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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, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ______________
COMMISSION FILE NUMBER: 0-15536
CODORUS VALLEY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
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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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 April 24, 2007, 3,678,065
shares of common stock, par value $2.50, were outstanding, which includes the
effect of the 5 percent stock dividend declared April 10, 2007.
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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 balance sheets 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 21
PART II - OTHER INFORMATION
Item 1. Legal proceedings 21
Item 1A. Risk factors 21
Item 2. Unregistered sales of equity securities
and use of proceeds 21
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 22
SIGNATURES 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
March 31, December 31,
(dollars in thousands, except per share data) 2007 2006
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ASSETS
Interest bearing deposits with banks $ 111 $ 118
Cash and due from banks 14,178 11,104
Federal funds sold 24,304 24,150
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Total cash and cash equivalents 38,593 35,372
Securities available-for-sale 78,565 73,423
Securities held-to-maturity (fair value $ 5,211 for 2007 and $7,840 for 2006) 4,965 7,503
Loans held for sale 160 1,687
Loans (net of deferred fees of $498 in 2007 and $534 in 2006) 426,356 405,573
Less-allowance for loan losses (3,046) (3,126)
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Net loans 423,310 402,447
Premises and equipment, net 10,347 10,495
Other assets 16,762 17,285
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Total assets $ 572,702 $ 548,212
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LIABILITIES
Deposits
Noninterest bearing $ 48,306 $ 49,190
Interest bearing 432,990 407,455
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Total deposits 481,296 456,645
Long-term debt 32,733 35,029
Junior Subordinated debentures 10,310 10,310
Other liabilities 4,080 3,442
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Total liabilities 528,419 505,426
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; 3,678,065 shares issued and
outstanding on 3/31/07 and 3,502,919 on 12/31/06 9,195 8,757
Additional paid-in capital 31,789 28,839
Retained earnings 3,350 5,434
Accumulated other comprehensive loss (51) (244)
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Total shareholders' equity 44,283 42,786
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Total liabilities and shareholders' equity $ 572,702 $ 548,212
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See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Three months ended
March 31,
(dollars in thousands, except per share data) 2007 2006
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INTEREST INCOME
Loans, including fees $ 7,907 $ 7,005
Investment securities
Taxable 701 599
Tax-exempt 287 138
Dividends 55 29
Federal funds sold 254 15
Other 2 2
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Total interest income 9,206 7,788
INTEREST EXPENSE
Deposits 3,991 2,494
Federal funds purchased and other short-term borrowings 0 112
Long-term debt 590 486
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Total interest expense 4,581 3,092
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Net interest income 4,625 4,696
PROVISION FOR (RECOVERY OF) LOAN LOSSES (919) 210
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Net interest income after provision for loan losses 5,544 4,486
NONINTEREST INCOME
Trust and investment services fees 324 325
Service charges on deposit accounts 454 434
Mutual fund, annuity and insurance sales 278 254
Income from bank owned life insurance 66 63
Other income 105 119
Gain on sales of mortgages 94 88
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Total noninterest income 1,321 1,283
NONINTEREST EXPENSE
Personnel 2,536 2,139
Occupancy of premises, net 353 384
Furniture and equipment 340 407
Postage, stationery and supplies 109 121
Professional and legal 62 31
Marketing and advertising 71 108
Other 985 731
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Total noninterest expense 4,456 3,921
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Income before income taxes 2,409 1,848
PROVISION FOR INCOME TAXES 640 487
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Net income $ 1,769 $ 1,361
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Net income per share, basic $0.48 $0.37
Net income per share, diluted $0.47 $0.36
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See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Three months ended
March 31,
(dollars in thousands) 2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,769 $ 1,361
Adjustments to reconcile net income to net cash provided by operations
Depreciation 284 296
Provision for loan losses (919) 210
Amortization of investment in real estate partnership 126 121
Increase in cash surrender value of life insurance investment (66) (63)
Originations of held for sale mortgages (5,154) (5,601)
Proceeds from sales of held for sale mortgages 6,775 6,606
Gain on sales of held for sale mortgages (94) (88)
Loss on sales of foreclosed real estate 2 0
Stock-based compensation expense 8 12
Decrease (increase) in accrued interest receivable and other assets 316 (210)
Increase in accrued interest payable and other liabilities 638 539
