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CODORUS VALLEY BANCORP INC - Quarter Report: 2014 June (Form 10-Q)

Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 


x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from____________to______________

Commission file number: 0-15536

 

 

 


 

CODORUS VALLEY BANCORP, INC.

(Exact name of registrant as specified in its charter)


 

 

 

 

 

 

 

Pennsylvania

 

 

23-2428543

 

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)


 

 

 

105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405

(Address of principal executive offices) (Zip code)

 

 

717-747-1519

 

(Registrant’s telephone number, including area code)

 

 

Not Applicable

 

(Former name, former address and former fiscal year,

if changed since the last report.)


 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer o

Accelerated filer o

 

Non-accelerated filer o

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 August 1, 2014, 5,493,061 shares of common stock, par value $2.50, were outstanding.

- 1 -




Codorus Valley Bancorp, Inc.
Form 10-Q Index

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Page #

 

 

 

 

Item 1.

Financial statements (unaudited):

 

 

 

Consolidated balance sheets

 

3

 

Consolidated statements of income

 

4

 

Consolidated statements of comprehensive income

 

5

 

Consolidated statements of cash flows

 

6

 

Consolidated statements of changes in shareholders’ equity

 

7

 

Notes to consolidated financial statements

 

8

 

 

 

 

Item 2.

Management’s discussion and analysis of financial condition and results of operations

 

35

 

 

 

 

Item 3.

Quantitative and qualitative disclosures about market risk

 

57

 

 

 

 

Item 4.

Controls and procedures

 

57

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal proceedings

 

57

 

 

 

 

Item 1A.

Risk factors

 

57

 

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

 

57

 

 

 

 

Item 3.

Defaults upon senior securities

 

57

 

 

 

 

Item 4.

Mine safety disclosures

 

57

 

 

 

 

Item 5.

Other information

 

58

 

 

 

 

Item 6.

Exhibits

 

58

 

 

 

 

SIGNATURES

 

59

- 2 -


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
Unaudited

 

 

 

 

 

 

 

 

(dollars in thousands, except share and per share data)

 

June 30,
2014

 

December 31,
2013

 

Assets

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

20,857

 

$

1,947

 

Cash and due from banks

 

 

15,218

 

 

13,115

 

Total cash and cash equivalents

 

 

36,075

 

 

15,062

 

Securities, available-for-sale

 

 

226,586

 

 

228,741

 

Restricted investment in bank stocks, at cost

 

 

4,710

 

 

4,742

 

Loans held for sale

 

 

875

 

 

514

 

Loans (net of deferred fees of $2,203 - 2014 and $1,963 - 2013)

 

 

887,908

 

 

859,384

 

Less-allowance for loan losses

 

 

(10,460

)

 

(9,975

)

Net loans

 

 

877,448

 

 

849,409

 

Premises and equipment, net

 

 

15,303

 

 

14,599

 

Other assets

 

 

39,641

 

 

37,574

 

Total assets

 

$

1,200,638

 

$

1,150,641

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest bearing

 

$

113,207

 

$

107,921

 

Interest bearing

 

 

855,292

 

 

817,382

 

Total deposits

 

 

968,499

 

 

925,303

 

Short-term borrowings

 

 

29,971

 

 

40,363

 

Long-term debt

 

 

80,451

 

 

70,493

 

Other liabilities

 

 

8,036

 

 

6,833

 

Total liabilities

 

 

1,086,957

 

 

1,042,992

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred stock, par value $2.50 per share; $1,000 liquidation preference, 1,000,000 shares authorized; Series B shares issued and outstanding: 12,000 at June 30, 2014 and 25,000 at December 31, 2013

 

 

12,000

 

 

25,000

 

Common stock, par value $2.50 per share; 15,000,000 shares authorized; shares issued and outstanding: 5,489,784 at June 30, 2014 and 4,800,318 at December 31, 2013

 

 

13,724

 

 

12,001

 

Additional paid-in capital

 

 

57,009

 

 

45,399

 

Retained earnings

 

 

27,540

 

 

23,077

 

Accumulated other comprehensive income

 

 

3,408

 

 

2,172

 

Total shareholders’ equity

 

 

113,681

 

 

107,649

 

Total liabilities and shareholders’ equity

 

$

1,200,638

 

$

1,150,641

 

See accompanying notes.

- 3 -


Table of Contents

Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

(dollars in thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,885

 

$

10,209

 

$

21,885

 

$

20,277

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

858

 

 

621

 

 

1,697

 

 

1,266

 

Tax-exempt

 

 

505

 

 

612

 

 

1,046

 

 

1,240

 

Dividends

 

 

93

 

 

3

 

 

123

 

 

9

 

Other

 

 

23

 

 

28

 

 

26

 

 

42

 

Total interest income

 

 

12,364

 

 

11,473

 

 

24,777

 

 

22,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,741

 

 

1,951

 

 

3,412

 

 

3,960

 

Federal funds purchased and other short-term borrowings

 

 

37

 

 

29

 

 

73

 

 

57

 

Long-term debt

 

 

297

 

 

192

 

 

582

 

 

364

 

Total interest expense

 

 

2,075

 

 

2,172

 

 

4,067

 

 

4,381

 

Net interest income

 

 

10,289

 

 

9,301

 

 

20,710

 

 

18,453

 

Provision for loan losses

 

 

300

 

 

560

 

 

850

 

 

820

 

Net interest income after provision for loan losses

 

 

9,989

 

 

8,741

 

 

19,860

 

 

17,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and investment services fees

 

 

525

 

 

464

 

 

1,052

 

 

937

 

Income from mutual fund, annuity and insurance sales

 

 

192

 

 

173

 

 

325

 

 

422

 

Service charges on deposit accounts

 

 

760

 

 

670

 

 

1,438

 

 

1,304

 

Income from bank owned life insurance

 

 

175

 

 

185

 

 

348

 

 

351

 

Other income

 

 

164

 

 

180

 

 

303

 

 

346

 

Net gain on sales of loans held for sale

 

 

102

 

 

322

 

 

182

 

 

641

 

Gain on sales of securities

 

 

0

 

 

44

 

 

0

 

 

44

 

Total noninterest income

 

 

1,918

 

 

2,038

 

 

3,648

 

 

4,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

 

4,288

 

 

4,115

 

 

8,604

 

 

8,295

 

Occupancy of premises, net

 

 

515

 

 

512

 

 

1,081

 

 

1,023

 

Furniture and equipment

 

 

551

 

 

476

 

 

1,094

 

 

970

 

Postage, stationery and supplies

 

 

163

 

 

157

 

 

322

 

 

307

 

Professional and legal

 

 

256

 

 

165

 

 

439

 

 

302

 

Marketing

 

 

413

 

 

254

 

 

720

 

 

400

 

FDIC insurance

 

 

173

 

 

138

 

 

362

 

 

309

 

Debit card processing

 

 

193

 

 

195

 

 

393

 

 

373

 

Charitable donations

 

 

32

 

 

11

 

 

769

 

 

486

 

Telephone

 

 

145

 

 

132

 

 

291

 

 

266

 

External data processing

 

 

233

 

 

167

 

 

435

 

 

335

 

Foreclosed real estate including (gains) losses on sales

 

 

167

 

 

74

 

 

247

 

 

137

 

Other

 

 

857

 

 

761

 

 

877

 

 

1,207

 

Total noninterest expense

 

 

7,986

 

 

7,157

 

 

15,634

 

 

14,410

 

Income before income taxes

 

 

3,921

 

 

3,622

 

 

7,874

 

 

7,268

 

Provision for income taxes

 

 

1,114

 

 

977

 

 

2,064

 

 

1,961

 

Net income

 

 

2,807

 

 

2,645

 

 

5,810

 

 

5,307

 

Preferred stock dividends

 

 

52

 

 

62

 

 

114

 

 

125

 

Net income available to common shareholders

 

$

2,755

 

$

2,583

 

$

5,696

 

$

5,182

 

Net income per common share, basic

 

$

0.50

 

$

0.55

 

$

1.11

 

$

1.10

 

Net income per common share, diluted

 

$

0.49

 

$

0.54

 

$

1.08

 

$

1.08

 

See accompanying notes.

- 4 -


Table of Contents

Codorus Valley Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Unaudited

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

(dollars in thousands)

 

2014

 

2013

 

Net income

 

$

2,807

 

$

2,645

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

Net unrealized holding gains (losses) arising during the period (net of tax expense (benefit) of $439 and ($1,283), respectively)

 

 

851

 

 

(2,489

)

Reclassification adjustment for gains included in net income (net of tax expense of $0 and $15, respectively) (a) (b)

 

 

0

 

 

(29

)

Net unrealized gains (losses)

 

 

851

 

 

(2,518

)

Comprehensive income

 

$

3,658

 

$

127

 


 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

(dollars in thousands)

 

2014

 

2013

 

Net income

 

$

5,810

 

$

5,307

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

Net unrealized holding gains (losses) arising during the period (net of tax expense (benefit) of $637 and ($1,500), respectively)

 

 

1,236

 

 

(2,911

)

Reclassification adjustment for gains included in net income (net of tax expense of $0 and $15, respectively) (a) (b)

 

 

0

 

 

(29

)

Net unrealized gains (losses)

 

 

1,236

 

 

(2,940

)

Comprehensive income

 

$

7,046

 

$

2,367

 


 

 

 

 

(a)

Amounts are included in net gain on sales of securities on the Consolidated Statements of Income within noninterest income.

 

(b)

Income tax amounts are included in provision for income taxes on the Consolidated Statements of Income.

See accompanying notes.

- 5 -


Table of Contents

Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

(dollars in thousands)

 

2014

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

5,810

 

$

5,307

 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

 

 

Depreciation/amortization

 

 

873

 

 

729

 

Net amortization of premiums on securities

 

 

481

 

 

722

 

Amortization of deferred loan origination fees and costs

 

 

(345

)

 

(277

)

Provision for loan losses

 

 

850

 

 

820

 

Provision for losses on foreclosed real estate

 

 

50

 

 

0

 

Deferred income tax benefit

 

 

(145

)

 

0

 

Amortization of investment in real estate partnership

 

 

178

 

 

161

 

Increase in cash surrender of bank owned life insurance

 

 

(348

)

 

(351

)

Originations of loans held for sale

 

 

(9,025

)

 

(33,537

)

Proceeds from sales of loans held for sale

 

 

8,846

 

 

36,125

 

Net gain on sales of loans held for sale

 

 

(182

)

 

(641

)

Gain on disposal of premises and equipment

 

 

(11

)

 

0

 

Gain on sales of securities, available-for-sale

 

 

0

 

 

(44

)

Gain on sales of foreclosed real estate

 

 

0

 

 

(15

)

Stock-based compensation

 

 

157

 

 

157

 

(Increase) decrease in interest receivable

 

 

(54

)

 

181

 

(Decrease) increase in other assets

 

 

(1,697

)

 

621

 

Increase (decrease) in interest payable

 

 

96

 

 

(79

)

Increase in other liabilities

 

 

1,146

 

 

439

 

Net cash provided by operating activities

 

 

6,680

 

 

10,318

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of securities, available-for-sale

 

 

(14,841

)

 

(14,143

)

Maturities, repayments and calls of securities, available-for-sale

 

 

18,388

 

 

20,961

 

Sales of securities, available-for-sale

 

 

0

 

 

927

 

Redemption (purchase) of restricted investment in bank stock

 

 

32

 

 

(230

)

Net increase in loans made to customers

 

 

(30,114

)

 

(31,852

)

Purchases of premises and equipment

 

 

(1,566

)

 

(2,265

)

Investment in bank owned life insurance

 

 

0

 

 

(5,300

)

Proceeds from sales of foreclosed real estate

 

 

877

 

 

207

 

Net cash used in investing activities

 

 

(27,224

)

 

(31,695

)

Cash flows from financing activities

 

 

 

 

 

 

 

Net increase in demand and savings deposits

 

 

10,903

 

 

19,877

 

Net increase in time deposits

 

 

32,293

 

 

3,666

 

Net (decrease) increase in short-term borrowings

 

 

(10,392

)

 

3,774

 

Proceeds from issuance of long-term debt

 

 

10,000

 

 

10,000

 

Repayment of long-term debt

 

 

(42

)

 

(282

)

Cash dividends paid to preferred shareholder

 

 

(147

)

 

(125

)

Cash dividends paid to common shareholders

 

 

(1,233

)

 

(988

)

Redemption of preferred stock

 

 

(13,000

)

 

0

 

Issuance of common stock

 

 

13,175

 

 

514

 

Net cash provided by financing activities

 

 

41,557

 

 

36,436

 

Net increase in cash and cash equivalents

 

 

21,013

 

 

15,059

 

Cash and cash equivalents at beginning of year

 

 

15,062

 

 

49,757

 

Cash and cash equivalents at end of period

 

$

36,075

 

$

64,816

 

See accompanying notes.

- 6 -


Table of Contents

Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

Preferred
Stock

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Treasury
Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

$

25,000

 

$

12,001

 

$

45,399

 

$

23,077

 

$

2,172

 

$

0

 

$

107,649

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,810

 

 

 

 

 

 

 

 

5,810

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,236

 

 

 

 

 

1,236

 

Common stock cash dividends ($0.24 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,233

)

 

 

 

 

 

 

 

(1,233

)

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(114

)

 

 

 

 

 

 

 

(114

)

Redemption of preferred stock

 

 

(13,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,000

)

Stock-based compensation including related tax benefit

 

 

 

 

 

 

 

 

157

 

 

 

 

 

 

 

 

 

 

 

157

 

Forfeiture of restricted stock

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

(1

)

 

0

 

Issuance and reissuance of common stock including related tax benefit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

650,000 shares through private placement

 

 

 

 

 

1,625

 

 

10,885

 

 

 

 

 

 

 

 

 

 

 

12,510

 

8,706 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

22

 

 

164

 

 

 

 

 

 

 

 

1

 

 

187

 

27,104 shares under the stock option plan

 

 

 

 

 

67

 

 

351

 

 

 

 

 

 

 

 

 

 

 

418

 

3,613 shares under employee stock purchase plan

 

 

 

 

 

9

 

 

52

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2014

 

$

12,000

 

$

13,724

 

$

57,009

 

$

27,540

 

$

3,408

 

$

0

 

$

113,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

$

25,000

 

$

11,206

 

$

40,524

 

$

18,868

 

$

5,733

 

$

0

 

$

101,331

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,307

 

 

 

 

 

 

 

 

5,307

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,940

)

 

 

 

 

(2,940

)

Common stock cash dividends ($0.21 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

(988

)

 

 

 

 

 

 

 

(988

)

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

 

 

 

 

 

(125

)

Stock-based compensation including related tax benefit

 

 

 

 

 

 

 

 

157

 

 

 

 

 

 

 

 

 

 

 

157

 

Issuance of common stock including related tax benefit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,453 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

26

 

 

151

 

 

 

 

 

 

 

 

 

 

 

177

 

23,105 shares under the stock option plan

 

 

 

 

 

58

 

 

226

 

 

 

 

 

 

 

 

 

 

 

284

 

4,246 shares under employee stock purchase plan

 

 

 

 

 

10

 

 

43

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2013

 

$

25,000

 

$

11,300

 

$

41,101

 

$

23,062

 

$

2,793

 

$

0

 

$

103,256

 

See accompanying notes.

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Table of Contents

Note 1—Basis of Presentation

The accompanying unaudited consolidated balance sheet at December 31, 2013 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and FASB Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

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 operates two wholly-owned subsidiaries, Codorus Valley Financial Advisors, Inc. and SYC Settlement Services, Inc. and periodically creates nonbank subsidiaries whose purpose is to temporarily hold foreclosed properties pending eventual liquidation. 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.

These consolidated statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of June 30, 2014 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Note 2—Significant Accounting Policies

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are stated at their outstanding unpaid principal balances less amounts charged off, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Generally, loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) over the contractual life of the loan. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following industry classes: builder & developer, commercial real estate investor, residential real estate investor, hotel/motel, wholesale & retail, agriculture, manufacturing and all other. Consumer loans consist of the following classes: residential mortgage, home equity and all other.

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to the Corporation’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

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Table of Contents

Allowance for Loan Losses

The allowance for loan losses represents the Corporation’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. While the Corporation attributes a portion of the allowance to individual loans and groups of loans that it evaluates and determines to be impaired, the allowance is available to cover all charge-offs that arise from the loan portfolio.

