percent. The prime rate, established by
commercial banks, moved in lock-step and increased from 5.25 percent to 6.75
percent. Conversely, long-term interest rates (10-year UST bond), which are
influenced largely by the markets' perception of inflation, have moved little
during this period resulting in a flattening of the US yield curve. Based on
commentary from the Fed, the recent damage inflicted on the Gulf States by
several hurricanes is viewed as a short-term economic setback. Accordingly, the
markets are poised for further interest rate increases by the Fed through
year-end 2005. Ben Bernanke was recently confirmed successor to Federal Reserve
Chairman Alan Greenspan. Mr. Bernanke, who shares a similar economic philosophy
with Greenspan according to news reports, will officially take the office of
Chairman on February 1, 2006.
-15-
Net interest income for the nine-month period ended September 30, 2005, was
$12,000,000, an increase of $1,898,000 or 19 percent above the same period in
2004. Earning assets averaged $391 million and yielded 6.35 percent (tax
equivalent) for 2005, compared to $350 million and 5.77 percent, respectively,
for 2004. The $41 million or 12 percent increase in average earning assets
occurred primarily in business loans and secondarily in consumer installment
loans. The average balance of investment securities for both periods was
approximately $73 million; however, the yield for the current period averaged
4.36 percent (tax equivalent) or 18 basis points above 2004. Interest bearing
liabilities averaged $344 million at an average rate of 2.49 percent for 2005,
compared to $311 million and 2.08 percent, respectively, for 2004. The $33
million or 11 percent increase in the average balance of interest bearing
liabilities occurred primarily in core (non-CD) deposits and borrowings, and
secondarily in CDs. The addition of three financial centers since October 2004
positively impacted the growth in core deposits. The increase in long-term debt
supplemented deposit growth as an important source of funding for loan growth.
Net interest margin, ie., net interest income (tax equivalent) as a percentage
of average earning assets, was 4.16 percent for the nine-month period ended
September 30, 2005, compared to 3.92 percent for the same period in 2004. In the
period ahead, management expects that growth in net interest income will be
constrained as a result of higher funding costs and a relatively flat US yield
curve environment. Funding costs are expected to increase in response to changes
in deposit mix, rising short-term interest rates and competition.
PROVISION FOR LOAN LOSSES
A $525,000 provision expense for loan losses was recorded for the nine-month
period ended September 30, 2005, compared to $205,000 for the same period in
2004. The current period provision was based on management's assessment of
overall credit quality, loan growth, local employment 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 nine-month period was $3,727,000, an
increase of $370,000 or 11 percent above the same period in 2004. The increase
was primarily attributable to a $233,000 or 35 percent increase in commission
income from the sale of mutual fund, annuity and insurance products, which
resulted from increased sales. Increases in trust fees, service charges on
deposit accounts, and gains from the sale of mortgages from normal business
growth also contributed. Losses from the sale of securities available-for-sale
during the current period resulted from a bond "swap." The swap entailed selling
low yielding investments at a loss and replacing them with higher yielding
instruments, which was designed to increase portfolio yield and interest income
in future periods.
NONINTEREST EXPENSE
Total noninterest expense for the current nine-month period was $10,378,000, an
increase of $904,000 or 10 percent above the same period in 2004. The increase
was primarily attributable to increases in personnel, occupancy, supplies and
marketing expenses, which resulted from expansion of the banking franchise
previously described in the Overview section. In the period ahead, it is
probable that noninterest expense will increase as a result of franchise
expansion, financial center renovations, and the increase in premiums for
employee health insurance. Marketing expense is also expected to increase as
management implements a brand image campaign, to distinguish PeoplesBank from
its competition, in November 2005 through early 2006.
-16-
INCOME TAXES
The provision for federal income tax was $1,228,000 for the current nine-month
period, compared to $964,000 for the same period in 2004. The $264,000 or 27
percent increase in tax provision was the result of a 28 percent 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 $248,000, compared to $155,000 for
the first nine months of 2004.
BALANCE SHEET REVIEW
LOANS
On September 30, 2005, loans were approximately $337 million, an increase of $38
million or 13 percent above year-end 2004. The increase was primarily
attributable to growth in the business loan portfolio and to a lesser degree
consumer installment loans.
DEPOSITS
On September 30, 2005, total deposits were approximately $369 million, an
increase of $40 million or 12 percent above year-end 2004. The increase was
attributable, in part, to the addition of three financial centers and normal
business growth. Two financial centers were opened in the first quarter of 2005
and one was opened in the fourth quarter of 2004. The increase in deposits
occurred primarily within the demand (non-interest bearing and NOW), money
market and CD categories. Most of the growth in the CD category was attributable
to variable rate CDs, which re-price weekly based on the rate of the one year US
Treasury bond. In a rising interest rate environment the cost of variable rate
CDs increases. A comparative table of deposits, by deposit type, is provided in
Note 3 of this report.