Other, net 9 114
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Net cash provided by operating activities 3,694 3,297
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (6,489) (3,253)
Maturities and calls 1,613 2,893
Securities, held-to-maturity, calls 2,604 0
Net increase in loans made to customers (19,983) (5,258)
Purchases of premises and equipment (136) (388)
Proceeds from sales of foreclosed real estate 36 0
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Net cash used in investing activities (22,355) (6,006)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 12,271 16,596
Net increase in time deposits 12,380 5,688
Net decrease in short-term borrowings 0 (9,781)
Repayment of long-term debt (2,296) (392)
Dividends paid (473) (410)
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Net cash provided by financing activities 21,882 11,701
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Net increase in cash and cash equivalents 3,221 8,992
Cash and cash equivalents at beginning of year 35,372 12,085
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Cash and cash equivalents at end of period $ 38,593 $ 21,077
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See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
(dollars in thousands, except share data) Stock Capital Earnings Loss Total
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For the three months ended March 31, 2007
Balance, December 31, 2006 $8,757 $28,839 $5,434 ($244) $42,786
Comprehensive incom:
Net income 1,769 1,769
Other comprehensive income, net of tax:
Unrealized gains on securities, net 193 193
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Total comprehensive income 1,962
Cash dividends ($.129 per share, adjusted) (473) (473)
5% stock dividend - 175,146 shares at fair value 438 2,942 (3,380) 0
Stock-based compensation 8 8
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Balance, March 31, 2007 $9,195 $31,789 $3,350 ($51) $44,283
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For the three months ended March 31, 2006
Balance, December 31, 2005 $7,902 $23,035 $8,204 ($412) $38,729
Comprehensive income:
Net income 1,361 1,361
Other comprehensive loss, net of tax:
Unrealized losses on securities, net (135) (135)
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Total comprehensive income 1,226
Cash dividends ($.112 per share, adjusted) (410) (410)
5% stock dividend - 158,041 shares at fair value 395 2,673 (3,068) 0
Stock-based compensation 12 12
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Balance, March 31, 2006 $8,297 $25,720 $6,087 ($547) $39,557
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See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The interim financial statements 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 Corporation's Annual Report on Form 10-K
for the year ended December 31, 2006.
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 the
Corporation). PeoplesBank has two wholly owned subsidiaries, Codorus Valley
Financial Advisors, 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, 2007 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 a 5 percent stock dividend declared April 10, 2007. The weighted
average number of shares of common stock outstanding used for basic and diluted
calculations are provided below.
Three months ended
(dollars in thousands, except per share data) March 31,
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2007 2006
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Net income $1,769 $1,361
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Weighted average shares outstanding (basic) 3,678 3,659
Effect of dilutive stock options 90 83
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Weighted average shares outstanding (diluted) 3,768 3,742
Basic earnings per share $ .48 $ .37
Diluted earnings per share $ .47 $ .36
Comprehensive income
Accounting principles generally accepted in the United States of America 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
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of other comprehensive income (loss) and related tax effects are presented in
the following table:
Three months ended
March 31,
(Dollars in thousands) 2007 2006
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Unrealized holding gains (losses) arising during
the period $ 292 $(205)
Reclassification adjustment for (gains) losses
included in income 0 0
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Net unrealized gains (losses) 292 (205)
Tax effect (99) 70
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Net of tax amount $ 193 $(135)
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Reclassification
Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 presentation.
Income Taxes
The Corporation adopted FASB Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" in the first quarter of 2007 and, after evaluation, has deemed
it immaterial to the consolidated financial statements.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities-Including
an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS
No. 159 is effective for Codorus Valley on January 1, 2008. The Corporation is
evaluating the impact that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
In September 2006, the Financial Accounting Standards Board issued FASB
Statement No. 157, "Fair Value Measurements," which defines fair value,
establishes a framework for measuring fair value under Generally Accepted
Accounting Principles, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. The Corporation is currently
evaluating the potential impact, if any, of the adoption of FASB Statement No.