The allowance for loan losses is maintained at a level considered by management to be adequate to provide for losses that can be reasonably anticipated. The Corporation performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired, generally substandard and nonaccrual loans. For loans that are classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative (environmental) risk factors. Historical loss rates are based on a two year rolling average of net charge-offs. Qualitative risk factors that supplement historical losses in the evaluation of loan pools include:

 

 

 

 

Changes in national and local economies and business conditions

 

Changes in the value of collateral for collateral dependent loans

 

Changes in the level of concentrations of credit

 

Changes in the volume and severity of classified and past due loans

 

Changes in the nature and volume of the portfolio

 

Changes in collection, charge-off, and recovery procedures

 

Changes in underwriting standards and loan terms

 

Changes in the quality of the loan review system

 

Changes in the experience/ability of lending management and key lending staff

 

Regulatory and legal regulations that could affect the level of credit losses

 

Other pertinent environmental factors

Each factor is assigned a value to reflect improving, stable or declining conditions based on the Corporation’s best judgment using relevant information available at the time of the evaluation. An unallocated component is maintained to cover uncertainties that could affect the Corporation’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

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Table of Contents

As disclosed in Note 5-Loans, the Corporation engages in commercial and consumer lending. Loans are made within the Corporation’s primary market area and surrounding areas, and include the purchase of whole loan or participation interests in loans from other financial institutions or private equity companies. Commercial loans, which pose the greatest risk of loss to the Corporation, whether originated or purchased, are generally secured by real estate. Within the broad commercial loan segment, the builder & developer and commercial real estate investor loan classes generally present a higher level of risk than other commercial loan classifications. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, unstable real estate prices and the dependency upon successful construction and sale or operation of the real estate project. Within the consumer loan segment, junior (i.e., second) liens present a slightly higher risk to the Corporation because economic and housing market conditions can adversely affect the underlying value of the collateral and the ability of some borrowers to service their debt.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Corporation determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Loans that are deemed impaired are evaluated for impairment loss based on the net realizable value of the collateral, as applicable. Loans that are not collateral dependent will rely on the present value of expected future cash flows discounted at the loan’s effective interest rate to determine impairment loss. Large groups of smaller balance homogeneous loans such as residential mortgage loans, home equity loans and other consumer loans are collectively evaluated for impairment, unless they are considered to be a troubled debt restructuring.

An allowance for loan losses is established for an impaired commercial loan if its carrying value exceeds its estimated fair value. For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals of the underlying collateral. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the most recent appraisal and the condition of the property. Appraisals are generally discounted to provide for selling costs and other factors to determine an estimate of the net realizable value of the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. In instances when specific consumer related loans become impaired, they may be partially or fully charged off, which obviates the need for a specific allowance.

Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted under a troubled debt restructuring may involve an interest rate that is below the market rate given the associated credit risk of the loan or an extension of a loan’s stated maturity date. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a reasonable period of time, generally six consecutive months after modification and future payments are reasonably assured.

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Table of Contents

Banking regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to the Corporation. Based on an analysis of the loan portfolio, the Corporation believes that the level of the allowance for loan losses at June 30, 2014 is adequate.

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals, based upon an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a charge-off. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At June 30, 2014, foreclosed real estate, net of allowance, was $4,711,000, compared to $4,068,000 for December 31, 2013.

Per Common Share Computations

All per share computations include the effect of stock dividends distributed. The computation of net income per common share is provided in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

(in thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

Net income available to common shareholders

 

$

2,755

 

$

2,583

 

$

5,696

 

$

5,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (basic)

 

 

5,475

 

 

4,731

 

 

5,167

 

 

4,720

 

Effect of dilutive stock options

 

 

101

 

 

87

 

 

103

 

 

87

 

Weighted average shares outstanding (diluted)

 

 

5,576

 

 

4,818

 

 

5,270

 

 

4,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.50

 

$

0.55

 

$

1.11

 

$

1.10

 

Diluted earnings per common share

 

$

0.49

 

$

0.54

 

$

1.08

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive stock options excluded from the computation of earnings per share

 

 

23

 

 

29

 

 

23

 

 

29

 

Comprehensive Income

Accounting principles generally accepted in the United States 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 shareholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

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Table of Contents

Cash Flow Information

For purposes of the statements of cash flows, the Corporation considers interest bearing deposits with banks, cash and due from banks, and federal funds sold to be cash and cash equivalents.

Supplemental cash flow information is provided in the table below.

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

(dollars in thousands)

 

2014

 

2013

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

2,285

 

$

1,965

 

Interest

 

$

3,971

 

$

4,460

 

 

 

 

 

 

 

 

 

Noncash investing activities:

 

 

 

 

 

 

 

Transfer of loans to foreclosed real estate

 

$

1,570

 

$

0

 

Reclassification

Certain amounts in the prior periods consolidated financial statements have been reclassified to conform to the current period presentation, such reclassification did not impact net income or shareholders’ equity.

Recent Accounting Pronouncements

There were no new accounting pronouncements affecting the Corporation during the reporting period that were not already adopted or that are expected to have a material impact on the Corporation’s consolidated financial position or results of operations.

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Table of Contents

Note 3-Securities

A summary of securities available-for-sale at June 30, 2014 and December 31, 2013 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At June 30, 2014, the fair value of the municipal bond portfolio was concentrated in the states of Pennsylvania at 42 percent and Texas at 17 percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross Unrealized

 

Fair
Value

 

(dollars in thousands)

 

 

Gains

 

Losses

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

33,230

 

$

665

 

$

(111

)

$

33,784

 

U.S. agency mortgage-backed, residential

 

 

110,813

 

 

2,387

 

 

(14

)

 

113,186

 

State and municipal

 

 

77,379

 

 

2,256

 

 

(19

)

 

79,616

 

Total debt securities

 

$

221,422

 

$

5,308

 

$

(144

)

$

226,586

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

33,265

 

$

695

 

$

(461

)

$

33,499

 

U.S. agency mortgage-backed, residential

 

 

105,181

 

 

1,563

 

 

(825

)

 

105,919

 

State and municipal

 

 

87,004

 

 

2,411

 

 

(92

)

 

89,323

 

Total debt securities

 

$

225,450

 

$

4,669

 

$

(1,378

)

$

228,741

 

The amortized cost and estimated fair value of debt securities at June 30, 2014 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

(dollars in thousands)

 

 

Amortized
Cost

 

 

Fair
Value

 

Due in one year or less

 

$

17,116

 

$

17,315

 

Due after one year through five years

 

 

135,111

 

 

139,078

 

Due after five years through ten years

 

 

65,376

 

 

66,176

 

Due after ten years

 

 

3,819

 

 

4,017

 

Total debt securities

 

$

221,422

 

$

226,586

 

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Table of Contents

Gross realized gains and losses on sales of securities available-for-sale are shown below. Realized gains and losses are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the income statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

(dollars in thousands)

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Realized gains

 

$

0

 

$

44

 

$

0

 

$

44

 

Realized losses

 

 

0

 

 

0

 

 

0

 

 

0

 

Net gains

 

$

0

 

$

44

 

$

0

 

$

44

 

Securities, issued by agencies of the federal government, with a carrying value of $154,722,000 and $142,914,000 on June 30, 2014 and December 31, 2013, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

(dollars in thousands)

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

0

 

$

0

 

$

11,021

 

$

(111

)

$

11,021

 

$

(111

)

U.S. agency mortgage-backed, residential

 

 

0

 

 

0

 

 

4,415

 

 

(14

)

 

4,415

 

 

(14

)

State and municipal

 

 

2,215

 

 

(4

)

 

1,697

 

 

(15

)

 

3,912

 

 

(19

)

Total temporarily impaired debt securities, available-for-sale

 

$

2,215

 

$

(4

)

$

17,133

 

$

(140

)

$

19,348

 

$

(144

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

15,351

 

$

(461

)

$

0

 

$

0

 

$

15,351

 

$

(461

)

U.S. agency mortgage-backed, residential

 

 

56,787

 

 

(825

)

 

0

 

 

0

 

 

56,787

 

 

(825

)

State and municipal

 

 

9,897

 

 

(78

)

 

797

 

 

(14

)

 

10,694

 

 

(92

)

Total temporarily impaired debt securities, available-for-sale

 

$

82,035

 

$

(1,364

)

$

797

 

$

(14

)

$

82,832

 

$

(1,378

)

The unrealized losses of $4,000 at June 30, 2014 within the less than 12 months category were attributable to six state and municipal securities. The unrealized losses of $140,000 within the 12 months or more category were attributable to four U.S. agency securities, two U.S. agency mortgage-backed securities, and four state and municipal securities. All of the securities with unrealized losses have been evaluated and determined to be investment grade.

Securities available-for-sale are analyzed quarterly for possible other-than-temporary impairment. The analysis considers, among other factors: 1) whether the Corporation has the intent to sell its securities prior to market recovery or maturity; 2) whether it is more likely than not that the Corporation will be required to sell its securities prior to market recovery or maturity; 3) default rates/history by security type; 4) third-party securities ratings; 5) third-party guarantees; 6) subordination; 7) payment delinquencies; 8) nature of the issuer; and 9) current financial news.

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The Corporation believes that unrealized losses at June 30, 2014 were primarily the result of changes in market interest rates and that it has the ability to hold these investments for a time necessary to recover the amortized cost. Through June 30, 2014 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

Note 4—Restricted Investment in Bank Stocks

Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of June 30, 2014 and December 31, 2013, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (FHLBP) and, to a lesser degree, Atlantic Community Bankers Bank (ACBB). Under the FHLBP’s Capital Plan, PeoplesBank is required to maintain a minimum member stock investment, as a condition of remaining a member and as a condition of obtaining borrowings from the FHLBP. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

The FHLBP paid dividends during the periods ended June 30, 2014 and 2013. FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of five percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes no impairment charge was necessary related to the restricted stock during the periods ended June 30, 2014 and 2013.

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Table of Contents

Note 5—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at June 30, 2014 and December 31, 2013. The portfolio is comprised of two segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance. Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations.

 

 

 

 

 

 

 

 

(dollars in thousands)

 

June 30,
2014

 

December 31,
2013

 

Builder & developer

 

$

106,322

 

$

106,436

 

Commercial real estate investor

 

 

142,227

 

 

141,372

 

Residential real estate investor

 

 

88,299

 

 

78,400

 

Hotel/Motel

 

 

77,645

 

 

70,324

 

Wholesale & retail

 

 

73,194

 

 

75,445

 

Manufacturing

 

 

35,919

 

 

36,872

 

Agriculture

 

 

40,169

 

 

38,041

 

Other

 

 

177,966

 

 

167,325

 

Total commercial related loans

 

 

741,741

 

 

714,215

 

Residential mortgages

 

 

30,683

 

 

25,695

 

Home equity

 

 

80,738

 

 

80,859

 

Other

 

 

34,746

 

 

38,615

 

Total consumer related loans

 

 

146,167

 

 

145,169

 

Total loans

 

$

887,908

 

$

859,384

 

Loan Risk Ratings

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans and residential mortgages held for investment are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer loans, and commercial loans up to $750,000, the Corporation uses third-party credit scoring software models for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings are generally performed by the Special Asset Committee, which includes senior management. The Committee, which meets monthly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value.

The Corporation uses ten risk ratings to grade loans. The first seven ratings, representing the lowest risk, are combined and given a “pass” rating. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current net worth or paying capacity of the borrower or of the collateral pledged. A substandard loan has a well defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to loss if the deficiencies are not corrected. A loan classified “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and value highly improbable and the possibility of loss extremely high. When circumstances indicate that collection of the loan is doubtful, the loan is risk rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. The table below does not include the regulatory classification of “doubtful,” which is subsumed within the nonaccrual risk rating category, nor does it include the regulatory classification of “loss” because the Corporation promptly charges off known loan losses.

-16-


Table of Contents

The table below presents a summary of loan risk ratings by loan class at June 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Pass

 

Special
Mention

 

Substandard

 

Nonaccrual

 

Total

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

95,039

 

$

4,830

 

$

4,782

 

$

1,671

 

$

106,322

 

Commercial real estate investor

 

 

131,357

 

 

4,227

 

 

3,403

 

 

3,240

 

 

142,227

 

Residential real estate investor

 

 

84,005

 

 

2,037

 

 

270

 

 

1,987

 

 

88,299

 

Hotel/Motel

 

 

77,046

 

 

0

 

 

599

 

 

0

 

 

77,645

 

Wholesale & retail

 

 

71,809

 

 

850

 

 

0

 

 

535

 

 

73,194

 

Manufacturing

 

 

34,210

 

 

1,043

 

 

666

 

 

0

 

 

35,919

 

Agriculture

 

 

36,947

 

 

2,780

 

 

442

 

 

0

 

 

40,169

 

Other

 

 

175,074

 

 

1,126

 

 

1,031

 

 

735

 

 

177,966

 

Total commercial related loans

 

 

705,487

 

 

16,893

 

 

11,193

 

 

8,168

 

 

741,741

 

Residential mortgage

 

 

30,537

 

 

0

 

 

28

 

 

118

 

 

30,683

 

Home equity

 

 

80,164

 

 

390

 

 

10

 

 

174

 

 

80,738

 

Other

 

 

34,057

 

 

185

 

 

0

 

 

504

 

 

34,746

 

Total consumer related loans

 

 

144,758

 

 

575

 

 

38

 

 

796

 

 

146,167

 

Total loans

 

$

850,245

 

$

17,468

 

$

11,231

 

$

8,964

 

$

887,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

91,106

 

$

4,879

 

$

4,786

 

$

5,665

 

$

106,436

 

Commercial real estate investor

 

 

129,763

 

 

3,749

 

 

3,426

 

 

4,434

 

 

141,372

 

Residential real estate investor

 

 

74,626

 

 

1,790

 

 

187

 

 

1,797

 

 

78,400

 

Hotel/Motel

 

 

70,324

 

 

0

 

 

0

 

 

0

 

 

70,324

 

Wholesale & retail

 

 

73,425

 

 

892

 

 

0

 

 

1,128

 

 

75,445

 

Manufacturing

 

 

34,986

 

 

1,215

 

 

671

 

 

0

 

 

36,872

 

Agriculture

 

 

34,961

 

 

2,629

 

 

451

 

 

0

 

 

38,041

 

Other

 

 

164,621

 

 

880

 

 

482

 

 

1,342

 

 

167,325

 

Total commercial related loans

 

 

673,812

 

 

16,034

 

 

10,003

 

 

14,366

 

 

714,215

 

Residential mortgage

 

 

25,541

 

 

4

 

 

30

 

 

120

 

 

25,695

 

Home equity

 

 

80,271

 

 

357

 

 

11

 

 

220

 

 

80,859

 

Other

 

 

37,814

 

 

207

 

 

0

 

 

594

 

 

38,615

 

Total consumer related loans

 

 

143,626

 

 

568

 

 

41

 

 

934

 

 

145,169

 

Total loans

 

$

817,438

 

$

16,602

 

$

10,044

 

$

15,300

 

$

859,384

 

- 17 -


Table of Contents

Impaired Loans

The table below presents a summary of impaired loans at June 30, 2014 and December 31, 2013. Generally, impaired loans are loans risk rated substandard and nonaccrual or classified as troubled debt restructurings. An allowance is established for individual commercial loans where the Corporation has doubt as to full recovery of the outstanding principal balance. Typically, impaired consumer loans are partially or fully charged off obviating the need for a specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for charge-offs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

December 31, 2013

(dollars in thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Impaired loans with no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

4,408

 

$

4,408

 

 

 

$

3,861

 

$

3,861

 

 

 

Commercial real estate investor

 

 

6,643

 

 

6,643

 

 

 

 

7,860

 

 

7,860

 

 

 

Residential real estate investor

 

 

731

 

 

731

 

 

 

 

354

 

 

579

 

 

 

Hotel/Motel

 

 

599

 

 

599

 

 

 

 

0

 

 

0

 

 

 

Wholesale & retail

 

 

808

 

 

808

 

 

 

 

1,403

 

 

1,403

 

 

 

Manufacturing

 

 

666

 

 

666

 

 

 

 

671

 

 

671

 

 

 

Agriculture

 

 

0

 

 

0

 

 

 

 

0

 

 

0

 

 

 

Other commercial

 

 

1,291

 

 

1,291

 

 

 

 

1,498

 

 

1,498

 

 

 

Residential mortgage

 

 

146

 

 

172

 

 

 

 

150

 

 

176

 

 

 

Home equity

 

 

184

 

 

184

 

 

 

 

231

 

 

256

 

 

 

Other consumer

 

 

504

 

 

559

 

 

 

 

594

 

 

609

 

 

 

Total impaired loans with no related allowance

 

$

15,980

 

$

16,061

 

 

 

$

16,622

 

$

16,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

2,045

 

$

2,045

 

$

953

 

$

7,733

 

$

7,733

 

$

850

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Residential real estate investor

 

 

1,526

 

 

1,526

 

 

559

 

 

1,630

 

 

1,630

 

 

650

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Agriculture

 

 

442

 

 

442

 

 

100

 

 

451

 

 

451

 

 

100

 

Other commercial

 

 

475

 

 

475

 

 

300

 

 

326

 

 

326

 

 

120

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Home equity

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other consumer

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Total impaired loans with a related allowance

 

$

4,488

 

$

4,488

 

$

1,912

 

$

10,140

 

$

10,140

 

$

1,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

6,453

 

$

6,453

 

$

953

 

$

11,594

 

$

11,594

 

$

850

 

Commercial real estate investor

 

 