LONG-TERM DEBT
On September 30, 2005, total long-term debt was $39 million, an increase of $12
million or 47 percent above year-end 2004. The increase in debt supplemented
deposit growth and provided necessary funding for current and planned loan
growth. A comparative table of long-term debt is provided in Note 4 of this
report. On October 3, 2005, PeoplesBank borrowed $7 million from the Federal
Home Loan Bank of Pittsburgh to help fund short-term business loans. This
borrowing has a fixed interest rate of 4.68 percent and matures, in full, in two
years.
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 $38,250,000 on September 30, 2005, an increase of $2,268,000 or 6
percent above December 31, 2004. The increase was caused primarily by an
increase in retained earnings from profitable operations.
On October 11, 2005, the Board of Directors declared a quarterly cash dividend
of $.13 per common share, payable on or before November 8, 2005, to shareholders
of record October 25, 2005. This follows a $.125 per share cash dividend paid in
July and a $.119 per common share cash dividend paid in May and February, as
adjusted for the 5 percent common stock dividend distributed in June of this
year. The stock dividend resulted in the issuance of 149,593 common shares. Cash
dividends for 2005 will total $.493, compared to $.464 for 2004, a 2.9 cents or
6 percent increase, as adjusted.
-17-
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
September 30, 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 September 30, 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 September 30, 2005, compared to December 31, 2004.
TABLE 1-NONPERFORMING ASSETS
September 30, December 31,
(dollars in thousands) 2005 2004
- ------------------------------------------------------------------------------
Nonaccrual loans $1,206 $ 622
Accruing loans that are contractually past due
90 days or more as to principal or interest 2,599 19
Foreclosed real estate, net of allowance 12 1,535
- ------------------------------------------------------------------------------
Total nonperforming assets $3,817 $2,176
==============================================================================
Ratios:
Nonaccrual loans as a % of total period-end loans 0.36% 0.21%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 1.13% 0.72%
Nonperforming assets as a % of total period-end
stockholders' equity 9.98% 6.05%
Allowance for loan losses as a multiple of
nonaccrual loans 1.8x 3.0x
For the current period, nonaccrual loans consisted of business, consumer and
mortgage loans for which interest income was recognized on a cash basis. On
September 30, 2005, the nonaccrual loan portfolio was $1,206,000, compared to
$622,000 on December 31, 2004. The increase was attributable to the
reclassification of an $865,000 business account to nonaccrual in September
2005. In management's judgment the net realizable value of the collateral, which
the borrower is attempting to liquidate, is adequate. On September 30, 2005, the
portfolio was comprised of 11 unrelated accounts ranging in size from $14,000 to
$865,000. Collection efforts including modification of contractual terms for
individual
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accounts, based on prevailing market conditions, and liquidation of collateral
assets are being employed to maximize recovery.
Loans that are contractually past due 90 days or more as to principal or
interest were $2,599,000 on September 30, 2005, compared to $19,000 on December
31, 2004. The current period included a $2,400,000 business loan that matured in
June 2005, which was in the process of being refinanced with PeoplesBank. The
refinance process with this borrower, who is in good standing with PeoplesBank,
took longer than ninety days to complete. In October 2005, the refinance of this
loan was completed and it was removed from the 90-days past due category.
Generally, loans in the past due category are adequately collateralized and in
the process of collection.
Foreclosed real estate, net of allowance, was $12,000 on September 30, 2005,
compared to $1,535,000 on December 31, 2004. The decrease was attributable to
the sale, in February 2005, of real estate from one account that had a carrying
value of approximately $1,527,000. Sale proceeds exceeded the carrying value of
the real estate by $151,000 resulting in a gain on the sale. Approximately
$29,000 of the total gain was recognized in February 2005 at the time of
settlement. The remaining $122,000 gain was recognized as income in July 2005.
The delay in income recognition on this transaction was due to litigation over a
mechanic's lien, which was resolved in the Corporation's favor in July. Efforts
to liquidate the remaining 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
$2,277,000 or .68 percent of total loans on September 30, 2005, compared to
$1,719,000 or .60 percent of total loans, respectively, on September 30, 2004.
The $558,000 or 32 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, local employment 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 September 30, 2005.