157 on our consolidated financial position, results of operations and cash
flows.
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF 06-4").
EITF 06-4 requires the recognition of a liability related to the postretirement
benefits covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder) has a
liability for the benefit it
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is providing to its employee. As such, if the policyholder has agreed to
maintain the insurance policy in force for the employee's benefit during his or
her retirement, then the liability recognized during the employee's active
service period should be based on the future cost of insurance to be incurred
during the employee's retirement. Alternatively, if the policy holder has agreed
to provide the employee with a death benefit, then the liability for the future
death benefit should be recognized by following the guidance in SFAS No. 106 or
Accounting Principles Board (APB) Opinion No. 12, as appropriate. For
transition, an entity can choose to apply the guidance using either of the
following approaches: (a) a change in accounting principle through retrospective
application to all periods presented or (b) a change in accounting principle
through a cumulative-effect adjustment to the balance in retained earnings at
the beginning of the year of adoption. The disclosures are required in fiscal
years beginning after December 15, 2007, with early adoption permitted. The
Corporation is evaluating the impact that the adoption of EITF Issue No. 06-4
will have on its consolidated financial statements.
NOTE 3 -- DEPOSITS
The composition of deposits on March 31, 2007 and December 31, 2006, was as
follows:
March 31, December 31,
(Dollars in thousands) 2007 2006
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Noninterest bearing demand $ 48,306 $ 49,190
NOW 43,771 43,864
Money market 156,196 144,292
Savings 18,877 17,533
Time CDs less than $100,000 153,192 145,849
Time CDs $100,000 or more 60,954 55,917
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Total deposits $481,296 $456,645
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NOTE 4 -- LONG-TERM DEBT
A summary of long-term debt at March 31, 2007 and December 31, 2006 follows:
March 31, December 31,
(Dollars in thousands) 2007 2006
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Obligations of PeoplesBank to FHLBP
Due 2007, 4.68% $ 7,000 $ 7,000
Due 2009, 3.47%, convertible quarterly after
December 2006 5,000 5,000
Due 2010, 4.32% 6,000 6,000
Due 2011, 4.30%, amortizing 4,439 4,504
Due 2012, 4.25%, amortizing 1,915 1,998
Due 2013, 3.46%, amortizing 3,284 3,403
Due 2014, 6.43%, convertible quarterly after
July 2009 3,000 5,000
Obligations of Codorus Valley Bancorp, Inc.
Due 2011, floating rate based on 1 month
LIBOR plus 1.50%, amortizing 1,541 1,562
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32,179 34,467
Capital lease obligation 554 562
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Total long-term debt $32,733 $35,029
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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.
Codorus Valley's obligation 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 year-to-date average assets (leverage ratio). Management
believes that Codorus Valley and PeoplesBank were well capitalized on March 31,
2007, based on FDIC capital guidelines.
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MINIMUM FOR WELL CAPITALIZED
ACTUAL CAPITAL ADEQUACY MINIMUM*
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(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
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CODORUS VALLEY BANCORP, INC. (CONSOLIDATED)
AT MARCH 31, 2007
Capital ratios:
Tier 1 risk based $53,901 11.86% $18,179 4.0% n/a n/a
Total risk based 56,947 12.53 36,358 8.0 n/a n/a
Leverage 53,901 9.73 22,160 4.0 n/a n/a
AT DECEMBER 31, 2006
Capital ratios:
Tier 1 risk based $52,587 11.99% $17,538 4.0% n/a n/a
Total risk based 55,713 12.71 35,076 8.0 n/a n/a
Leverage 52,587 9.83 21,401 4.0 n/a n/a
PEOPLESBANK, A CODORUS VALLEY COMPANY
AT MARCH 31, 2007
Capital ratios:
Tier 1 risk based $49,602 11.03% $17,985 4.0% $26,978 6.0%
Total risk based 52,648 11.71 35,970 8.0 44,963 10.0
Leverage 49,602 9.03 21,960 4.0 27,450 5.0
AT DECEMBER 31, 2006
Capital ratios:
Tier 1 risk based $48,130 11.12% $17,316 4.0% $25,973 6.0%
Total risk based 51,256 11.84 34,631 8.0 43,289 10.0
Leverage 48,130 9.09 21,168 4.0 26,460 5.0
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* To be well capitalized under prompt corrective action provisions.