6,643

 

 

6,643

 

 

0

 

 

7,860

 

 

7,860

 

 

0

 

Residential real estate investor

 

 

2,257

 

 

2,257

 

 

559

 

 

1,984

 

 

2,209

 

 

650

 

Hotel/Motel

 

 

599

 

 

599

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

808

 

 

808

 

 

0

 

 

1,403

 

 

1,403

 

 

0

 

Manufacturing

 

 

666

 

 

666

 

 

0

 

 

671

 

 

671

 

 

0

 

Agriculture

 

 

442

 

 

442

 

 

100

 

 

451

 

 

451

 

 

100

 

Other commercial

 

 

1,766

 

 

1,766

 

 

300

 

 

1,824

 

 

1,824

 

 

120

 

Residential mortgage

 

 

146

 

 

172

 

 

0

 

 

150

 

 

176

 

 

0

 

Home equity

 

 

184

 

 

184

 

 

0

 

 

231

 

 

256

 

 

0

 

Other consumer

 

 

504

 

 

559

 

 

0

 

 

594

 

 

609

 

 

0

 

Total impaired loans

 

$

20,468

 

$

20,549

 

$

1,912

 

$

26,762

 

$

27,053

 

$

1,720

 

- 18 -


Table of Contents

The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and six months ended June 30, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

June 30, 2014

 

June 30, 2013

 

(dollars in thousands)

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Cash Basis
Interest
Income

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Cash Basis
Interest
Income

 

Impaired loans with no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

4,419

 

$

67

 

$

1

 

$

9,211

 

$

135

 

$

3

 

Commercial real estate investor

 

 

7,229

 

 

74

 

 

25

 

 

5,702

 

 

67

 

 

33

 

Residential real estate investor

 

 

542

 

 

2

 

 

0

 

 

239

 

 

3

 

 

1

 

Hotel/Motel

 

 

614

 

 

5

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

809

 

 

3

 

 

0

 

 

2,539

 

 

66

 

 

64

 

Manufacturing

 

 

667

 

 

10

 

 

0

 

 

685

 

 

11

 

 

0

 

Agriculture

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other commercial

 

 

1,149

 

 

7

 

 

0

 

 

1,667

 

 

7

 

 

2

 

Residential mortgage

 

 

148

 

 

2

 

 

2

 

 

118

 

 

2

 

 

2

 

Home equity

 

 

235

 

 

2

 

 

2

 

 

338

 

 

3

 

 

0

 

Other consumer

 

 

490

 

 

2

 

 

2

 

 

642

 

 

7

 

 

7

 

Total impaired loans with no related allowance

 

$

16,302

 

$

174

 

$

32

 

$

21,141

 

$

301

 

$

112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

3,985

 

$

7

 

$

0

 

$

66

 

$

0

 

$

0

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Residential real estate investor

 

 

1,467

 

 

2

 

 

0

 

 

2,453

 

 

0

 

 

0

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Agriculture

 

 

445

 

 

8

 

 

0

 

 

466

 

 

8

 

 

0

 

Other commercial

 

 

337

 

 

7

 

 

0

 

 

924

 

 

0

 

 

0

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Home equity

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other consumer

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Total impaired loans with a related allowance

 

$

6,234

 

$

24

 

$

0

 

$

3,909

 

$

8

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

8,404

 

$

74

 

$

1

 

$

9,277

 

$

135

 

$

3

 

Commercial real estate investor

 

 

7,229

 

 

74

 

 

25

 

 

5,702

 

 

67

 

 

33

 

Residential real estate investor

 

 

2,009

 

 

4

 

 

0

 

 

2,692

 

 

3

 

 

1

 

Hotel/Motel

 

 

614

 

 

5

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

809

 

 

3

 

 

0

 

 

2,539

 

 

66

 

 

64

 

Manufacturing

 

 

667

 

 

10

 

 

0

 

 

685

 

 

11

 

 

0

 

Agriculture

 

 

445

 

 

8

 

 

0

 

 

466

 

 

8

 

 

0

 

Other commercial

 

 

1,486

 

 

14

 

 

0

 

 

2,591

 

 

7

 

 

2

 

Residential mortgage

 

 

148

 

 

2

 

 

2

 

 

118

 

 

2

 

 

2

 

Home equity

 

 

235

 

 

2

 

 

2

 

 

338

 

 

3

 

 

0

 

Other consumer

 

 

490

 

 

2

 

 

2

 

 

642

 

 

7

 

 

7

 

Total impaired loans

 

$

22,536

 

$

198

 

$

32

 

$

25,050

 

$

309

 

$

112

 

- 19-


Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

 

June 30, 2014

 

June 30, 2013

 

(dollars in thousands)

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Cash Basis
Interest
Income

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Cash Basis
Interest
Income

 

Impaired loans with no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

4,233

 

$

164

 

$

17

 

$

10,211

 

$

264

 

$

5

 

Commercial real estate investor

 

 

7,440

 

 

150

 

 

52

 

 

5,713

 

 

134

 

 

69

 

Residential real estate investor

 

 

479

 

 

5

 

 

0

 

 

184

 

 

5

 

 

2

 

Hotel/Motel

 

 

410

 

 

10

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

1,007

 

 

74

 

 

68

 

 

2,708

 

 

43

 

 

64

 

Manufacturing

 

 

669

 

 

21

 

 

0

 

 

690

 

 

22

 

 

0

 

Agriculture

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other commercial

 

 

1,266

 

 

31

 

 

21

 

 

1,606

 

 

6

 

 

4

 

Residential mortgage

 

 

148

 

 

4

 

 

3

 

 

107

 

 

4

 

 

3

 

Home equity

 

 

233

 

 

3

 

 

2

 

 

339

 

 

6

 

 

1

 

Other consumer

 

 

524

 

 

15

 

 

15

 

 

642

 

 

13

 

 

13

 

Total impaired loans with no related allowance

 

$

16,409

 

$

477

 

$

178

 

$

22,200

 

$

497

 

$

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

5,234

 

$

14

 

$

0

 

$

129

 

$

0

 

$

0

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Residential real estate investor

 

 

1,521

 

 

2

 

 

0

 

 

2,522

 

 

(9

)

 

0

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Agriculture

 

 

447

 

 

16

 

 

0

 

 

468

 

 

16

 

 

0

 

Other commercial

 

 

333

 

 

7

 

 

0

 

 

939

 

 

0

 

 

0

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Home equity

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other consumer

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Total impaired loans with a related allowance

 

$

7,535

 

$

39

 

$

0

 

$

4,058

 

$

7

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

9,467

 

$

178

 

$

17

 

$

10,340

 

$

264

 

$

5

 

Commercial real estate investor

 

 

7,440

 

 

150

 

 

52

 

 

5,713

 

 

134

 

 

69

 

Residential real estate investor

 

 

2,000

 

 

7

 

 

0

 

 

2,706

 

 

(4

)

 

2

 

Hotel/Motel

 

 

410

 

 

10

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

1,007

 

 

74

 

 

68

 

 

2,708

 

 

43

 

 

64

 

Manufacturing

 

 

669

 

 

21

 

 

0

 

 

690

 

 

22

 

 

0

 

Agriculture

 

 

447

 

 

16

 

 

0

 

 

468

 

 

16

 

 

0

 

Other commercial

 

 

1,599

 

 

38

 

 

21

 

 

2,545

 

 

6

 

 

4

 

Residential mortgage

 

 

148

 

 

4

 

 

3

 

 

107

 

 

4

 

 

3

 

Home equity

 

 

233

 

 

3

 

 

2

 

 

339

 

 

6

 

 

1

 

Other consumer

 

 

524

 

 

15

 

 

15

 

 

642

 

 

13

 

 

13

 

Total impaired loans

 

$

23,944

 

$

516

 

$

178

 

$

26,258

 

$

504

 

$

161

 

- 20 -


Table of Contents

Past Due and Nonaccrual

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule which shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at June 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

30-59
Days
Past Due

 

60-89
Days
Past Due

 

≥ 90 Days
Past Due
and
Accruing

 

Nonaccrual

 

Total Past
Due and
Nonaccrual

 

Current

 

Total
Loans

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

0

 

$

0

 

$

0

 

$

1,671

 

$

1,671

 

$

104,651

 

$

106,322

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

3,240

 

 

3,240

 

 

138,987

 

 

142,227

 

Residential real estate investor

 

 

0

 

 

0

 

 

0

 

 

1,987

 

 

1,987

 

 

86,312

 

 

88,299

 

Hotel/Motel

 

 

0

 

 

599

 

 

0

 

 

0

 

 

599

 

 

77,046

 

 

77,645

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

535

 

 

535

 

 

72,659

 

 

73,194

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

35,919

 

 

35,919

 

Agriculture

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

40,169

 

 

40,169

 

Other

 

 

10

 

 

129

 

 

0

 

 

735

 

 

874

 

 

177,092

 

 

177,966

 

Total commercial related loans

 

 

10

 

 

728

 

 

0

 

 

8,168

 

 

8,906

 

 

732,835

 

 

741,741

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

118

 

 

118

 

 

30,565

 

 

30,683

 

Home equity

 

 

100

 

 

0

 

 

0

 

 

174

 

 

274

 

 

80,464

 

 

80,738

 

Other

 

 

160

 

 

0

 

 

0

 

 

504

 

 

664

 

 

34,082

 

 

34,746

 

Total consumer related loans

 

 

260

 

 

0

 

 

0

 

 

796

 

 

1,056

 

 

145,111

 

 

146,167

 

Total loans

 

$

270

 

$

728

 

$

0

 

$

8,964

 

$

9,962

 

$

877,946

 

$

887,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

220

 

$

0

 

$

0

 

$

5,665

 

$

5,885

 

$

100,551

 

$

106,436

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

4,434

 

 

4,434

 

 

136,938

 

 

141,372

 

Residential real estate investor

 

 

0

 

 

265

 

 

0

 

 

1,797

 

 

2,062

 

 

76,338

 

 

78,400

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

70,324

 

 

70,324

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

1,128

 

 

1,128

 

 

74,317

 

 

75,445

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

36,872

 

 

36,872

 

Agriculture

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

38,041

 

 

38,041

 

Other

 

 

109

 

 

0

 

 

0

 

 

1,342

 

 

1,451

 

 

165,874

 

 

167,325

 

Total commercial related loans

 

 

329

 

 

265

 

 

0

 

 

14,366

 

 

14,960

 

 

699,255

 

 

714,215

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

120

 

 

120

 

 

25,575

 

 

25,695

 

Home equity

 

 

171

 

 

0

 

 

0

 

 

220

 

 

391

 

 

80,468

 

 

80,859

 

Other

 

 

118

 

 

161

 

 

0

 

 

594

 

 

873

 

 

37,742

 

 

38,615

 

Total consumer related loans

 

 

289

 

 

161

 

 

0

 

 

934

 

 

1,384

 

 

143,785

 

 

145,169

 

Total loans

 

$

618

 

$

426

 

$

0

 

$

15,300

 

$

16,344

 

$

843,040

 

$

859,384

 

Troubled Debt Restructurings

Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans generally involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss.

A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and management believes that future loan payments are reasonably assured under the modified terms.

- 21 -


Table of Contents

The table below shows loans whose terms have been modified under TDRs during the three and six months ended June 30, 2014 and 2013. There was no impairment loss recognized on any of these TDRs, and they are all performing under their modified terms. There were no defaults during the three and six months ended June 30, 2014 and 2013 for TDRs entered into for the last 12 months.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Modifications

 

(dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investments

 

Post-Modification
Outstanding
Recorded
Investments

 

Recorded
Investment
at Period End

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer related loans nonaccrual

 

 

1

 

$

150

 

$

120

 

$

120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer related loans nonaccrual

 

 

1

 

$

150

 

$

120

 

$

120

 

Commercial related loans accruing

 

 

1

 

$

194

 

$

194

 

$

188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related loans accruing

 

 

1

 

$

208

 

$

208

 

$

208

 

- 22 -


Table of Contents

NOTE 6 – Allowance for Loan Losses

The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three and six months ended June 30, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Builder &
developer

 

Commercial
real estate
investor

 

Residential
real estate
investor

 

Hotel/
Motel

 

Wholesale &
retail

 

Manufacturing

 

Agriculture

 

Other

 

Total
commercial
related

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2014

 

$

2,195

 

$

1,488

 

$

1,430

 

$

617

 

$

639

 

$

217

 

$

311

 

$

1,425

 

$

8,322

 

Charge-offs

 

 

0

 

 

(200

)

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

(200

)

Recoveries

 

 

0

 

 

0

 

 

190

 

 

0

 

 

4

 

 

0

 

 

0

 

 

0

 

 

194

 

Provisions

 

 

46

 

 

304

 

 

(200

)

 

38

 

 

(6

)

 

(5

)

 

7

 

 

88

 

 

272

 

Balance, June 30, 2014

 

$

2,241

 

$

1,592

 

$

1,420

 

$

655

 

$

637

 

$

212

 

$

318

 

$

1,513

 

$

8,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2013

 

$

1,534

 

$

1,286

 

$

1,196

 

$

514

 

$

1,832

 

$

224

 

$

237

 

$

1,156

 

$

7,979

 

Charge-offs

 

 

(62

)

 

0

 

 

(225

)

 

0

 

 

(210

)

 

0

 

 

0

 

 

0

 

 

(497

)

Recoveries

 

 

0

 

 

0

 

 

0

 

 

0

 

 

18

 

 

0

 

 

0

 

 

0

 

 

18

 

Provisions

 

 

104

 

 

(73

)

 

210

 

 

(9

)

 

216

 

 

(23

)

 

16

 

 

(5

)

 

436

 

Balance, June 30, 2013

 

$

1,576

 

$

1,213

 

$

1,181

 

$

505

 

$

1,856

 

$

201

 

$

253

 

$

1,151

 

$

7,936

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Residential
mortgage

 

Home
equity

 

Other

 

Total
consumer
related

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2014

 

$

59

 

$

156

 

$

318

 

$

533

 

$

1,458

 

$

10,313

 

Charge-offs

 

 

(30

)

 

(1

)

 

(125

)

 

(156

)

 

0

 

 

(356

)

Recoveries

 

 

0

 

 

4

 

 

5

 

 

9

 

 

0

 

 

203

 

Provisions

 

 

32

 

 

(2

)

 

125

 

 

155

 

 

(127

)

 

300

 

Balance, June 30, 2014

 

$

61

 

$

157

 

$

323

 

$

541

 

$

1,331

 

$

10,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2013

 

$

48

 

$

315

 

$

197

 

$

560

 

$

947

 

$

9,486

 

Charge-offs

 

 

(28

)

 

0

 

 

(101

)

 

(129

)

 

0

 

 

(626

)

Recoveries

 

 

2

 

 

6

 

 

13

 

 

21

 

 

0

 

 

39

 

Provisions

 

 

55

 

 

(85

)

 

167

 

 

137

 

 

(13

)

 

560

 

Balance, June 30, 2013

 

$

77

 

$

236

 

$

276

 

$

589

 

$

934

 

$

9,459

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Builder &
developer

 

Commercial
real estate
investor

 

Residential
real estate
investor

 

Hotel/
Motel

 

Wholesale &
retail

 

Manufacturing

 

Agriculture

 

Other

 

Total
commercial
related

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

$

2,073

 

$

1,500

 

$

1,482

 

$

595

 

$

637

 

$

217

 

$

307

 

$

1,393

 

$

8,204

 

Charge-offs

 

 

0

 

 

(200

)

 

(91

)

 

0

 

 

(34

)

 

0

 

 

0

 

 

0

 

 

(325

)

Recoveries

 

 

0

 

 

0

 

 

190

 

 

0

 

 

22

 

 

0

 

 

0

 

 

0

 

 

212

 

Provisions

 

 

168

 

 

292

 

 

(161

)

 

60

 

 

12

 

 

(5

)

 

11

 

 

120

 

 

497

 

Balance, June 30, 2014

 

$

2,241

 

$

1,592

 

$

1,420

 

$

655

 

$

637

 

$

212

 

$

318

 

$

1,513

 

$

8,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

$

1,571

 

$

1,259

 

$

1,195

 

$

485

 

$

1,913

 

$

237

 

$

202

 

$

1,170

 

$

8,032

 

Charge-offs

 

 

(62

)

 

0

 

 

(225

)

 

0

 

 

(210

)

 

0

 

 

0

 

 

0

 

 

(497

)

Recoveries

 

 

0

 

 

0

 

 

0

 

 

0

 

 

22

 

 

0

 

 

0

 

 

0

 

 

22

 

Provisions

 

 

67

 

 

(46

)

 

211

 

 

20

 

 

131

 

 

(36

)

 

51

 

 

(19

)

 

379

 

Balance, June 30, 2013

 

$

1,576

 

$

1,213

 

$

1,181

 

$

505

 

$

1,856

 

$

201

 

$

253

 

$

1,151

 

$

7,936

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Residential
mortgage

 

Home
equity

 

Other

 