-19-
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 525 205
Loans charged off:
Commercial 34 215
Real estate-mortgage 99 30
Consumer 59 111
- ------------------------------------------------------------------------------
Total loans charged off 192 356
Recoveries:
Commercial 57 166
Real estate-mortgage 1 1
Consumer 21 9
- ------------------------------------------------------------------------------
Total recoveries 79 176
- ------------------------------------------------------------------------------
Net charge-offs 113 180
- ------------------------------------------------------------------------------
Balance-September 30, $2,277 $1,719
==============================================================================
Ratios:
Net charge-offs (annualized) to average total loans 0.05% 0.09%
Allowance for loan losses to total loans at
period-end 0.68% 0.60%
Allowance for loan losses to nonaccrual loans and
loans past due 90 days or more 59.8% 207.9%
LIQUIDITY
Codorus Valley's loan-to-deposit ratio, which is used as a broad measure of
liquidity, was approximately 91 percent on September 30, 2005, and December 31,
2004. Liquidity for both periods was adequate based on availability from many
sources, including the potential liquidation of a $61 million portfolio of
available-for-sale securities, valued at September 30, 2005. Another important
source of liquidity for PeoplesBank is available credit from the Federal Home
Loan Bank of Pittsburgh (FHLBP). On June 30, 2005, the latest available date,
available funding from the FHLBP was approximately $94 million. The recent
addition of three financial centers and planned deposit promotions 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 September
30, 2005, totaled $119,918,000 and consisted of $63,694,000 in unfunded
commitments of existing loans, $52,969,000 to grant new loans and $3,255,000 in
letters of credit. Due to fixed maturity dates and specified conditions within
these instruments, many will expire without being drawn upon. Management
believes that amounts actually drawn upon can be funded in the normal course of
operations and therefore do not present a significant liquidity risk to Codorus
Valley.
-20-
Contractual Obligations
Codorus Valley has various long-term contractual obligations outstanding at
September 30, 2005, including long-term debt, time deposits and obligations
under capital and operating leases, which were reported in Table 11 of the Form
10-K for the year ended 2004. Over the past nine months, PeoplesBank has
increased its contractual obligations to support balance sheet growth and
physical expansion. A comparative schedule of deposits, which includes time
deposits, is provided in Note 3 of this Form 10-Q report. A comparative schedule
of long-term debt is provided in Note 4.
MARKET RISK MANAGEMENT
In the normal course of conducting business, Codorus Valley is exposed to market
risk, principally interest rate risk, through the operations of its banking
subsidiary. Interest rate risk arises from market driven fluctuations in
interest rates, which may affect cash flows, income, expense and values of
financial instruments. An asset-liability management committee comprised of
members of management manages interest rate risk.
Codorus Valley performed a simulation on its balance sheet at September 30, 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 closely matched in terms of its repriceable interest sensitive
assets and liabilities on September 30, 2005. Growth in interest sensitive
liabilities, principally variable rate CDs and money market funds, during 2005
resulted in a slightly liability sensitive balance sheet on September 30, 2005.
This suggests that earnings may increase if market interest rates decrease, or
conversely, earnings may decrease if market interest rates increase. A detailed
discussion of market interest rate 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
Change in interest rates
(basis points) Forecasted interest Change in net income
ramped over 12 mos rate scenario $000's %
- ------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2005
+75 Most likely (28) (0.6)
+200 High (56) (1.2)
0 Flat (baseline) 0 0.0
-200 Low (31) (0.7)
AT DECEMBER 31, 2004
+125 Most likely 141 3.4
+200 High 161 3.9
0 Flat (baseline) 0 0.0
-200 Low (145) (3.5)
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.
-21-
Periodically, federal and state legislation is proposed that could result in
additional regulation of, or restrictions on, the business of Codorus Valley and
its subsidiaries. Other than as discussed in the Corporation's Form 10-K for the
year ended December 31, 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 21 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 September 30, 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
September 30, 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 sales or repurchases of equity securities during the
quarter ended September 30, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
-22-
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 October
14, 2005.)
3(ii) By-laws (Incorporated by reference to Exhibit 3(ii) to Current
Report on Form 8-K, filed with the Commission on October 14, 2005.)
4 Rights Agreement dated as of November 4, 2005 (Incorporated by
reference to Exhibit 4 to Current Report on Form 8-K, filed with the
Commission on November 8, 2005.)
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.)
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.)
-23-
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
-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 8 , 2005 /s/ Larry J. Miller
- ----------------- ---------------------------------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
November 8, 2005 /s/ Jann A. Weaver
- ---------------- ---------------------------------------------
Date Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting officer)
-25-