NOTE 6 -- STOCK-BASED COMPENSATION
During the quarter ended March 31, 2007, there were no stock options granted or
exercised. A summary of stock options from all plans, adjusted for stock
dividends declared, is shown below.
WEIGHTED AVERAGE WEIGHTED AVERAGE AGGREGATE
EXERCISE PRICE REMAINING INTRINSIC VALUE
OPTIONS PER SHARE CONTRACTUAL TERM (IN THOUSANDS)
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Outstanding at March 31, 2007 284,200 $12.70 3.7 years $1,540
Exerciseable at March 31, 2007 263,995 $12.45 3.4 years $1,499
As of March 31, 2007, total unrecognized compensation cost related to nonvested
options was $68,000. The cost is expected to be recognized over a weighted
average period of 1.5 years.
NOTE 7 -- CONTINGENT LIABILITIES
Management is not aware of any material contingent liabilities on March 31,
2007.
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NOTE 8 -- 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 $3,858,000 of standby letters of credit
outstanding on March 31, 2007, compared to $6,121,000 on December 31, 2006.
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 letters of
credit. The current amount of the liability as of March 31, 2007 and December
31, 2006, 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 the 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 are incorporated 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.
-12-
CRITICAL ACCOUNTING ESTIMATES:
Disclosure of Codorus Valley's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2006 Annual Report on
Form 10-K for the period ended December 31, 2006. Some of these policies require
management to make significant judgments, estimates and assumptions that have a
material impact on the carrying value of certain assets and liabilities.
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, and 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. Additional information is contained in Management's
Discussion and Analysis regarding critical accounting estimates, including the
provision and allowance for loan losses, located on pages 14 and 18 of this Form
10-Q.
The Corporation changed its method of accounting for stock-based compensation in
2006, in accordance with Financial Accounting Standard No. 123(R). Based on
stock options outstanding on March 31, 2007, approximately $68,000 will be
expensed over the weighted average period of 1.5 years.
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, 2007,
COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
---------------------------------------------
FINANCIAL HIGHLIGHTS
The Corporation earned $1,769,000 or $.48 per share ($.47 diluted) for the
three-month period ended March 31, 2007, compared to $1,361,000 or $.37 per
share ($.36 diluted), for the same period of 2006. The $408,000 or 30 percent
increase in net income was primarily the result of an $839,000 pre-tax ($554,000
after-tax) recovery of loan losses that were incurred by PeoplesBank during
2002-2003. Due to the adequacy of the allowance for loan losses on March 31,
2007, the full amount of the recovery was credited to the loan loss provision.
The effect on net income from the reduction in the loan loss provision more than
offset an increase in noninterest expense and a decrease in net interest income.
Noninterest expense increased $535,000 or 14 percent for the first quarter of
2007 due primarily to increased personnel costs, caused by the timing of
performance incentives and staff additions associated with normal business
growth, and other expense. Other expense included the recognition of an $185,000
($122,000 after-tax) prepayment penalty on the early pay-down of a $2 million
Federal Home Loan Bank advance. The Corporation paid down the advance, which had
an above market interest rate, to reduce interest expense in future periods. The
$71,000 or 2 percent decrease in net interest income was due largely to
increased deposit costs, which were adversely affected by the inverted US
treasury yield curve environment, customer preference for higher rate deposit
products, and competitive pricing pressures. Total assets were approximately
$573 million on March 31, 2007, an increase of $83 million or 17 percent above
March 31, 2006. Asset growth occurred primarily in business loans and investment
securities, which were funded by strong deposit growth, primarily money market
deposits and variable rate CDs.
-13-
Net income as a percentage of average shareholders' equity (ROE) was 16.13
percent for the first three months (annualized) of 2007, compared to 13.79
percent for the same period of 2006. Net income as a percentage of average total
assets (ROA) was 1.28 percent for the first three months (annualized) of 2007,
compared to 1.13 percent for the same period of 2006. The efficiency ratio was
72.3 percent for the first quarter of 2007, compared to 64.3 percent for the
same quarter of 2006.