Total
consumer
related

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

$

65

 

$

237

 

$

269

 

$

571

 

$

1,200

 

$

9,975

 

Charge-offs

 

 

(30

)

 

(41

)

 

(251

)

 

(322

)

 

0

 

 

(647

)

Recoveries

 

 

4

 

 

35

 

 

31

 

 

70

 

 

0

 

 

282

 

Provisions

 

 

22

 

 

(74

)

 

274

 

 

222

 

 

131

 

 

850

 

Balance, June 30, 2014

 

$

61

 

$

157

 

$

323

 

$

541

 

$

1,331

 

$

10,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

$

124

 

$

237

 

$

238

 

$

599

 

$

671

 

$

9,302

 

Charge-offs

 

 

(28

)

 

(75

)

 

(133

)

 

(236

)

 

0

 

 

(733

)

Recoveries

 

 

2

 

 

7

 

 

39

 

 

48

 

 

0

 

 

70

 

Provisions

 

 

(21

)

 

67

 

 

132

 

 

178

 

 

263

 

 

820

 

Balance, June 30, 2013

 

$

77

 

$

236

 

$

276

 

$

589

 

$

934

 

$

9,459

 

- 23 -


Table of Contents

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment at June 30, 2014 and 2013 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Builder &
developer

 

Commercial
real estate
investor

 

Residential
real estate
investor

 

Hotel/
Motel

 

Wholesale &
retail

 

Manufacturing

 

Agriculture

 

Other

 

Total
commercial
related

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

953

 

$

0

 

$

559

 

$

0

 

$

0

 

$

0

 

$

100

 

$

300

 

$

1,912

 

Collectively evaluated for impairment

 

 

1,288

 

 

1,592

 

 

861

 

 

655

 

 

637

 

 

212

 

 

218

 

 

1,213

 

 

6,676

 

Balance, June 30, 2014

 

$

2,241

 

$

1,592

 

$

1,420

 

$

655

 

$

637

 

$

212

 

$

318

 

$

1,513

 

$

8,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

850

 

$

0

 

$

650

 

$

0

 

$

0

 

$

0

 

$

100

 

$

120

 

$

1,720

 

Collectively evaluated for impairment

 

 

1,223

 

 

1,500

 

 

832

 

 

595

 

 

637

 

 

217

 

 

207

 

 

1,273

 

 

6,484

 

Balance, December 31, 2013

 

$

2,073

 

$

1,500

 

$

1,482

 

$

595

 

$

637

 

$

217

 

$

307

 

$

1,393

 

$

8,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

550

 

$

0

 

$

0

 

$

0

 

$

100

 

$

120

 

$

770

 

Collectively evaluated for impairment

 

 

1,576

 

 

1,213

 

 

631

 

 

505

 

 

1,856

 

 

201

 

 

153

 

 

1,031

 

 

7,166

 

Balance, June 30, 2013

 

$

1,576

 

$

1,213

 

$

1,181

 

$

505

 

$

1,856

 

$

201

 

$

253

 

$

1,151

 

$

7,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

6,453

 

$

6,643

 

$

2,257

 

$

599

 

$

808

 

$

666

 

$

442

 

$

1,766

 

$

19,634

 

Collectively evaluated for impairment

 

 

99,869

 

 

135,584

 

 

86,042

 

 

77,046

 

 

72,386

 

 

35,253

 

 

39,727

 

 

176,200

 

 

722,107

 

Balance, June 30, 2014

 

$

106,322

 

$

142,227

 

$

88,299

 

$

77,645

 

$

73,194

 

$

35,919

 

$

40,169

 

$

177,966

 

$

741,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

11,594

 

$

7,860

 

$

1,984

 

$

0

 

$

1,403

 

$

671

 

$

451

 

$

1,824

 

$

25,787

 

Collectively evaluated for impairment

 

 

94,842

 

 

133,512

 

 

76,416

 

 

70,324

 

 

74,042

 

 

36,201

 

 

37,590

 

 

165,501

 

 

688,428

 

Balance, December 31, 2013

 

$

106,436

 

$

141,372

 

$

78,400

 

$

70,324

 

$

75,445

 

$

36,872

 

$

38,041

 

$

167,325

 

$

714,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

9,168

 

$

5,691

 

$

2,571

 

$

0

 

$

2,149

 

$

682

 

$

463

 

$

2,468

 

$

23,192

 

Collectively evaluated for impairment

 

 

92,743

 

 

112,394

 

 

67,095

 

 

67,668

 

 

66,434

 

 

33,460

 

 

30,690

 

 

140,169

 

 

610,653

 

Balance, June 30, 2013

 

$

101,911

 

$

118,085

 

$

69,666

 

$

67,668

 

$

68,583

 

$

34,142

 

$

31,153

 

$

142,637

 

$

633,845

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Residential
mortgage

 

Home
equity

 

Other

 

Total
consumer
related

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

1,912

 

Collectively evaluated for impairment

 

 

61

 

 

157

 

 

323

 

 

541

 

 

1,331

 

 

8,548

 

Balance, June 30, 2014

 

$

61

 

$

157

 

$

323

 

$

541

 

$

1,331

 

$

10,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

1,720

 

Collectively evaluated for impairment

 

 

65

 

 

237

 

 

269

 

 

571

 

 

1,200

 

 

8,255

 

Balance, December 31, 2013

 

$

65

 

$

237

 

$

269

 

$

571

 

$

1,200

 

$

9,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

770

 

Collectively evaluated for impairment

 

 

77

 

 

236

 

 

276

 

 

589

 

 

934

 

 

8,689

 

Balance, June 30, 2013

 

$

77

 

$

236

 

$

276

 

$

589

 

$

934

 

$

9,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

146

 

$

184

 

$

504

 

$

834

 

$

 

 

$

20,468

 

Collectively evaluated for impairment

 

 

30,537

 

 

80,554

 

 

34,242

 

 

145,333

 

 

 

 

 

867,440

 

Balance, June 30, 2014

 

$

30,683

 

$

80,738

 

$

34,746

 

$

146,167

 

$

 

 

$

887,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

150

 

$

231

 

$

594

 

$

975

 

$

 

 

$

26,762

 

Collectively evaluated for impairment

 

 

25,545

 

 

80,628

 

 

38,021

 

 

144,194

 

 

 

 

 

832,622

 

Balance, December 31, 2013

 

$

25,695

 

$

80,859

 

$

38,615

 

$

145,169

 

$

 

 

$

859,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

152

 

$

397

 

$

667

 

$

1,216

 

$

 

 

$

24,408

 

Collectively evaluated for impairment

 

 

24,276

 

 

71,169

 

 

38,094

 

 

133,539

 

 

 

 

 

744,192

 

Balance, June 30, 2013

 

$

24,428

 

$

71,566

 

$

38,761

 

$

134,755

 

$

 

 

$

768,600

 

- 24 -


Table of Contents

Note 7—Deposits

The composition of deposits as of June 30, 2014 and December 31, 2013 is shown below.

 

 

 

 

 

 

 

 

(dollars in thousands)

 

June 30,
2014

 

December 31,
2013

 

Noninterest bearing demand

 

$

113,207

 

$

107,921

 

NOW

 

 

88,654

 

 

83,949

 

Money market

 

 

291,377

 

 

292,870

 

Savings

 

 

41,927

 

 

39,522

 

Time deposits less than $100,000

 

 

246,394

 

 

230,641

 

Time deposits $100,000 or more

 

 

186,940

 

 

170,400

 

Total deposits

 

$

968,499

 

$

925,303

 

Note 8—Short-Term Borrowings and Long-Term Debt

Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At June 30, 2014, the balance of securities sold under agreements to repurchase was $29,971,000 compared to $24,597,000 at December 31, 2013. At June 30, 2014, there were no other short- term borrowings compared to $15,766,000 at December 31, 2013.

The following table presents a summary of long-term debt as of June 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

(dollars in thousands)

 

June 30,
2014

 

December 31,
2013

 

PeoplesBank’s obligations:

 

 

 

 

 

 

 

Federal Home Loan Bank of Pittsburgh (FHLBP)

 

 

 

 

 

 

 

Due July 2015, 1.90%

 

$

5,000

 

$

5,000

 

Due July 2016, 2.35%

 

 

5,000

 

 

5,000

 

Due September 2016, 1.18%

 

 

10,000

 

 

10,000

 

Due October 2016, 1.06%

 

 

10,000

 

 

10,000

 

Due October 2016, 1.10%

 

 

10,000

 

 

10,000

 

Due April 2017, .97%

 

 

10,000

 

 

0

 

Due March 2018, 1.17%

 

 

10,000

 

 

10,000

 

Due June 2018, 1.87%

 

 

5,000

 

 

5,000

 

Due June 2019, 2.10%

 

 

5,000

 

 

5,000

 

Total FHLBP

 

 

70,000

 

 

60,000

 

Capital lease obligation

 

 

141

 

 

183

 

Codorus Valley Bancorp, Inc. obligations:

 

 

 

 

 

 

 

Junior subordinated debt

 

 

 

 

 

 

 

Due 2034, 2.25%, floating rate based on 3 month

 

 

 

 

 

 

 

LIBOR plus 2.02%, callable quarterly

 

 

3,093

 

 

3,093

 

Due 2036, 1.77% floating rate based on 3 month

 

 

 

 

 

 

 

LIBOR plus 1.54%, callable quarterly

 

 

7,217

 

 

7,217

 

Total long-term debt

 

$

80,451

 

$

70,493

 

- 25 -


Table of Contents

PeoplesBank’s long-term debt obligations to the FHLBP are fixed rate instruments. Under terms of a blanket collateral agreement with the FHLBP, the obligations are secured by FHLBP stock and PeoplesBank qualifying loan receivables, principally real estate secured loans.

In June 2006, Codorus Valley formed CVB Statutory Trust No. 2, a wholly-owned special purpose subsidiary whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7,217,000. In November 2004, Codorus Valley formed CVB Statutory Trust No. 1 to facilitate a pooled trust preferred debt issuance of $3,093,000. The Corporation owns all of the common stock of these nonbank subsidiaries, and the debentures are the sole assets of the Trusts. The accounts of both Trusts are not consolidated for financial reporting purposes in accordance with FASB ASC 810. For regulatory capital purposes, all of the Corporation’s trust preferred securities qualified as Tier 1 capital for all reported periods. Trust preferred securities are subject to capital limitations under the FDIC’s risk-based capital guidelines. The Corporation used the net proceeds from these offerings to fund its operations.

- 26 -


Table of Contents

Note 9—Regulatory Matters

Codorus Valley and PeoplesBank are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if imposed, could have a material adverse 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 quarter-to-date average assets (leverage ratio). Management believes that Codorus Valley and PeoplesBank were well capitalized on June 30, 2014 based on regulatory capital guidelines.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Minimum for
Capital Adequacy

 

Well Capitalized
Minimum*

 

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Codorus Valley Bancorp, Inc. (consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

120,273

 

 

12.90

%

$

37,292

 

 

4.00

%

 

n/a

 

 

n/a

 

Total risk based

 

 

130,733

 

 

14.02

 

 

74,584

 

 

8.00

 

 

n/a

 

 

n/a

 

Leverage

 

 

120,273

 

 

10.04

 

 

47,919

 

 

4.00

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

115,477

 

 

12.79

%

$

36,118

 

 

4.00

%

 

n/a

 

 

n/a

 

Total risk based

 

 

125,452

 

 

13.89

 

 

72,236

 

 

8.00

 

 

n/a

 

 

n/a

 

Leverage

 

 

115,477

 

 

10.18

 

 

45,371

 

 

4.00

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PeoplesBank, A Codorus Valley Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

116,666

 

 

12.56

%

$

37,166

 

 

4.00

%

$

55,748

 

 

6.00

%

Total risk based

 

 

127,126

 

 

13.68

 

 

74,331

 

 

8.00

 

 

92,914

 

 

10.00

 

Leverage

 

 

116,666

 

 

9.76

 

 

47,793

 

 

4.00

 

 

59,742

 

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

111,713

 

 

12.42

%

$

35,987

 

 

4.00

%

$

53,981

 

 

6.00

%

Total risk based

 

 

121,688

 

 

13.53

 

 

71,975

 

 

8.00

 

 

89,968

 

 

10.00

 

Leverage

 

 

111,713

 

 

9.88

 

 

45,236

 

 

4.00

 

 

56,545

 

 

5.00

 

*To be well capitalized under prompt corrective action provisions.

Note 10—Shareholders’ Equity

Private Placement of Common Stock

On March 26, 2014, the Corporation completed a private placement of 650,000 shares of its common stock, par value $2.50 per share, pursuant to the terms of a Securities Purchase Agreement (“Purchase Agreement”) dated March 26, 2014, by and among the Corporation and seven accredited investors. Pursuant to the terms of the Purchase Agreement, the accredited investors also entered into a Registration Rights Agreement with the Corporation, under which the Corporation agreed to file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of the common stock issued pursuant to the Purchase Agreement. This registration statement was filed with the SEC on April 25, 2014. The full text and form of both the Purchase Agreement and the Registration Rights Agreement are attached to the Corporation’s related Form 8-K filed on March 27, 2014.

- 27 -


Table of Contents

The Corporation raised net proceeds of approximately $12.5 million resulting from the gross amount of the private placement transaction of $13 million, less related issuance costs of approximately $0.5 million. The Corporation used the net proceeds from the private placement, and additional cash, to redeem $13 million of the $25 million in outstanding shares of the Corporation’s preferred stock held by the United States Department of the Treasury.

Preferred stock issued under the US Treasury’s Small Business Lending Fund Program

The U.S. Department of the Treasury (Treasury) has a capital investment in the Corporation pursuant to the Corporation’s participation in the Treasury’s Small Business Lending Funding Program (SBLF Program). In August 2011, the Corporation sold to the Treasury, for an aggregate purchase price of $25 million, 25,000 shares of non-cumulative, perpetual preferred stock, Series B, $1,000 liquidation value, $2.50 par value. On May 30, 2014, the Corporation redeemed 13,000 of the 25,000 outstanding shares of the Corporation’s preferred stock that had been issued to the Treasury, leaving 12,000 outstanding shares and $12 million of preferred stock as of June 30, 2014. The May 30, 2014 preferred stock redemption was funded primarily with the funds the Corporation raised in the March 26, 2014 private placement of its common stock.

The annualized dividend rate on the preferred stock issued under the SBLF Program was 1 percent for the three and six months ended June 30, 2014 and 2013. Based on the increase in the qualified small business lending portfolio balance over the baseline level at September 30, 2013, the dividend rate will remain at 1 percent through February 18, 2016. Thereafter, under the provisions of the SBLF Program the dividend rate will increase to 9% (including a quarterly lending incentive fee of 0.5%). Additional information about SBLF preferred stock is disclosed in Note 10—Shareholders’ Equity in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

Common stock dividend

Periodically, the Corporation distributes stock dividends on its common stock. The Corporation distributed a 5 percent stock dividend on December 10, 2013 which resulted in the issuance of 225,937 additional common shares.

Note 11—Contingent Liabilities

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 consolidated financial position and/or operating results of the Corporation other than routine litigation incidental to the business. Management is not aware of any proceedings known or contemplated by government authorities.

Note 12—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 are written conditional commitments issued by 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 $25,350,000 of standby letters of credit outstanding on June 30, 2014, compared to $27,673,000 on December 31, 2013. 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 payments required under the corresponding letters of credit. The amount of the liability as of June 30, 2014 and December 31, 2013, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

- 28 -


Table of Contents

Note 13—Fair Value of Assets and Liabilities

The Corporation uses its best judgment in estimating the fair value of the Corporation’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates herein are not necessarily indicative of the amounts that could be realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

 

 

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

 

 

 

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

 

 

 

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.

Since management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications on a quarterly basis.

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Table of Contents

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

The fair values of investment securities were measured using information from a third-party pricing service. The pricing service uses quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, by relying on the securities’ relationship to other benchmark quoted prices. At least annually, the Corporation reviews a random sample of the pricing information received from the third-party pricing service by comparing it to price quotes from third-party brokers. Historically, price deviations have been immaterial.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

(dollars in thousands)

 

Total

 

(Level 1)
Quoted Prices in
Active Markets for
Identical Assets

 

(Level 2)
Significant Other
Observable
Inputs

 

(Level 3)
Significant Other
Unobservable
Inputs

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

33,784

 

$

0

 

$

33,784

 

$

0

 

U.S. agency mortgage-backed, residential

 

 

113,186

 

 

0

 

 

113,186

 

 

0

 

State and municipal

 

 

79,616

 

 

0

 

 

79,616

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

33,499

 

$

0

 

$

33,499

 

$

0

 

U.S. agency mortgage-backed, residential

 

 

105,919

 

 

0

 

 

105,919

 

 

0

 

State and municipal

 

 

89,323

 

 

0

 

 

89,323

 

 

0

 

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans
Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At June 30, 2014, the fair value of impaired loans with a valuation allowance or charge-off was of $2,803,000, which is net of valuation allowances of $1,912,000 and charge-offs of $81,000. At December 31, 2013 the fair value of impaired loans with a valuation allowance or charge-off was $8,669,000, which is net of valuation allowances of $1,720,000 and charge-offs of $291,000.