On March 31, 2007, nonperforming assets as a percentage of total loans and net
foreclosed real estate were 0.99 percent, compared to 1.03 percent for March 31,
2006. Information regarding nonperforming assets is provided in the Risk
Management section of this report, including Table 3 -- Nonperforming Assets.
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 loan portfolio on March 31, 2007. An analysis of the allowance
is provided in Table 4 -- Analysis of Allowance for Loan Losses.
Throughout the current period Codorus Valley maintained a capital level well
above minimum regulatory quantitative requirements. Currently, there are three
federal regulatory definitions of capital that take the form of minimum ratios.
Note 5 -- Regulatory Matters, shows that the Corporation and PeoplesBank were
well capitalized on March 31, 2007.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income for the three-month period ended March 31, 2007, was
$4,625,000, a decrease of $71,000 or 2 percent below the same period in 2006.
While the average balance of earning assets and deposits showed strong growth of
16 percent and 17 percent, respectively, net interest margin declined from 4.35
percent to 3.76 percent. The decrease in net interest income and net interest
margin was primarily the result of an increase in interest expense from a larger
volume of interest bearing deposits and higher interest rates, due in part to
the lingering presence of the flat (or slightly inverted) US treasury yield
curve environment and competitive pricing pressures. Deposit customers showed a
preference for higher rate deposit products such as money market deposits and
certificates of deposit, principally variable rate CDs. Interest bearing
liabilities averaged $463 million at an average rate of 4.01 percent for the
first quarter of 2007, compared to $395 million and 3.18 percent, respectively,
for the first quarter of 2006.
Earning assets averaged $516 million and yielded 7.36 percent (tax equivalent
basis) for the first quarter of 2007, compared to $446 million and 7.24 percent,
respectively, for the first quarter of 2006. The $69 million or 16 percent
increase in average earning assets occurred primarily in business loans and
investment securities. In the period ahead, management expects that growth in
net interest income will remain constrained by the flat or inverted US treasury
yield curve environment and competitive pricing pressures.
PROVISION FOR LOAN LOSSES
As a result of a large loan loss recovery during the current period and adequacy
of the allowance on March 31, 2007, Codorus Valley recorded a $919,000 credit to
the provision for loan losses, compared to a $210,000 provision expense for the
same period in 2006. In February 2007, PeoplesBank recovered approximately
$839,000, representing its portion of a $12 million restitution fund created in
settlement
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of a claim by the United States Department of Justice against the Bank of New
York. The funds partially reimbursed PeoplesBank for loan losses that were
incurred in 2002 and 2003 that pertained to a group of related equipment leasing
contracts that PeoplesBank acquired from a third-party broker who designated
Bank of New York as escrow agent for payments under these contracts.
NONINTEREST INCOME
The following table presents the components of total noninterest income for the
first quarter of 2007, compared to the first quarter of 2006. The $38,000 or 3
percent increase was primarily attributable to increases in commissions from
mutual fund, annuity and insurance sales, and service charges on deposit
accounts, which resulted from increased sales and business growth.
TABLE 1 - NONINTEREST INCOME
Three months ended Change
March 31 Increase (Decrease)
(dollars in thousands) 2007 2006 $ %
-------------------------------------------------------------------------------------------
Trust and investment services fees $ 324 $ 325 $ (1) (0)%
Service charges on deposit accounts 454 434 20 5
Mutual fund, annuity and insurance sales 278 254 24 9
Income from bank owned life insurance 66 63 3 5
Other income 105 119 (14) (12)
Gain on sales of mortgages 94 88 6 7
-------------------------------------------------------------------------------------------
Total noninterest income $1,321 $ 1,283 $ 38 3%
===========================================================================================
NONINTEREST EXPENSE
The following table presents the components of total noninterest expense for the
first quarter of 2007, compared to the first quarter of 2006.
TABLE 2 - NONINTEREST EXPENSE
Three months ended Change
March 31 Increase (Decrease)
(dollars in thousands) 2007 2006 $ %
------------------------------------------------------------------------------------
Personnel $ 2,536 $ 2,139 $ 397 19%
Occupancy of premises, net 353 384 (31) (8)
Furniture and equipment 340 407 (67) (16)
Postage, stationery and supplies 109 121 (12) (10)
Professional and legal 62 31 31 100
Marketing and advertising 71 108 (37) (34)
Other 985 731 254 35
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Total noninterest expense $ 4,456 $ 3,921 $ 535 14%
------------------------------------------------------------------------------------
The discussion that follows addresses changes in selected categories of
noninterest expense.
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Personnel -- For the first three months of 2007, personnel expense, comprised of
wages, payroll taxes and employee benefits, increased $397,000 or 19 percent due
to performance incentives and staff additions associated with normal business
growth.
Furniture and equipment -- For the first three months of 2007, furniture and
equipment expense decreased $67,000 or 16 percent below the first quarter of
2006. The first quarter of 2006 included an increase in expense for ATM
maintenance contracts and a bulk replacement of personal computers.
Professional and legal -- For the first three months of 2007, professional and
legal expense increased $31,000 or 100 percent above the first quarter of 2006.
The first quarter of 2006 included a $35,000 reimbursement of legal expenses to
PeoplesBank, which resulted from the settlement of a lawsuit from routine bank
business.
Marketing and advertising -- For the first three months of 2007, marketing and
advertising expense decreased $37,000 or 34% below last year due primarily to
timing.
Other -- For the first three months of 2007, other expense increased $254,000 or
35 percent due primarily to the recognition of a $185,000 prepayment penalty on
the early pay-down of a $2 million Federal Home Loan Bank advance. The
Corporation paid down the advance, which had an above market interest rate, to
reduce interest expense in future periods. There was no comparable prepayment
penalty in the prior year.
INCOME TAXES
The provision for income tax was $640,000 for the current three-month period,
compared to $487,000 for the same period in 2006. The $153,000 or 31 percent
increase in the tax provision was the result of a 30 percent increase in pretax
income. Codorus Valley's effective federal income tax and marginal tax rates
were 26 percent and 34 percent, respectively, for quarters ended March 31, 2007,
and 2006.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
On March 31, 2007, the securities available-for-sale portfolio was approximately
$79 million, compared to $73 million for year-end 2006. The 7 percent increase
occurred primarily from the purchase of high quality US agency mortgage-backed
bonds and tax-exempt municipal bonds.
On March 31, 2007, the securities held-to-maturity portfolio, recorded at
amortized cost, was approximately $5 million, compared to approximately $8
million for year-end 2006. The 34 percent decrease in the portfolio was the
result of three bonds being called by issuers exercising their call options. The
held-to-maturity portfolio for both periods consisted of fixed rate, junior
subordinated debt instruments issued by commercial bank holding companies. These
investments are callable in 2007 and thereafter, and mature in years 2026-2028.
In the period ahead, it is probable that more of these high yielding investments
will be called by issuers based on the current level of market interest rates.
If such calls occur, the calls will be at a premium; however, reinvestment
yields are expected to be much lower.
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LOANS
On March 31, 2007, total loans were $426 million, an increase of $21 million or
5 percent above year-end 2006. The increase was primarily attributable to an
increase in business loans. The average yield (tax-equivalent basis) earned on
total loans was 7.80 percent for the first quarter of 2007, compared to 7.68
percent for the fourth quarter of 2006 and 7.59 percent for the first quarter of
2006.
DEPOSITS
On March 31, 2007, total deposits were approximately $481 million, an increase
of $25 million or 5 percent above year-end 2006. The increase in deposits, which
reflected the continuation of a long trend of successful sales efforts, occurred
primarily within the money market and CD categories, as shown in Note 3 --
Deposits. The flat or slightly inverted US treasury yield curve environment,
customer preference for higher rate deposit products and competitive pricing
pressures are factors that increased deposit interest rates. The average rate
paid on interest-bearing deposits was 3.87 percent for the first quarter of
2007, compared to 3.73 percent for the fourth quarter of 2006 and 2.93 percent
for the first quarter of 2006.