Foreclosed Real Estate
Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. At June 30, 2014, the fair value of foreclosed real estate with a valuation allowance or charge-off was $2,915,000, which is net of valuation allowances of $3,878,000. At December 31, 2013, the carrying value of foreclosed real estate with a valuation allowance or charge-off was $3,098,000, which is net of valuation allowances of $3,954,000 and charge-offs of $100,000.

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Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

(dollars in thousands)

 

Total

 

(Level 1)
Quoted Prices in
Active Markets for
Identical Assets

 

(Level 2)
Significant Other
Observable
Inputs

 

(Level 3)
Significant Other
Unobservable
Inputs

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,803

 

$

0

 

$

0

 

$

2,803

 

Foreclosed real estate

 

 

2,915

 

 

0

 

 

0

 

 

2,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

8,669

 

$

0

 

$

0

 

$

8,669

 

Foreclosed real estate

 

 

3,098

 

 

0

 

 

0

 

 

3,098

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

(dollars in thousands)

 

Fair Value
Estimate

 

Valuation
Techniques

 

Unobservable
Input

 

 

Range

Weighted
Average

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,803

 

 

Appraisal

 

 

(1

)

Appraisal adjustments

 

(2)

10% - 41 %

22%

Foreclosed real estate

 

 

2,915

 

 

Appraisal

 

 

(1

)

Appraisal adjustments

 

(2)

8% - 66 %

45%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

8,669

 

 

Appraisal

 

 

(1

)

Appraisal adjustments

 

(2)

13% - 27 %

19%

Foreclosed real estate

 

 

3,098

 

 

Appraisal

 

 

(1

)

Appraisal adjustments

 

(2)

8% - 67 %

45%


 

 

(1)

Fair value is generally determined through independent appraisals, which generally include various level 3 inputs that are not identifiable.

(2)

Appraisals may be adjusted downward by the Corporation’s management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments as of June 30, 2014 and December 31, 2013:

Cash and cash equivalents
The carrying amount is a reasonable estimate of fair value.

Securities available for sale
The fair value of securities available for sale is determined in accordance with the methods described under FASB ASC Topic 820 as described above.

Restricted investment in bank stocks
The carrying amount of restricted investment in bank stocks is a reasonable estimate of fair value. The Corporation is required to maintain minimum investment balances in these stocks. These stocks are not actively traded, and therefore, have no readily determinable market value.

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Table of Contents

Loans held for sale
The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If quoted prices do not exist, quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan, are used.

Loans, net
The fair value of loans, excluding all impaired loans, is estimated using discounted cash flow analyses using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans are first segregated by type such as commercial, real estate, and consumer, and then further segmented by rate type. Projected future cash flows are calculated based on contractual maturity or call dates. Generally, for variable rate loans that reprice frequently have no significant change in credit risk, fair value is based on carrying value.

Interest receivable
The carrying value of interest receivable is a reasonable estimate of fair value.

Deposits
The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using a discounted cash flow analysis. Discount rates used are based on rates currently offered for deposits with similar remaining maturities. Fair value of variable rate time deposits that reprice frequently are based on carrying value. Fair values of time deposit liabilities do not include the value of the Corporation’s long-term relationships with depositors, which may be significant.

Short-term borrowings
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Long-term debt
Long-term debt includes FHLB advances (Level 2) and junior subordinated debt (Level 3). The fair value of FHLB advances is estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices are obtained from this active market and represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. The fair value of junior subordinated debt is estimated using discounted cash flow analysis, based on market rates and spread characteristics of similar debt with similar credit risk characteristics, terms and remaining maturity.

Interest payable
The carrying value of interest payable is a reasonable estimate of fair value.

Off-balance sheet instruments
Off-balance sheet instruments consist of lending commitments and letters of credit are based on fees currently charged in the market to enter into similar arrangements, taking into account the remaining terms of the agreements and counterparties’ credit standing. These amounts were not considered material.

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Table of Contents

The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of June 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Estimates

 

 

 

 

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(dollars in thousands)

 

Carrying
Amount

 

Estimated
Fair Value

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Other
Unobservable
Inputs

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,075

 

$

36,075

 

$

36,075

 

$

0

 

$

0

 

Securities available-for-sale

 

 

226,586

 

 

226,586

 

$

0

 

 

226,586

 

 

0

 

Restricted investment in bank stocks

 

 

4,710

 

 

4,710

 

 

0

 

 

4,710

 

 

0

 

Loans held for sale

 

 

875

 

 

895

 

 

0

 

 

895

 

 

0

 

Loans, net

 

 

877,448

 

 

892,753

 

 

0

 

 

0

 

 

892,753

 

Interest receivable

 

 

3,637

 

 

3,637

 

 

0

 

 

3,637

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

968,499

 

$

970,616

 

$

0

 

$

970,616

 

$

0

 

Short-term borrowings

 

 

29,971

 

 

29,971

 

 

0

 

 

29,971

 

 

0

 

Long-term debt

 

 

80,451

 

 

78,228

 

 

0

 

 

70,555

 

 

7,673

 

Interest payable

 

 

487

 

 

487

 

 

0

 

 

487

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,062

 

$

15,062

 

$

15,062

 

$

0

 

$

0

 

Securities available-for-sale

 

 

228,741

 

 

228,741

 

 

0

 

 

228,741

 

 

0

 

Restricted investment in bank stocks

 

 

4,742

 

 

4,742

 

 

0

 

 

4,742

 

 

0

 

Loans held for sale

 

 

514

 

 

524

 

 

0

 

 

524

 

 

0

 

Loans, net

 

 

849,409

 

 

868,413

 

 

0

 

 

0

 

 

868,413

 

Interest receivable

 

 

3,583

 

 

3,583

 

 

0

 

 

3,583

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

925,303

 

$

927,396

 

$

0

 

$

927,396

 

$

0

 

Short-term borrowings

 

 

40,363

 

 

40,363

 

 

0

 

 

40,363

 

 

0

 

Long-term debt

 

 

70,493

 

 

68,604

 

 

0

 

 

60,417

 

 

8,187

 

Interest payable

 

 

391

 

 

391

 

 

0

 

 

391

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

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Table of Contents

Note 14—Assets and Liabilities Subject to Offsetting

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

PeoplesBank enters into agreements under which it sells securities subject to an obligation to repurchase the same securities the next business day. These repurchase agreements are accounted for as a collateralized financing arrangement (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability (short-term borrowings) in the Corporation’s consolidated financial statements of condition, while the securities underlying the repurchase agreements remain in the respective securities asset accounts. In other words, there is no offsetting or netting of the securities with the repurchase agreement liabilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross
Amounts of
Recognized
Liabilities

 

Gross
Amounts
Offset in the
Statements of
Condition

 

Net Amounts
of Liabilities
Presented in
the Statements
of Condition

 

Gross amounts Not Offset in
the Statements of Condition

 

 

 

(dollars in thousands)

 

 

 

 

 

Financial
Instruments

 

Cash Collateral
Pledged

 

Net
Amount

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements

(1

)

$

29,971

 

$

0

 

$

29,971

 

$

(29,971

)

$

0

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements

(1

)

$

24,597

 

$

0

 

$

24,597

 

$

(24,597

)

$

0

 

$

0

 


 

 

(1)

As of June 30, 2014 and December 31, 2013, the fair value of securities pledged in connection with repurchase agreements was $34,596,000 and $29,299,000, respectively.

Note 15—Subsequent Events

On July 22, 2014, the Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Madison Bancorp, Inc., a Maryland corporation (“Madison”), and CVLY Corp., a Pennsylvania corporation and wholly-owned subsidiary of the Corporation (“Acquisition Subsidiary”), pursuant to which the Corporation will acquire Madison through the merger of Acquisition Subsidiary with and into Madison (the “Merger”), with Madison being the surviving corporation in the Merger. In connection with the Merger, Madison will cause its wholly-owned subsidiary, Madison Square Federal Savings Bank (“Madison Square”), to merge with and into PeoplesBank (the “Bank Merger”), with PeoplesBank being the surviving bank in the Bank Merger.

Under the terms of the Merger Agreement, upon consummation of the Merger, each share of Madison common stock will be converted into the right to receive $22.90 in cash, without interest, and each outstanding option to purchase Madison common stock will be converted into the right to receive cash based on a formula set forth in the Merger Agreement. The transaction is valued at approximately $14.4 million.

Consummation of the Merger is subject to certain terms and conditions, including, but not limited to, receipt of various regulatory approvals and approval by Madison’s shareholders.

It is expected that the acquisition will be completed in the fourth quarter of 2014 or first quarter of 2015.

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Table of Contents

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.

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, but are not limited to, the following:

 

 

 

 

operating, legal and regulatory risks;

 

enacted financial reform legislation, e.g., Dodd-Frank Wall Street Reform and Consumer Protection Act, which may have a significant impact on the Corporation’s business and results of operations;

 

a prolonged economic downturn;

 

an increase in nonperforming assets requiring loss provisions and the incurrence of carrying costs related to nonperforming assets;

 

declines in the market value of investment securities considered to be other-than-temporary;

 

the effects of and changes in the rate of FDIC premiums, including special assessments;

 

interest rate fluctuations which could increase our cost of funds or decrease our yield on earning assets and therefore reduce our net interest income;

 

future legislative or administrative changes to U.S. governmental capital programs;

 

unavailability of capital when needed or availability at less than favorable terms;

 

political and competitive forces affecting banking, securities, asset management and credit services businesses;

 

unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, which may adversely affect the Corporation’s operations, net income or reputation; 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.

Critical accounting policies

We have identified critical accounting policies for the Corporation to include the allowance for loan losses, valuation of foreclosed real estate, and evaluation of other-than-temporary impairment losses of securities. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for the year ended December 31, 2013 in regards to application or related judgments and estimates. A detailed disclosure pertaining to critical accounting estimates is provided in Item 7 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

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Table of Contents

Three months ended June 30, 2014,
compared to three months ended June 30, 2013

FINANCIAL HIGHLIGHTS

The Corporation earned net income available to common shareholders (earnings) totaling $2,755,000 for the quarter ended June 30, 2014, compared to $2,583,000 for the quarter ended June 30, 2013. The $172,000 or 7 percent increase in earnings was primarily the result of an increase in net interest income and a decrease in the provision for loan losses, which more than offset an increase in noninterest expense, a decrease in noninterest income, and an increase in the provision for income taxes, as described below.

Net interest income increased $988,000 or 11 percent for the second quarter of 2014, compared to the second quarter of 2013, due primarily to an increase in the volume of interest-earning assets, principally commercial loans and U.S. agency mortgage-backed securities, and a decrease in the overall cost of deposits.

The provision for loan losses for the second quarter of 2014 decreased $260,000 or 46 percent compared to the second quarter of 2013. Net charge-offs in the second quarter of 2014 were $153,000, compared to $587,000 for the second quarter of 2013. The Corporation realized a recovery of $190,000 of a previous partial charge-off of an impaired commercial loan due to updated collateral appraisals resulting in a favorable fair value adjustment prior to the asset being transferred to foreclosed real estate.

The $120,000 or 6 percent decrease in total noninterest income for the second quarter of 2014, compared to the second quarter of 2013, was primarily the result of a substantial decrease in net gain from sales of loans held for sale (i.e. residential mortgage loans), reflecting a sharp decrease in refinancing demand and elevated mortgage market interest rates.

The $829,000 or 12 percent increase in noninterest expense for the second quarter of 2014, compared to the second quarter of 2013, was driven by increases in personnel, marketing, foreclosed real estate, and professional and legal expenses. Personnel expense increased $173,000 or 4 percent as a result of expanding the banking franchise in the third quarter of 2013, and normal business growth. Marketing expense increased $159,000 or 63 percent primarily as a result of non-recurring costs to promote PeoplesBank’s 150th year in business anniversary. Foreclosed real estate expenses increased $93,000 or 126 percent as a result of increased holding costs and valuation adjustments based upon updated appraisals for selected properties. The $91,000 or 55 percent increase in professional and legal expense was due primarily to an increase in consulting expense, which supported various corporate initiatives, and normal business growth.

The $137,000 or 14 percent increase in the provision for income taxes for the second quarter of 2014, compared to the second quarter of 2013, was primarily the result of a higher level of pretax earnings, and a decrease in the amount of tax-exempt income for the second quarter of 2014 as compared to the same period in 2013.

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Table of Contents

The schedule below presents selected performance metrics for second quarter of 2014 and 2013. Earnings per common share reflect an adjustment for the 5 percent common stock dividend distributed on December 10, 2013.

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

 

2014

 

2013

 

Basic earnings per common share

 

$

0.50

 

$

0.55

 

Diluted earnings per common share

 

$

0.49

 

$

0.54

 

Cash dividend payout ratio

 

 

23.8

%

 

19.2

%

Return on average assets

 

 

0.93

%

 

0.98

%

Return on average equity

 

 

9.63

%

 

10.13

%

Net interest margin (tax equivalent basis)

 

 

3.73

%

 

3.79

%

Net overhead ratio

 

 

2.02

%

 

1.91

%

Efficiency ratio

 

 

63.21

%

 

60.86

%

Average equity to average assets

 

 

9.71

%

 

9.67

%

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 June 30, 2014, was $10,289,000, an increase of $988,000 or 11 percent above the second quarter of 2013. The increase was due primarily to increased interest income from a higher average volume of interest earning assets, and a decrease in the cost of deposits, partially offset by an increase in long-term debt interest expense due to an increase in borrowings. Net interest income (tax equivalent basis) annualized as a percentage of average interest earning assets, i.e., net interest margin, was 3.73 percent for the second quarter of 2014, compared to 3.79 percent for the same period in 2013.

Interest income for the second quarter of 2014 totaled $12,364,000, an increase of $891,000 or 8 percent above the second quarter of 2013. The increase was driven primarily by an increase in the average volume of interest earning assets, principally commercial loans and U.S. agency mortgage-backed securities. Interest earning assets averaged $1.14 billion and yielded 4.46 percent (tax equivalent basis) for the second quarter of 2014, compared to $1.02 billion and 4.65 percent, respectively, for the second quarter of 2013. While the volume of earning assets increased, its effect on interest income was muted by lower loan yields, a reflection of the continuing low interest rate environment.

Interest expense for the second quarter of 2014 totaled $2,075,000, a decrease of $97,000 or 4 percent below the second quarter of 2013. The decrease in total interest expense was driven primarily by a general decrease in deposit rates, due to the low interest rate environment, and from a larger volume of low-cost core deposits. The Corporation defines core deposits as noninterest and interest bearing demand, savings and money market deposits. The average volume of these core demand and savings deposits was $537 million for the second quarter of 2014, a $43 million or 9 percent increase above the average volume for the second quarter of 2013. The growth of core deposits is a particular focus of the Corporation because of the lower cost of funds, fee income generated by certain transaction activity, and the relationship opportunity to cross-sell other financial products and services. Decreased interest expense on deposits was partially offset by higher interest expense on long-term debt, which increased $105,000 or 55 percent due to an increase in the average volume of borrowings. Long-term debt averaged $80 million for the second quarter of 2014, compared to a $41 million average for the second quarter of 2013. The increase in long-term debt was comprised of advances from the Federal Home Loan Bank of Pittsburgh. These advances were low rate borrowings with intermediate term bullet maturities that supplement deposit funding and provide a hedge against rising market interest rates.