LONG-TERM DEBT
On March 31, 2007, long-term debt was approximately $33 million, compared to $35
million outstanding at year-end 2006. In March 2007, the Company paid down $2
million on a $5 million Federal Home Loan Bank advance with an above market
rate. This pay-down is expected to lower interest expense in future periods. A
listing of outstanding long-term debt obligations is provided in Note 4 --
Long-term Debt.
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 $44.3 million on March 31, 2007, an increase of $1.5 million, or
approximately 4 percent above December 31, 2006. The increase was caused
primarily by retained earnings from profitable operations.
On April 10, 2007, the Board of Directors declared a quarterly cash dividend of
$.135 per common share ($.129 adjusted), payable on or before May 8, 2007, to
shareholders of record April 24, 2007. This follows a $.135 per share ($.129
adjusted) cash dividend paid in February. Also on April 10, 2007, the Board
declared a 5 percent stock dividend payable on or before June 7, 2007, to
shareholders of record April 24, 2007. Distribution of the stock dividend will
result in the issuance of approximately 175,146 common shares, as reflected in
the financial statements.
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, 2007, based on
FDIC capital guidelines.
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RISK MANAGEMENT
NONPERFORMING ASSETS
Table 3 -- Nonperforming Assets, provides a summary of nonperforming assets and
related ratios. The paragraphs below provide information for selected categories
for March 31, 2007, compared to December 31, 2006.
TABLE 3-NONPERFORMING ASSETS
March 31, December 31,
(dollars in thousands) 2007 2006
--------------------------------------------------------------------------------------
Nonaccrual loans $4,229 $4,368
Accruing loans that are contractually past due
90 days or more as to principal or interest 4 4
Foreclosed real estate, net of allowance - 38
--------------------------------------------------------------------------------------
Total nonperforming assets $4,233 $4,410
======================================================================================
Ratios:
Nonaccrual loans as a % of total period-end loans 0.99% 1.08%
Nonperforming assets as a % of total period-end
loans and net foreclosed real estate 0.99% 1.09%
Nonperforming assets as a % of total period-end
shareholders' equity 9.56% 10.31%
Allowance for loan losses as a multiple of
nonaccrual loans .7x .7x
On March 31, 2007, nonaccrual loans consisted of collateralized business and
mortgage loans, and consumer loans. The Corporation recognizes interest income
on a cash basis for nonaccrual loans. On March 31, 2007, the nonaccrual loan
portfolio was $4,229,000, slightly below the $4,368,000 portfolio on December
31, 2006. During the current quarter, a $530,000 nonaccrual business loan was
paid off resulting in full recovery of unpaid principal and interest, fees and
reimbursable costs. This positive news was offset to some degree by the addition
of a $450,000 business loan to the nonaccrual loans portfolio. In management's
judgment this loan is adequately collateralized by real estate based on a
current independent appraisal. On March 31, 2007, the nonaccrual loans portfolio
was comprised of 17 unrelated accounts ranging in size from $4,000 to
$2,624,000. The underlying collateral for the $2,624,000 loan has been sold and
management is awaiting distribution of the proceeds, which will provide full
recovery of all unpaid principal and interest, fees and reimbursable costs.
ALLOWANCE FOR LOAN LOSSES
Table 4 -- Analysis of Allowance for Loan Losses, shows the allowance was
$3,046,000 or .71 percent of total loans on March 31, 2007, compared to
$2,763,000 or .74 percent of total loans, respectively, on March 31, 2006. The
$283,000 or 10 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 the heightened level of energy
costs and interest rates, and a slow down in the
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real estate market. Based on a recent evaluation of probable loan losses in the
current portfolio, management believes that the allowance is adequate to support
losses inherent in the loan portfolio on March 31, 2007.