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Table of Contents

Table 1-Average Balances and Interest Rates (tax equivalent basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

2014

 

2013

 

(dollars in thousands)

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

36,740

 

$

23

 

 

0.25

%

$

44,315

 

$

28

 

 

0.25

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

149,407

 

 

951

 

 

2.55

 

 

120,860

 

 

624

 

 

2.07

 

Tax-exempt

 

 

76,918

 

 

752

 

 

3.92

 

 

92,784

 

 

908

 

 

3.93

 

Total investment securities

 

 

226,325

 

 

1,703

 

 

3.02

 

 

213,644

 

 

1,532

 

 

2.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable (1)

 

 

859,412

 

 

10,737

 

 

5.01

 

 

751,554

 

 

10,105

 

 

5.39

 

Tax-exempt

 

 

18,096

 

 

221

 

 

4.90

 

 

11,111

 

 

155

 

 

5.60

 

Total loans

 

 

877,508

 

 

10,958

 

 

5.01

 

 

762,665

 

 

10,260

 

 

5.40

 

Total earning assets

 

 

1,140,573

 

 

12,684

 

 

4.46

 

 

1,020,624

 

 

11,820

 

 

4.65

 

Other assets (2)

 

 

60,447

 

 

 

 

 

 

 

 

58,939

 

 

 

 

 

 

 

Total assets

 

$

1,201,020

 

 

 

 

 

 

 

$

1,079,563

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

$

381,758

 

$

329

 

 

0.35

%

$

363,182

 

$

337

 

 

0.37

%

Savings

 

 

41,236

 

 

20

 

 

0.19

 

 

38,194

 

 

24

 

 

0.25

 

Time

 

 

430,927

 

 

1,392

 

 

1.30

 

 

410,682

 

 

1,590

 

 

1.55

 

Total interest bearing deposits

 

 

853,921

 

 

1,741

 

 

0.82

 

 

812,058

 

 

1,951

 

 

0.96

 

Short-term borrowings

 

 

27,176

 

 

37

 

 

0.55

 

 

21,051

 

 

29

 

 

0.55

 

Long-term debt

 

 

80,463

 

 

297

 

 

1.48

 

 

40,569

 

 

192

 

 

1.90

 

Total interest bearing liabilities

 

 

961,560

 

 

2,075

 

 

0.87

 

 

873,678

 

 

2,172

 

 

1.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

 

114,409

 

 

 

 

 

 

 

 

93,442

 

 

 

 

 

 

 

Other liabilities

 

 

8,454

 

 

 

 

 

 

 

 

8,001

 

 

 

 

 

 

 

Shareholders’ equity

 

 

116,597

 

 

 

 

 

 

 

 

104,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,201,020

 

 

 

 

 

 

 

$

1,079,563

 

 

 

 

 

 

 

Net interest income (tax equivalent basis)

 

 

 

 

$

10,609

 

 

 

 

 

 

 

$

9,648

 

 

 

 

Net interest margin (3)

 

 

 

 

 

 

 

 

3.73

%

 

 

 

 

 

 

 

3.79

%

Tax equivalent adjustment

 

 

 

 

 

(320

)

 

 

 

 

 

 

 

(347

)

 

 

 

Net interest income

 

 

 

 

$

10,289

 

 

 

 

 

 

 

$

9,301

 

 

 

 


 

 

(1)

Average balance includes average nonaccrual loans of $12,001,000 for 2014 and $11,726,000 for 2013.

 

Interest includes net loan fees of $362,000 for 2014 and $393,000 for 2013.

(2)

Average balance includes average bank owned life insurance, foreclosed real estate and unrealized holding gains (losses) on investment securities.

(3)

Net interest income (tax equivalent basis) annualized as a percentage of average interest earning assets.

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Table of Contents

Table 2-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,
2014 vs. 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to change in

 

(dollars in thousands)

 

Volume

 

Rate

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

(5

)

$

0

 

$

(5

)

Investment securities:

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

145

 

 

182

 

 

327

 

Tax-exempt

 

 

(155

)

 

(1

)

 

(156

)

Loans:

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,499

 

 

(867

)

 

632

 

Tax-exempt

 

 

97

 

 

(31

)

 

66

 

Total interest income

 

 

1,581

 

 

(717

)

 

864

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

 

21

 

 

(29

)

 

(8

)

Savings

 

 

1

 

 

(5

)

 

(4

)

Time

 

 

78

 

 

(276

)

 

(198

)

Short-term borrowings

 

 

9

 

 

(1

)

 

8

 

Long-term debt

 

 

185

 

 

(80

)

 

105

 

Total interest expense

 

 

294

 

 

(391

)

 

(97

)

Net interest income

 

$

1,287

 

$

(326

)

$

961

 

Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate.

Provision for loan losses

The provision for loan losses was $300,000 for the three month period ended June 30, 2014, a decrease of $260,000 or 46 percent below the provision of $560,000 for the second quarter of 2013. The decrease in the provision was consistent with a decrease in net charge-offs in the second quarter of 2014, which totaled $153,000. The current quarter benefited from a recovery of $190,000 from a previous partial charge-off of an impaired commercial loan due to updated collateral appraisals resulting in a favorable fair value adjustment prior to the asset being transferred to foreclosed real estate. Comparatively, net charge-offs totaled $587,000 for the second quarter of 2013. More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 55.

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Table of Contents

Noninterest income

The following table presents the components of total noninterest income for the second quarter of 2014, compared to the second quarter of 2013.

Table 3 - Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Change
Increase (Decrease)

 

(dollars in thousands)

 

2014

 

2013

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and investment services fees

 

$

525

 

$

464

 

$

61

 

 

13

%

Income from mutual fund, annuity and insurance sales

 

 

192

 

 

173

 

 

19

 

 

11

 

Service charges on deposit accounts

 

 

760

 

 

670

 

 

90

 

 

13

 

Income from bank owned life insurance

 

 

175

 

 

185

 

 

(10

)

 

(5

)

Other income

 

 

164

 

 

180

 

 

(16

)

 

(9

)

Net gain on sales of loans held for sale

 

 

102

 

 

322

 

 

(220

)

 

(68

)

Gain on sales of securities

 

 

0

 

 

44

 

 

(44

)

 

(100

)

Total noninterest income

 

$

1,918

 

$

2,038

 

$

(120

)

 

(6

)%

The discussion that follows addresses changes in selected categories of noninterest income.

Trust and investment services fees—The $61,000 or 13 percent increase in trust and investment services fees was due to appreciation in the market value of managed accounts, upon which some fees are based, and growth in traditional trust business.

Service charges on deposit accounts—The $90,000 or 13 percent increase in service charge income was due primarily to increases in overdraft fees and debit card revenue.

Net gain on sales of loans held for sale—The $220,000 or 68 percent decrease in gains from the sale of residential mortgage loans held for sale resulted from a decrease in mortgage originations, as refinancing demand and gains therefrom have declined significantly, and the higher level of mortgage interest rates has priced some borrowers out of the mortgage market.

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Table of Contents

Noninterest expense

The following table presents the components of total noninterest expense for the second quarter of 2014, compared to the second quarter of 2013.

Table 4 - Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Change
Increase (Decrease)

 

(dollars in thousands)

 

2014

 

2013

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

$

4,288

 

$

4,115

 

$

173

 

 

4

%

Occupancy of premises, net

 

 

515

 

 

512

 

 

3

 

 

1

 

Furniture and equipment

 

 

551

 

 

476

 

 

75

 

 

16

 

Postage, stationery and supplies

 

 

163

 

 

157

 

 

6

 

 

4

 

Professional and legal

 

 

256

 

 

165

 

 

91

 

 

55

 

Marketing

 

 

413

 

 

254

 

 

159

 

 

63

 

FDIC insurance

 

 

173

 

 

138

 

 

35

 

 

25

 

Debit card processing

 

 

193

 

 

195

 

 

(2

)

 

(1

)

Charitable donations

 

 

32

 

 

11

 

 

21

 

 

191

 

Telephone

 

 

145

 

 

132

 

 

13

 

 

10

 

External data processing

 

 

233

 

 

167

 

 

66

 

 

40

 

Foreclosed real estate including (gains) losses on sales

 

 

167

 

 

74

 

 

93

 

 

126

 

Other

 

 

857

 

 

761

 

 

96

 

 

13

 

Total noninterest expense

 

$

7,986

 

$

7,157

 

$

829

 

 

12

%

The discussion that follows addresses changes in selected categories of noninterest expense.

Personnel—The $173,000 or 4 percent increase in personnel expense was due largely to an increase in wage expense resulting from planned staff additions that occurred in the first half of 2014 and throughout the year 2013 that affect the current period (e.g. franchise expansion), and normal business growth.

Furniture and equipment—The $75,000 or 16 percent increase in furniture and equipment was due primarily to additions related to franchise/office expansion, and normal business growth, which included increases in depreciation expense on computer hardware and software.

Professional and legalThe $91,000 or 55 percent increase in professional and legal expense was due primarily to an increase in consulting expense, which supported various corporate initiatives, and normal business growth.

Marketing—The $159,000 or 63 percent increase in marketing expense was primarily the result of non-recurring costs to promote PeoplesBank’s 150th year in business anniversary.

External data processing—The $66,000 or 40 percent increase in external data processing reflects increased reliance on outsourcing transaction processing to specialized vendors, which is typically performed on their hosted and secure websites thereby increasing our processing efficiency. Increases in the services offered to our client base and increases in transaction volume from normal business growth also contributed to the increase in this expense category.

Foreclosed real estate—The $93,000 or 126 percent increase in foreclosed real estate expenses was a result of holding costs incurred including real estate taxes, property maintenance, and valuation adjustments based upon updated appraisals.

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Table of Contents

Provision for income taxes

The provision for income tax for the second quarter of 2014 was $1,114,000, compared to $977,000 for the second quarter of 2013. The $137,000 or 14 percent increase was primarily the result from a higher level of pretax earnings, and a decrease in the amount of tax-exempt income for the second quarter of 2014 as compared to the same period in 2013.

For both periods, the Corporation’s statutory federal income tax rate was 34 percent. The Corporation’s effective income tax rate was 28 percent for the second quarter of 2014, compared to 27 percent for the second quarter of 2013. The effective tax rate differs from the statutory tax rate due to the impact of low-income housing credits and tax-exempt income, including income from bank owned life insurance.

Preferred stock dividends

Preferred stock dividends for the second quarter of 2014 totaled $52,000 compared to $62,000 for the second quarter of 2013. Though an annualized dividend rate of 1 percent applied to both periods, the amount of preferred stock dividends for the second quarter of 2014 decreased because, on May 30, 2014, as reported on a Form 8-K filed on the same date, the Corporation used the net proceeds from a private placement of common stock, and additional cash, to redeem $13 million of the $25 million in outstanding shares of the Corporation’s preferred stock held by the United States Department of the Treasury. The Corporation is currently paying the lowest permissible dividend rate under the U.S. Treasury’s Small Business Lending Fund Program (SBLF Program) as a result of originating loans that qualify for the SBLF Program in excess of a pre-determined loan portfolio baseline balance. Information about the SBLF Program is provided in this report at Note 10-Shareholders’ Equity.

Six months ended June 30, 2014,
compared to six months ended June 30, 2013

FINANCIAL HIGHLIGHTS

The Corporation earned net income available to common shareholders (earnings) totaling $5,696,000 for the first six months of 2014, compared to $5,182,000 for the same period of 2013. The $514,000 or 10 percent increase in earnings was primarily the result of an increase in net interest income, which more than offset an increase in noninterest expense and a decrease in noninterest income as described below.

Net interest income increased $2,257,000 or 12 percent for the first six months of 2014, compared to the same period of 2013, due primarily to an increase in the volume of interest-earning assets, principally commercial loans and U.S. agency mortgage-backed securities, and a decrease in the overall cost of deposits. The average balance of interest-earning assets for the first six months of 2014 increased $111 million or 11 percent compared to the same period of 2013.

The provision for loan losses for the first six months of 2014 was $850,000, which was required to support growth in the commercial loan portfolio and maintain the adequacy of the allowance for loan losses. The provision was 4% higher compared to the first six months of 2013. Net charge-offs for the first six months of 2014 were $365,000, which benefited from a $190,000 recovery from a previous partial charge-off of an impaired commercial loan due to updated collateral appraisals resulting in a favorable fair value adjustment prior to the asset being transferred to foreclosed real estate. Comparatively, net charge-offs totaled $663,000 for the same period of 2013.

The $397,000 or 10 percent decrease in total noninterest income for the first six months of 2014, compared to the same period of 2013, was primarily the result of a substantial decrease in net gain from the sales of residential mortgage loans, reflecting a sharp decrease in refinancing demand and higher mortgage market interest rates. Additionally, a decrease in income from the sale of mutual fund, annuity, and insurance products resulted from the lingering impact of staff turnover in 2013, and the unusually severe weather affecting sales activities in early 2014.

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Table of Contents

The $1,224,000 or 8 percent increase in noninterest expense for the first six months of 2014, compared to the same period of 2013, was driven by increases in several areas including personnel, furniture and equipment, marketing, charitable donations, external data processing, foreclosed real estate expenses, and professional and legal expenses. Personnel expense increased $309,000 and furniture and equipment expenses increased $124,000 as a result of expanding the banking franchise in the third quarter of 2013, and normal business growth. Marketing expense increased $320,000 primarily as a result of non-recurring costs to promote PeoplesBank’s 150th year in business anniversary. An increase in charitable contributions of $283,000 reflects increased donations to nonprofit organizations that qualify for state tax credits, which reduce future tax liabilities and effectively lower the overall cost of the donation. Foreclosed real estate expenses increased $110,000 related to holding costs and valuation adjustments based upon updated appraisals. Professional and legal expense increased $137,000 due primarily to increases in consulting expenses which supported various corporate initiatives, and increased professional services associated with normal business growth. An increase in external data processing of $100,000 reflects increased reliance on outsourcing transaction processing to specialized vendors, increases in the services offered to our client base, and increases in transaction volume from normal business growth.

The $103,000 or 5 percent increase in the provision for income taxes for the first six months of 2014, compared to the same period of 2013, primarily resulted from higher level of pretax earnings and a decrease in the amount of tax-exempt income.

The schedule below presents selected performance metrics for the first six months of 2014 and 2013. Earnings per common share reflect an adjustment for the 5 percent common stock dividend distributed on December 10, 2013.

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

Basic earnings per common share

 

$

1.11

 

$

1.10

 

Diluted earnings per common share

 

$

1.08

 

$

1.08

 

Cash dividend payout ratio

 

 

21.7

%

 

19.1

%

Return on average assets

 

 

0.99

%

 

0.99

%

Return on average equity

 

 

10.21

%

 

10.26

%

Net interest margin (tax equivalent basis)

 

 

3.85

%

 

3.83

%

Net overhead ratio

 

 

2.03

%

 

1.95

%

Efficiency ratio

 

 

61.98

%

 

61.64

%

Average equity to average assets

 

 

9.65

%

 

9.70

%

A more detailed analysis of the factors and trends affecting corporate earnings follows.

INCOME STATEMENT ANALYSIS

Net interest income

Net interest income for the six-month period ended June 30, 2014, was $20,710,000, an increase of $2,257,000 or 12 percent above the same period of 2013. The increase was due primarily to increased interest income from a higher average volume of interest-earning assets. A decrease in the cost of deposits, partially offset by increased long-term debt interest expense due to an increase in borrowings, also contributed to the increase in net increase income. Net interest income (tax equivalent basis) annualized as a percentage of average interest-earning assets, i.e., net interest margin, was 3.85 percent for the first six months of 2014 compared to 3.83 percent for the same period in 2013.

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Table of Contents

Interest income for the first six months totaled $24,777,000, an increase of $1,943,000 or 9 percent above the same period of 2013. The increase was driven primarily by an increase in the average volume of interest earning assets, principally commercial loans and U.S. agency mortgage-backed securities. Interest earning assets averaged $1.12 billion and yielded 4.58 percent (tax equivalent basis) for the first six months of 2014, compared to $1.01 billion and 4.70 percent, respectively, for the first six months of 2013. While the volume of earning assets increased, its effect on interest income was muted by lower asset yields, a reflection of the continuing low interest rate environment.

Interest expense for the first six months of 2014 totaled $4,067,000, a decrease of $314,000 or 7 percent below the same period of 2013. The decrease in total interest expense was driven primarily by a general decrease in deposit rates, due to the low interest rate environment, and from a larger volume of low-cost core deposits. The Corporation defines core deposits as noninterest and interest bearing demand, savings and money market deposits. The average volume of these core demand and savings deposits was $536 million for the six-month period ending June 30, 2014, a $47 million or 10 percent increase above the average volume for the same period of 2013. The growth of core deposits is a particular focus of the Corporation because of the lower cost of funds, fee income generated by certain transaction activity, and the relationship opportunity to cross-sell other financial products and services. Decreased interest expense on deposits was offset by higher interest expense on long-term debt, which increased $218,000 or 60 percent due to an increase in average borrowings. Long-term debt averaged $79 million for the first six months of 2014, compared to a $37 million average for the same period of 2013. The increase in long-term debt was comprised of advances from the Federal Home Loan Bank of Pittsburgh. These advances were low rate borrowings with intermediate term bullet maturities that supplement deposit funding and provide a hedge against rising market interest rates.

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Table of Contents

Table 5-Average Balances and Interest Rates (tax equivalent basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

2014

 

2013

 

(dollars in thousands)

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

20,775

 

$

26

 

 

0.25

%

$

33,543

 

$

42

 

 

0.25

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

146,972

 

 

1,820

 

 

2.50

 

 

124,327

 

 

1,275

 

 

2.07

 

Tax-exempt

 

 

79,698

 

 

1,557

 

 

3.94

 

 

93,908

 

 

1,840

 

 

3.95

 

Total investment securities

 

 

226,670

 

 

3,377

 

 

3.00

 

 

218,235

 

 

3,115

 

 

2.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable (1)

 

 

854,894

 

 

21,597

 

 

5.09

 

 

746,601

 

 

20,072

 

 

5.42

 

Tax-exempt

 

 

17,438

 

 

431

 

 

4.98

 

 

10,874

 

 

306

 

 

5.67

 

Total loans

 

 

872,332

 

 

22,028

 

 

5.09

 

 

757,475

 

 

20,378

 

 

5.43

 

Total earning assets

 

 

1,119,777

 

 

25,431

 

 

4.58

 

 

1,009,253

 

 

23,535

 

 

4.70

 

Other assets (2)

 

 

59,218

 

 

 

 

 

 

 

 

57,607

 

 

 

 

 

 

 

Total assets

 

$

1,178,995

 

 

 

 

 

 

 

$

1,066,860

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

$

385,605

 

$

695

 

 

0.36

%

$

364,209

 

$

671

 

 

0.37

%

Savings

 

 

40,474

 

 

45

 

 

0.22

 

 

36,967

 

 

46

 

 

0.25

 

Time

 

 

414,636

 

 

2,672

 

 

1.30

 

 

408,478

 

 

3,243

 

 

1.60

 

Total interest bearing deposits

 

 

840,715

 

 

3,412

 

 

0.82

 

 

809,654

 

 

3,960

 

 

0.99

 

Short-term borrowings

 

 

27,722

 

 

73

 

 

0.53

 

 

20,592

 

 

57

 

 

0.56

 

Long-term debt

 

 

78,650

 

 

582

 

 

1.49

 

 

37,387

 

 

364

 

 

1.96

 

Total interest bearing liabilities

 

 

947,087

 

 

4,067

 

 

0.87

 

 

867,633

 

 

4,381

 

 

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

 

109,967

 

 

 

 

 

 

 

 

88,363

 

 

 

 

 

 

 

Other liabilities

 

 

8,137

 

 

 

 

 

 

 

 

7,377

 

 

 

 

 

 

 

Shareholders’ equity

 

 

113,804

 

 

 

 

 

 

 

 

103,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,178,995

 

 

 

 

 

 

 

$

1,066,860

 

 

 

 

 

 

 

Net interest income (tax equivalent basis)

 

 

 

 

$

21,364

 

 

 

 

 

 

 

$

19,154

 

 

 

 

Net interest margin (3)

 

 

 

 

 

 

 

 

3.85

%

 

 

 

 

 

 

 

3.83

%

Tax equivalent adjustment

 

 

 

 

 

(654

)

 

 

 

 

 

 

 

(701

)

 

 

 

Net interest income

 

 

 

 

$

20,710

 

 

 

 

 

 

 

$

18,453

 

 

 

 


 

 

(1)

Average balance includes average nonaccrual loans of $13,030,000 for 2014 and $10,249,000 for 2013. Interest includes net loan fees of $821,000 for 2014 and $721,000 for 2013.

(2)

Average balance includes average bank owned life insurance, foreclosed real estate and unrealized holding gains (losses) on investment securities.

(3)

Net interest income (tax equivalent basis) annualized as a percentage of average interest earning assets.

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Table 6-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,
2014 vs. 2013

 

 

 

Increase (decrease) due to change in

 

(dollars in thousands)

 

Volume

 

Rate

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

(16

)

$

0

 

$

(16

)

Investment securities:

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

224

 

 

321

 

 

545

 

Tax-exempt

 

 

(278

)

 

(5

)

 

(283

)

Loans:

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,116

 

 

(1,591

)

 

1,525

 

Tax-exempt

 

 

185

 

 

(60

)

 

125

 

Total interest income

 

 

3,231

 

 

(1,335

)

 

1,896

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

 

47

 

 

(23

)

 

24

 

Savings

 

 

4

 

 

(5

)

 

(1

)

Time

 

 

49

 

 

(620

)

 

(571

)

Short-term borrowings

 

 

15

 

 

1

 

 

16

 

Long-term debt

 

 

398

 

 

(180

)

 

218

 

Total interest expense

 

 

513

 

 

(827

)

 

(314

)

Net interest income

 

$

2,718

 

$

(508

)

$

2,210

 

Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate.

Provision for loan losses

The provision for loan losses for the first six months of 2014 was $850,000, which was required to support growth in the commercial loan portfolio and maintain the adequacy of the allowance for loan losses. The provision was 4% higher compared to the first six months of 2013. Net charge-offs for the first six months of 2014 were $365,000, which benefited from a $190,000 recovery from a previous partial charge-off of an impaired commercial loan due to updated collateral appraisals resulting in a favorable fair value adjustment prior to the asset being transferred to foreclosed real estate. Comparatively, net charge-offs totaled $663,000 for the same period of 2013. More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 55.

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Noninterest income

The following table presents the components of total noninterest income for the first six months of 2014 compared to the first six months of 2013.

Table 7 - Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

Change
Increase (Decrease)

 

(dollars in thousands)

 

2014

 

2013

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and investment services fees

 

$

1,052

 

$

937

 

$

115

 

 

12

%

Income from mutual fund, annuity and insurance sales

 

 

325

 

 

422

 

 

(97

)

 

(23

)

Service charges on deposit accounts

 

 

1,438

 

 

1,304

 

 

134

 

 

10

 

Income from bank owned life insurance

 

 

348

 

 

351

 

 

(3

)

 

(1

)

Other income

 

 

303

 

 

346

 

 

(43

)

 

(12

)

Net gain on sales of loans held for sale

 

 

182

 

 

641

 

 

(459

)

 

(72

)

Gain on sales of securities

 

 

0

 

 

44

 

 

(44

)

 

(100

)

Total noninterest income

 

$

3,648

 

$

4,045

 

$

(397

)

 

(10

)%

The discussion that follows addresses changes in selected categories of noninterest income.

Trust and investment services fees—The $115,000 or 12 percent increase in trust and investment services fees was due to appreciation in the market value of managed accounts, upon which some fees are based, and growth in traditional trust business.

Income from mutual fund, annuity and insurance sales—The $97,000 or 23 percent decrease in income from the sale of mutual fund, annuity and insurance products by Codorus Valley Financial Advisors (CVFA), a subsidiary of PeoplesBank, was a result of the lingering impact of the resignation of three registered representatives who left CVFA in 2013. Also, the level of sales early in 2014 was adversely affected by the unusually severe winter weather.

Service charges on deposit accounts—The $134,000 or 10 percent increase in service charge income was due primarily to increases in debit card revenue and overdraft fees.

Income from bank owned life insurance (BOLI)—Income from BOLI in the first six months of 2014, compared to the same period in 2013, was relatively flat as low market interest rates depressed yields.

Other income—The $43,000 or 12 percent decrease in other income was due primarily to a decrease in income from settlement services, which has been adversely affected by the decrease in mortgage banking activity.

Net gain on sales of loans held for sale—The $459,000 or 72 percent decrease in gains from the sale of residential mortgage loans held for sale resulted from a decrease in mortgage originations, as refinancing demand and gains therefrom have declined significantly, and the higher level of mortgage interest rates has priced some prospective borrowers out of the mortgage market.

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Noninterest expense

The following table presents the components of total noninterest expense for the first six months of 2014, compared to the first six months of 2013.

Table 8 - Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

Change
Increase (Decrease)

 

(dollars in thousands)

 

2014

 

2013

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

$

8,604

 

$

8,295

 

$

309

 

 

4

%

Occupancy of premises, net

 

 

1,081

 

 

1,023

 

 

58

 

 

6

 

Furniture and equipment

 

 

1,094

 

 

970

 

 

124

 

 

13

 

Postage, stationery and supplies

 

 

322

 

 

307

 

 

15

 

 

5

 

Professional and legal

 

 

439

 

 

302

 

 

137

 

 

45

 

Marketing and advertising

 

 

720

 

 

400

 

 

320

 

 

80

 

FDIC insurance

 

 

362

 

 

309

 

 

53

 

 

17

 

Debit card processing

 

 

393

 

 

373

 

 

20

 

 

5

 

Charitable donations

 

 

769

 

 

486

 

 

283

 

 

58

 

Telephone

 

 

291

 

 

266

 

 

25

 

 

9

 

External data processing

 

 

435

 

 

335

 

 

100

 

 

30

 

Foreclosed real estate including (gains) losses on sales

 

 

247

 

 

137

 

 

110

 

 

80

 

Other

 

 

877

 

 

1,207

 

 

(330

)

 

(27

)

Total noninterest expense

 

$

15,634

 

$

14,410

 

$

1,224

 

 

8

%

The discussion that follows addresses changes in selected categories of noninterest expense.

Personnel—The $309,000 or 4 percent increase in personnel expense was due largely to an increase in wage expense resulting from planned staff additions that occurred in the first six months of 2014 and throughout the year 2013 that affect the current period (e.g., franchise expansion), and normal business growth.

Furniture and equipment—The $124,000 or 13 percent increase in furniture and equipment was due primarily to normal business growth, including expenses from the addition of two banking offices in the year 2013 that affect the current period, which includes depreciation expense on computer hardware and software.

Professional and legalThe $137,000 or 45 percent increase in professional and legal expense was due primarily to increases in consulting expenses which supported various corporate initiatives, and increased professional services associated with normal business growth.

Marketing—The $320,000 or 80 percent increase in marketing expense was primarily the result of non-recurring costs to promote PeoplesBank’s 150th year in business anniversary.

Charitable donations—The $283,000 or 58 percent increase in charitable donations was the result of an increase in donations to nonprofit organizations that qualify for related state tax credits. PeoplesBank uses state tax credits from donations to reduce its Pennsylvania shares tax expense, included in other expenses. State tax credits typically range from 55 to 90 percent of the amount donated, effectively lowering the cost of the donation.

External data processing—The $100,000 or 30 percent increase in external data processing reflects increased reliance on outsourcing transaction processing to specialized vendors, which is typically performed on their hosted and secure websites thereby increasing our processing efficiency. Increases in the services offered to our client base and increases in transaction volume from normal business growth also contributed to the increase in this expense category.

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Foreclosed real estate—The $110,000 or 80 percent increase in foreclosed real estate expenses was a result of holding costs incurred including real estate taxes, property maintenance, and valuation adjustments based upon updated appraisals.

Other —The $330,000 or 27 percent decrease in other expense was primarily attributable to a $342,000 decrease in PA shares tax expense, a component of other expense. The decrease in shares tax expense reflected both (i) statutory changes in the formula for determining the shares tax which were favorable for the Corporation’s tax basis, and (ii) changes in the volume of tax credits which originated from qualifying charitable donations described earlier.

Provision for income taxes

The provision for income tax for the first six months of 2014 was $2,064,000, compared to $1,961,000 for the same period of 2013. The $103,000 or 5 percent increase in the provision for income taxes was primarily the result of higher pretax earnings. For both periods, the Corporation’s statutory federal income tax rate was 34 percent. The Corporation’s effective income tax rate was 26 percent for the first six months of 2014, compared to 27 percent for the first six months of 2013. The effective tax rate differs from the statutory tax rate due to the impact of low-income housing credits and tax-exempt income, including income from bank owned life insurance.

Preferred stock dividends

Preferred stock dividends for the first six months of 2014 totaled $114,000 compared to $125,000 for the same period of 2013. Though an annualized dividend rate of 1 percent applied to both periods, the amount of preferred stock dividends for the first half of 2014 decreased because, on May 30, 2014, as reported on a Form 8-K filed on the same date, the Corporation used the net proceeds from a private placement of common stock, and additional cash, to redeem $13 million of the $25 million in outstanding shares of the Corporation’s preferred stock held by the United States Department of the Treasury. The Corporation is currently paying the lowest permissible dividend rate under the U.S. Treasury’s Small Business Lending Fund Program (SBLF Program) as a result of originating loans that qualify for the SBLF Program in excess of a pre-determined loan portfolio baseline balance. Information about the SBLF Program is provided in this report at Note 10-Shareholders’ Equity.

BALANCE SHEET REVIEW

Interest bearing deposits with banks

On June 30, 2014, interest bearing deposits with banks totaled $21 million, compared to $2 million at year-end 2013. The increase was the result of funds generated from an increase in interest bearing deposits, and the proceeds from a $10 million borrowing from the Federal Home Loan Bank of Pittsburgh, which outpaced the deployment of funds to the loan and investment security portfolios.

Securities available-for-sale

On June 30, 2014, the fair value of securities available-for-sale totaled $227 million, which represented a slight 1 percent decrease compared to the $229 million value at year-end 2013. During the second quarter of 2014, cash inflows from U.S. agency mortgage-backed securities and state and municipal bond maturities (or bond calls) temporarily exceeded new investments in U.S. agency mortgage-backed securities. The overall composition of the Corporation’s investment securities portfolio is provided in Note 3-Securities.

Loans

On June 30, 2014, total loans, net of deferred fees, totaled $888 million, which was $29 million or 3 percent higher than the level at year-end 2013. The increase in volume was due primarily to increases in commercial loans within the residential real estate investor and hotel/motel sectors, and additional loan growth in other industries (e.g., agriculture, professional services and finance). The composition of the Corporation’s loan portfolio is provided in Note 5—Loans.

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Table of Contents

Deposits

On June 30, 2014, deposits totaled $968 million, which represented a $43 million or 5 percent increase compared to the level at year-end 2013. Of the increase in total deposits, $32 million was attributable to growth in time deposits, which reflected a special rate promotion to celebrate PeoplesBank’s 150th anniversary. Additional increases in the demand (both interest and non-interest bearing) and savings categories also contributed to the increase in deposits. The composition of the Corporation’s deposit portfolio is provided in Note 7—Deposits.

Long-term debt

On June 30, 2014, long-term debt totaled $80 million, which was $10 million or 14 percent above the year-end 2013 level. The increase was the result of a $10 million advance from the Federal Home Loan Bank of Pittsburgh that provides liquidity and acts as a hedge against rising market interest rates. The advance has a 38-month bullet maturity and a low fixed interest rate. A listing of outstanding long-term debt obligations is provided in Note 8—Short-Term Borrowing and Long-Term Debt.

Shareholders’ equity and capital adequacy

Shareholders’ equity, or capital, enables Codorus Valley to maintain asset growth and absorb losses. Total shareholders’ equity was approximately $114 million on June 30, 2014, an increase of approximately $6 million or 6 percent, compared to the level at December 31, 2013. The increase in capital was primarily the result of retained earnings from profitable operations, less cash dividends paid during the first six months of 2014. The composition of shareholders’ equity reflects an increase in common equity and a decrease in preferred equity as a result of the net proceeds from a $13 million private placement of common stock being used to redeem preferred stock, as discussed below.

Private placement of common stock and redemption of preferred stock

As previously announced on the Form 8-K filed on March 27, 2014, the Corporation completed the private placement of 650,000 shares of its common stock to accredited investors at a purchase price of $20 per share, pursuant to which the Corporation raised gross proceeds of $13 million. After issuance costs, net proceeds from the private placement totaled approximately $12.5 million.

The net proceeds from the private placement, in addition to $0.5 million in cash, were used to redeem $13 million of the $25 million of outstanding preferred stock issued to the U.S. Department of the Treasury under its Small Business Lending Fund Program, as reported on the Form 8-K filed on May 30, 2014. More information about the private placement and the preferred stock can be found in this report at Note 10—Shareholders’ Equity. For the six month periods ended June 30, 2014 and 2013, accrued dividends equated to an annualized dividend rate of 1 percent on the preferred stock outstanding.

Dividends on common stock

The Corporation has historically paid cash dividends on its common stock on a quarterly basis. The Board of Directors determines the dividend rate after considering the Corporation’s capital requirements, current and projected net income, and other relevant factors. As recently announced, the Board of Directors declared a quarterly cash dividend of $0.125 per common share on July 8, 2014, payable on August 12, 2014, to shareholders of record at the close of business on July 22, 2014. This dividend follows $0.12 per common share cash dividends paid in May and February 2014.

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Table of Contents

Capital adequacy

The Corporation 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 9—Regulatory Matters to the financial statements. We believe that Codorus Valley and PeoplesBank were well capitalized on June 30, 2014, based on regulatory capital guidelines.

On July 2, 2013, the Board of Governors of the Federal Reserve System finalized its rule implementing the Basel III regulatory capital framework, which the FDIC adopted on July 9, 2013. Under the rule, minimum requirements will increase both the quantity and quality of capital held by banking organizations. Additionally, a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent and a common equity Tier 1 conservation buffer of 2.5 percent of risk-weighted assets will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. The new rule also increases the risk weights for past-due loans, certain commercial real estate loans and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. The rule for smaller, less complex institutions, which includes the Corporation, takes effect January 1, 2015. The new rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold the 2.5 percent capital conservation buffer, which is to be phased in over a four year period beginning January 1, 2016, with the full 2.5 percent required as of January 1, 2019. The transition schedule for new ratios, including the capital conservation buffer, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1:

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

Minimum common equity Tier 1 capital ratio

 

 

4.5

%

 

4.5

%

 

4.5

%

 

4.5

%

 

4.5

%

Common equity Tier 1 capital conservation buffer

 

 

N/A

 

 

0.625

%

 

1.25

%

 

1.875

%

 

2.5

%

Minimum common equity Tier 1 capital ratio plus capital conservation buffer

 

 

4.5

%

 

5.125

%

 

5.75

%

 

6.375

%

 

7.0

%

Phase-in of most deductions from common equity Tier 1 capital

 

 

40

%

 

60

%

 

80

%

 

100

%

 

100

%

Minimum Tier 1 capital ratio

 

 

6.0

%

 

6.0

%

 

6.0

%

 

6.0

%

 

6.0

%

Minimum Tier 1 capital ratio plus capital conservation buffer

 

 

N/A

 

 

6.625

%

 

7.25

%

 

7.875

%

 

8.5

%

Minimum total capital ratio

 

 

8.0

%

 

8.0

%

 

8.0

%

 

8.0

%

 

8.0

%

Minimum total capital ratio plus capital conservation buffer

 

 

N/A

 

 

8.625

%

 

9.25

%

 

9.875

%

 

10.5

%

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Table of Contents

As fully phased in, a banking organization with a buffer greater than 2.5% would not be subject to limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible net income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the 4 calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:

 

 

 

Capital Conservation Buffer
(as a % of risk-weighted assets)

 

Maximum Payout
(as a % of eligible net income)

Greater than 2.5%

 

No payout limitation applies

≤2.5% and >1.875%

 

60%

≤1.875% and >1.25%

 

40%

≤1.25% and >0.625%

 

20%

≤0.625%

 

0%

The Corporation plans to manage its capital to ensure compliance with the new capital rules.