TABLE 4-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2007 2006
-------------------------------------------------------------------------------
Balance-January 1, $3,126 $2,538
Provision charged (credited) to operating expense (919) 210
Loans charged off:
Commercial 0 0
Real estate-mortgage 0 0
Consumer 18 7
-------------------------------------------------------------------------------
Total loans charged off 18 7
Recoveries:
Commercial 851 14
Real estate-mortgage 1 1
Consumer 5 7
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Total recoveries 857 22
-------------------------------------------------------------------------------
Net (recoveries) charge-offs (839) (15)
-------------------------------------------------------------------------------
Balance-March 31, $3,046 $2,763
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Ratios:
Net recoveries (annualized) to average total loans (0.82)% (0.02)%
Allowance for loan losses to total loans
at period-end 0.71% 0.74%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 72.0% 71.8%
LIQUIDITY
At March 31, 2007, management believes that liquidity was more than adequate
based on the level of overnight investment, the potential liquidation of a $79
million portfolio of available-for-sale securities, valued at March 31, 2007,
and available credit from the Federal Home Loan Bank of Pittsburgh (FHLBP). On
December 31, 2006, the latest available date, available funding from the FHLBP
was approximately $84 million. The Consolidated Statements of Cash Flows,
included in this report, present the changes in cash from operating, investing
and financing activities. Codorus Valley's loan-to-deposit ratio, which is used
as a broad measure of liquidity, was approximately 88.6 percent on March 31,
2007, compared to 88.8 percent on December 31, 2006.
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 under existing loan facilities, and letters of credit made
under the same standards as on-balance sheet instruments. Unused commitments on
March 31, 2007, totaled $146,984,000 and consisted of $87,544,000 in unfunded
commitments under existing loan facilities, $55,582,000 to grant new loans and
$3,858,000 in letters of credit. Due to fixed maturity
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dates and specified conditions within these instruments, many commitments 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.
Contractual Obligations
Codorus Valley has various long-term contractual obligations outstanding at
March 31, 2007, including long-term debt, time deposits and obligations under
capital and operating leases, which were reported in Table 13 of the Annual
Report on Form 10-K for the year ended 2006. 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 financial simulations on its balance sheet for March
31, 2007 and December 31, 2006 to determine its sensitivity to market interest
rate risk. The results of the point-in-time analyses are shown in Table 5 --
Interest Rate Sensitivity. For both periods the asset-liability management model
portrayed a balance sheet that was liability sensitive. Liability sensitivity
means that deposits and debt are likely to re-price to a greater and faster
degree than the loans and investments that they fund. This asset-liability
position suggests that net income may increase if market interest rates decrease
significantly. Conversely, net income would be expected to decrease if
short-term market interest rates increase significantly. Under the flat and low
rate scenarios for both periods, management presumed that trust preferred
investment securities, which are callable at a premium, would be called and
would result in a one time increase in interest income to the Corporation. A
detailed discussion of market interest rate risk is provided in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2006.
TABLE 5-INTEREST RATE SENSITIVITY
Forecasted hange in interest rates Change in
interest rate ramped over 12 months net income
scenario (basis points) $000's %
------------------------------------------------------------------------------
AT MARCH 31, 2007
Most likely -25 (113) (1.9)
High +200 (313) (5.2)
Flat (baseline) 0 0 0.0
Low -200 147 2.4
AT DECEMBER 31, 2006
Most likely -75 (91) (1.5)
High +200 (300) (5.0)
Flat (baseline) 0 0 0.0
Low -200 78 1.3
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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 20 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, 2007, 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, 2007, as evaluated by the chief executive and chief financial
officers.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against Codorus Valley Bancorp, Inc. or
any of its subsidiaries which are expected to have a material impact upon the
financial position and/or operating results of the Corporation. Management is
not aware of any proceedings known or contemplated by government authorities.
ITEM 1A. RISK FACTORS
Management is not aware of any material changes in the risk factors previously
disclosed in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2006.
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 March 31, 2007.
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.
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ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibit
------- -------------------------------------------------------------------
3(i) Amended Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to the Registrant's Current Report on Form 8-K, filed
with the Commission on October 14, 2005.)
3(ii) Amended By-laws (Incorporated by reference to Exhibit 3(ii) to the
Registrant's Current Report on Form 8-K, filed with the Commission
on May 10, 2007.)
4 Rights Agreement dated as of November 4, 2005 (Incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form
8-K, filed with the Commission on November 8, 2005.)
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
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 8, 2007 /s/ Larry J. Miller
----------- --------------------------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
May 8, 2007 /s/ Jann A. Weaver
----------- --------------------------------------
Date Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting officer)
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