RISK MANAGEMENT

Credit risk management

The Credit Risk Management section included in the Corporation’s Form 10-K for year-end 2013 provides a general overview of the Corporation’s credit risk management process and loan concentrations. Credit risk represents the possibility that a loan client, counterparty or issuer may not perform in accordance with contractual terms, posing one of the most significant risks to the Corporation.

Nonperforming assets

The following table presents asset categories posing the greatest risk of loss and related ratios. We generally place a loan on nonaccrual status and cease accruing interest income, i.e., recognize interest income on a cash basis, as long as the loan is sufficiently collateralized, when loan payment performance is unsatisfactory and the loan is past due 90 days or more. Loans past due 90 days or more and still accruing interest represent loans that are contractually past due, but are well collateralized and in the process of collection. Foreclosed real estate represents real estate acquired to satisfy debts owed to PeoplesBank. Troubled debt restructurings pertain to loans whose terms have been modified to include a concession that we would not ordinarily consider due to the debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a reduction of interest rate lower than the current market rate for new debt with similar risk, the deferral of payments or extension of the stated maturity date. Troubled debt restructurings are evaluated for impairment if they have been restructured during the most recent calendar year, or if they cease to perform in accordance with the modified terms. The paragraphs and table below address significant changes in the aforementioned categories as of June 30, 2014, compared to December 31, 2013.

Nonperforming assets are under the purview of in-house counsel, who continuously monitors and manages the collection of these accounts. Additionally, an internal asset quality control committee meets monthly to review nonperforming assets. We generally rely on appraisals performed by independent licensed appraisers to determine the value of collateral for impaired collateral-dependent loans. Generally, an appraisal is performed when: an account reaches 90 days past due, unless a certified appraisal was completed within the past twelve months; market values have changed significantly; the condition of the property has changed significantly; or the existing appraisal is outdated. In instances where the value of the collateral, net of costs to sell, is less than the net carrying amount for impaired commercial related loans, a specific loss allowance is established for the difference. When it is probable that some portion or an entire loan balance will not be collected, that amount is charged off as loss against the allowance.

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Table 9 - Nonperforming Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

June 30,
2014

 

December 31,
2013

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

$

6,842

 

$

13,231

 

Nonaccrual loans, troubled debt restructurings

 

 

2,122

 

 

2,069

 

Total nonperforming loans

 

 

8,964

 

 

15,300

 

Foreclosed real estate, net of allowance

 

 

4,711

 

 

4,068

 

Total nonperforming assets

 

$

13,675

 

$

19,368

 

Accruing troubled debt restructurings

 

$

2,186

 

$

3,342

 

 

 

 

 

 

 

 

 

Total period-end loans, net of deferred fees

 

$

887,908

 

$

859,384

 

Allowance for loan losses (ALL)

 

$

10,460

 

$

9,975

 

ALL as a % of total period-end loans

 

 

1.18

%

 

1.16

%

Annualized net charge-offs as a % of average total loans

 

 

0.08

%

 

0.10

%

ALL as a % of nonperforming loans

 

 

116.69

%

 

65.20

%

Nonperforming loans as a % of total period-end loans

 

 

1.01

%

 

1.78

%

Nonperforming assets as a % of total period-end loans and net foreclosed real estate

 

 

1.53

%

 

2.24

%

Nonperforming assets as a % of total period-end assets

 

 

1.14

%

 

1.68

%

Nonperforming assets as a % of total period-end shareholders’ equity

 

 

12.03

%

 

17.99

%

The current level of nonperforming assets has decreased by approximately $5.7 million or 29 percent when compared to year-end 2013. The decrease was primarily the result of (i) a $3.9 million payment received on a nonaccrual loan in the second quarter of 2014, (ii) the $1.05 million payoff of a nonaccrual commercial loan in the first quarter of 2014, and (iii) an approximate $0.5 million recovery from the sale of a foreclosed property in the first quarter of 2014. Generally, we remain concerned about prolonged low economic growth or weakening economic conditions and the corresponding effects it has on our commercial borrowers.

Nonaccrual loans

We evaluate the adequacy of the allowance for loan losses at least quarterly and have established a loss allowance for selected loan relationships where the net realizable value of the collateral is insufficient to repay the loan. In this regard, allowances, if applicable, are noted below within the description of the loan. Collection efforts, including modification of contractual terms for individual accounts based on prevailing market conditions and liquidation of collateral assets, are being employed to maximize recovery. Further provisions for loan losses may be required for nonaccrual loans as additional information becomes available or conditions change. There is also the potential for adjustment to the allowance as a result of regulatory examinations. A loan is returned to interest accruing status when we determine that circumstances have improved to the extent that all of the principal and interest amounts contractually due are current for at least six consecutive payments and future payments are reasonably assured.

As of June 30, 2014, the nonperforming loan portfolio balance totaled $8,964,000, compared to $15,300,000 at year-end 2013. The decrease was primarily the result of a $3.9 million payment received on a nonaccrual commercial loan, a $1.05 million payoff of a nonaccrual commercial loan and reclassifications to foreclosed real estate totaling $1.6 million. For both periods the portfolio balance was comprised primarily of collateralized commercial loans. On June 30, 2014, the nonaccrual loan portfolio was comprised of twenty-two unrelated loan relationships with outstanding principal balances ranging in size from $21,200 to $2,002,000. Four unrelated commercial relationships, which represent 71 percent of the nonperforming loan portfolio balance, are described below.

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Loan no. 1—At June 30, 2014, the outstanding principal balance of the loan relationship was $1,595,000 after a significant principal payment of $3,879,000 was received during the second quarter of 2014 from proceeds of the sale of the largest commercial property securing the loan. The remaining balance is collateralized by various smaller commercial properties, some with multiple lienholders. A $750,000 allowance for probable loan losses was established for this relationship. Management is pursuing its legal remedies to recover the remaining amount due.

Loan no. 2—At June 30, 2014, the outstanding principal balance of the loan relationship was $2,002,000, collateralized by commercial rental properties whose rents are assigned to PeoplesBank. Based on a recent appraisal of the primary real estate collateralizing the relationship, we believe that the loans are adequately collateralized. The borrower is presently operating under a troubled debt restructuring agreement.

Loan no. 3—At June 30, 2014, the outstanding principal balance of the loan relationship was $1,407,000, collateralized by various residential rental properties. A $500,000 allowance for loan losses was established for this relationship. The Bank is presently pursuing its legal remedies to recover the amount due.

Loan no. 4—At June 30, 2014, the outstanding principal balance of the loan relationship was $1,349,000, collateralized by two commercial properties. Based on an independent appraisal of the real estate collateralizing the relationship, we believe that the loans are adequately collateralized. The Bank is presently pursuing its legal remedies to recover the amount due.

Foreclosed real estate

On June 30, 2014, foreclosed real estate, net of allowance, totaled $4,711,000, compared to $4,068,000 at December 31, 2013. On June 30, 2014, the portfolio was comprised of nine unrelated accounts ranging in size from $51,000 to $1,179,000, net of related allowance. If a valuation allowance for probable loss has been established for a particular property, it is so noted in the property description below. Further valuation allowances may be required on any foreclosed property as additional information becomes available or conditions change. Foreclosed real estate is included in the other assets category on the Corporation’s balance sheet. Four unrelated foreclosed real estate properties, which represent 81% of the foreclosed real estate portfolio balance, net of allowance, are described below.

Property no. 1— The carrying amount of this property at June 30, 2014 was $1,179,000, which is net of a $2,119,000 valuation allowance based on an independent appraisal, as adjusted for improvements, less estimated selling costs. The property is comprised of 266 acres of unimproved land that is zoned for residential development. Management is working towards a sale of the property.

Property no. 2— The carrying amount of this property at June 30, 2014 was $1,088,000, which is net of a $1,627,000 valuation allowance. The property is comprised of 134 approved residential building lots. Of this total, 28 lots are improved. Management is evaluating its disposition options with regard to this property.

Property no. 3 – The carrying amount of this property at June 30, 2014 is $910,000. The property is comprised of an 8 acre parcel improved for commercially developable sites. Management is evaluating its disposition options with regard to this property.

Property no. 4—The carrying amount of this residential property at June 30, 2014 was $648,000, which is net of a $132,000 valuation allowance. The property is presently listed for sale.

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Allowance for loan losses

Although the Corporation maintains sound credit policies, certain loans deteriorate and must be charged off as losses. The allowance for loan losses is maintained to absorb losses inherent in the portfolio. The allowance is increased by provisions charged to expense and is reduced by loan charge-offs, net of recoveries. The allowance is based upon management’s continuous evaluation of the loan portfolio coupled with a formal review of adequacy on a quarterly basis, which is subject to review and approval by the Board.

The allowance for loan losses consists primarily of three components: specific allowances for individually impaired commercial loans; allowances calculated for pools of loans; and an unallocated component, which reflects the margin of imprecision inherent in the assumptions that underlie the evaluation of the adequacy of the allowance. The Corporation uses an internal risk rating system to evaluate individual loans. Loans are segmented into industry groups or pools with similar characteristics, and an allowance for loan losses is allocated to each segment based on quantitative factors such as recent loss history (two-year rolling average of net charge-offs) and qualitative factors, such as the results of internal and external credit reviews, changes in the size and composition of the loan portfolio, adequacy of collateral, general economic conditions and the local business outlook. Determining the level of the allowance for probable loan losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. We must make estimates using assumptions and information which are often subjective and fluid. There is also the potential for adjustment to the allowance as a result of regulatory examinations.

The following table presents an analysis of the activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013. The $1,001,000 or 11 percent increase in the allowance from June 30, 2013 to June 30, 2014, generally supported the $119 million or 16 percent increase in loans, net of deferred fees. The provision for loan losses for the first six months of 2014 was $850,000 or 4 percent higher compared to the provision of $820,000 for the first six months of 2013. The increased provision was required to support the larger commercial loan portfolio and maintain the adequacy of the allowance for loan losses. Net charge-offs for the first six months of 2014 were $365,000 compared to $663,000 of net charge-offs for the same period of 2013. The Corporation realized a recovery in 2014 of $190,000 of a previous partial charge-off of an impaired commercial loan due to updated collateral appraisals resulting in a favorable fair value adjustment prior to the asset being transferred to foreclosed real estate. The risks and uncertainties associated with prolonged low growth or weakness in economic and business conditions, and the level of unemployment and erosion of real estate values, can adversely affect our borrowers’ ability to service their loans, causing significant fluctuations in the level of charge-offs and provision expense from one period to another. Based on a comprehensive analysis of the loan portfolio, we believe that the allowance for loan losses was adequate at June 30, 2014.

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Table 10 - Analysis of Allowance for Loan Losses

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2014

 

2013

 

Balance-January 1,

 

$

9,975

 

$

9,302

 

 

 

 

 

 

 

 

 

Provision charged to operating expense

 

 

850

 

 

820

 

 

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

 

325

 

 

497

 

Real estate - residential mortgages

 

 

30

 

 

28

 

Consumer and home equity

 

 

292

 

 

208

 

Total loans charged off

 

 

647

 

 

733

 

Recoveries:

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

 

212

 

 

22

 

Real estate - residential mortgages

 

 

4

 

 

2

 

Consumer and home equity

 

 

66

 

 

46

 

Total recoveries

 

 

282

 

 

70

 

Net charge-offs

 

 

365

 

 

663

 

Balance-June 30,

 

$

10,460

 

$

9,459

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

Allowance for loan losses as a % of total period-end loans

 

 

1.18

%

 

1.23

%

Annualized net charge-offs as a % of average total loans

 

 

0.08

%

 

0.18

%

Allowance for loan losses as a % of nonperforming loans

 

 

116.69

%

 

85.00

%

Liquidity risk management

Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan customers, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, it provides funds for growth and business opportunities as they arise. Liquidity is generated from transactions relating to both the Corporation’s assets and liabilities. The primary sources of asset liquidity are scheduled investment security maturities and cash inflows, funds received from customer loan payments, and asset sales. The primary sources of liability liquidity are deposit growth, short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows, included in this report, present the changes in cash from operating, investing and financing activities. At June 30, 2014, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately $70 million and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately $272 million. The Corporation’s loan-to-deposit ratio was 92 percent at June 30, 2014, compared to 93 percent at year-end 2013.

Off-balance sheet arrangements

The Corporation’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 issued under the same standards as on-balance sheet instruments. Unused commitments on June 30, 2014, totaled $287 million and consisted of $204 million in unfunded commitments under existing loan facilities, $58 million to grant new loans and $25 million in letters of credit. Normally these commitments have fixed expiration dates or termination clauses and are for specific purposes. Accordingly, many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, the Corporation’s disclosure controls and procedures are effective. The Corporation’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. A control system, no matter how well conceived and operated, must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There has been no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended June 30, 2014, that has materially affected or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal proceedings

The Corporation and PeoplesBank are involved in routine litigation incidental to their business. There are no legal proceedings pending against the Corporation or any of its subsidiaries which are expected to have a material impact upon the consolidated 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

 

This Item 1A is not applicable to smaller reporting companies.

 

Item 2. Unregistered sales of equity securities and use of proceeds

The Corporation relies on its subsidiary PeoplesBank, A Codorus Valley Company, for dividend distributions, which are subject to restrictions as reported in Note 9—Regulatory Matters of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Corporation has a Share Repurchase Program (Program), which was authorized in 1995, and has been periodically amended, to permit the purchase of up to a maximum of 4.9 percent of the outstanding shares of the Corporation’s common stock at a price per share no greater than 200 percent of the latest quarterly published book value. For the six month period ended June 30, 2014 and the year ended December 31, 2013, the Corporation had not acquired any of its common stock under the Program. The U.S. Treasury’s Small Business Lending Fund (SBLF) agreement imposes limits on the ability of the Corporation to repurchase shares of common stock if it fails to declare and pay quarterly dividends on the SBLF preferred stock.

 

Item 3. Defaults upon senior securities

 

None

 

Item 4. Mine safety disclosures

 

This Item 4 is not applicable to the Corporation.

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Item 5. Other information

 

None

Item 6. Exhibits

 

 

 

 

Exhibit
Number

 

Description of Exhibit

 

3.1

 

Amended Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for September 30, 2012, filed with the Commission on November 13, 2012)

 

 

 

3.2

 

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 February 17, 2012)

 

 

 

3.3

 

Certificate of Designation of Senior Non-Cumulative Perpetual Preferred Stock, Series B (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on August 24, 2011)

 

 

 

4.1

 

Rights Agreement dated as of November 4, 2005 (Incorporated by reference to Exhibit 4 to the Registrant’s Quarterly Report on Form 10-Q for September 30, 2010, filed with Commission on November 15, 2010), as amended January 9, 2009 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for September 30, 2010, filed with the Commission on November 15, 2010), as further amended August 18, 2011 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on August 24, 2011)

 

 

 

4.2

 

Specimen Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series B (Incorporated by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 filed with the Commission on November 21, 2013)

 

 

 

4.3

 

Registration Rights Agreement dated March 26, 2014 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 26, 2014)

 

 

 

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

 

 

 

101

 

Financial statements from the Quarterly Report on Form 10-Q of Codorus Valley Bancorp, Inc. for the quarter ended June 30, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Shareholder’s Equity, and (vi) the Notes to Consolidated Financial Statements – filed herewith.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

 

 

 

 

Codorus Valley Bancorp, Inc.

 

 

(Registrant)

 

 

 

 

August 8, 2014

/s/ Larry J. Miller

 

Date

Larry J. Miller

 

 

President & CEO

 

 

(Principal Executive Officer)

 

 

 

 

August 8, 2014

/s/ Jann A. Weaver

 

Date

Jann A. Weaver

 

 

Treasurer & Assistant Secretary

 

 

(Principal Financial and Accounting Officer)

 

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