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Section 1: 10-Q (QUARTERLY REPORT)

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

For the quarterly period ended September 30, 2019

 

or

 

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

For the transition period from____________to______________

 

Commission file number: 0-15536

 

CODORUS VALLEY BANCORP, INC. 

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

 

23-2428543

 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer 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.)

 

 

 

Securities registered pursuant to Section 12(b) of the Act: 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $2.50 par value

CVLY

NASDAQ Global Market

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

 

Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

 

Non-accelerated filer ☐

Smaller reporting company ☒

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒   No ☐

 

APPLICABLE ONLY TO CORPORATE ISSUERS 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  On October 25, 2019, 9,725,688 shares of common stock, par value $2.50, were outstanding, which includes the effect of the 5 percent common stock dividend declared on October 8, 2019.

 

 

 

- 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

40

 

 

 

Item 3.

Quantitative and qualitative disclosures about market risk

64

 

 

 

Item 4.

Controls and procedures

65

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal proceedings

65

 

 

 

Item 1A.

Risk factors

65

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

66

 

 

 

Item 3.

Defaults upon senior securities

66

 

 

 

Item 4.

Mine safety disclosures

66

 

 

 

Item 5.

Other information

66

 

 

 

Item 6.

Exhibits

67

 

 

 

SIGNATURES

68

 

- 2 -

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Codorus Valley Bancorp, Inc. 

Consolidated Balance Sheets 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(dollars in thousands, except per share data)

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

103,260

 

 

$

69,103

 

Cash and due from banks

 

 

24,086

 

 

 

27,679

 

Total cash and cash equivalents

 

 

127,346

 

 

 

96,782

 

Securities, available-for-sale

 

 

162,918

 

 

 

149,593

 

Restricted investment in bank stocks, at cost

 

 

4,551

 

 

 

5,922

 

Loans held for sale

 

 

9,745

 

 

 

4,127

 

Loans (net of deferred fees of $3,635 - 2019 and $3,722 - 2018)

 

 

1,490,646

 

 

 

1,485,680

 

Less-allowance for loan losses

 

 

(21,164

)

 

 

(19,144

)

Net loans

 

 

1,469,482

 

 

 

1,466,536

 

Premises and equipment, net

 

 

26,782

 

 

 

24,724

 

Operating leases right-of-use assets

 

 

2,408

 

 

 

0

 

Goodwill

 

 

2,301

 

 

 

2,301

 

Other assets

 

 

63,863

 

 

 

57,495

 

Total assets

 

$

1,869,396

 

 

$

1,807,480

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

268,547

 

 

$

252,777

 

Interest bearing

 

 

1,291,477

 

 

 

1,242,503

 

Total deposits

 

 

1,560,024

 

 

 

1,495,280

 

Short-term borrowings

 

 

8,830

 

 

 

7,022

 

Long-term debt

 

 

96,758

 

 

 

115,310

 

Operating leases liabilities

 

 

2,579

 

 

 

0

 

Other liabilities

 

 

11,832

 

 

 

11,122

 

Total liabilities

 

 

1,680,023

 

 

 

1,628,734

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, par value $2.50 per share;

 

 

 

 

 

 

 

 

1,000,000 shares authorized;  0 shares issued and outstanding

 

 

0

 

 

 

0

 

Common stock, par value $2.50 per share; 30,000,000 shares authorized;

 

 

24,819

 

 

 

23,629

 

shares issued: 9,461,918 at September 30, 2019 and 9,451,547 at December 31, 2018; and shares outstanding: 9,328,354 at September 30, 2019  and 9,451,547 at December 31, 2018

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

144,114

 

 

 

134,506

 

Retained earnings

 

 

21,971

 

 

 

22,837

 

Accumulated other comprehensive income (loss)

 

 

1,509

 

 

 

(2,226

)

Treasury stock, at cost; 133,564 shares at September 30, 2019

 

 

(3,040

)

 

 

0

 

Total shareholders’ equity

 

 

189,373

 

 

 

178,746

 

Total liabilities and shareholders’ equity

 

$

1,869,396

 

 

$

1,807,480

 

 

See accompanying notes.

 

- 3 -

 

Codorus Valley Bancorp, Inc. 

Consolidated Statements of Income 

Unaudited 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands, except per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

19,847

 

 

$

19,580

 

 

$

59,331

 

 

$

55,723

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

780

 

 

 

568

 

 

 

2,200

 

 

 

1,702

 

Tax-exempt

 

 

152

 

 

 

261

 

 

 

532

 

 

 

817

 

Dividends

 

 

85

 

 

 

100

 

 

 

292

 

 

 

318

 

Other

 

 

602

 

 

 

287

 

 

 

1,522

 

 

 

663

 

Total interest income

 

 

21,466

 

 

 

20,796

 

 

 

63,877

 

 

 

59,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,815

 

 

 

3,581

 

 

 

14,051

 

 

 

9,283

 

Federal funds purchased and other short-term borrowings

 

 

11

 

 

 

15

 

 

 

31

 

 

 

48

 

Long-term debt

 

 

627

 

 

 

768

 

 

 

2,008

 

 

 

2,036

 

Total interest expense

 

 

5,453

 

 

 

4,364

 

 

 

16,090

 

 

 

11,367

 

Net interest income

 

 

16,013

 

 

 

16,432

 

 

 

47,787

 

 

 

47,856

 

Provision for loan losses

 

 

0

 

 

 

1,300

 

 

 

2,250

 

 

 

1,800

 

Net interest income after provision for loan losses

 

 

16,013

 

 

 

15,132

 

 

 

45,537

 

 

 

46,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and investment services fees

 

 

921

 

 

 

818

 

 

 

2,642

 

 

 

2,389

 

Income from mutual fund, annuity and insurance sales

 

 

255

 

 

 

255

 

 

 

786

 

 

 

806

 

Service charges on deposit accounts

 

 

1,239

 

 

 

1,187

 

 

 

3,605

 

 

 

3,485

 

Income from bank owned life insurance

 

 

301

 

 

 

248

 

 

 

960

 

 

 

730

 

Other income

 

 

443

 

 

 

364

 

 

 

1,497

 

 

 

1,221

 

Gain on sales of loans held for sale

 

 

312

 

 

 

435

 

 

 

849

 

 

 

1,436

 

Gain (loss) on sales of securities

 

 

2

 

 

 

0

 

 

 

(1

)

 

 

0

 

Total noninterest income

 

 

3,473

 

 

 

3,307

 

 

 

10,338

 

 

 

10,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

 

7,849

 

 

 

7,159

 

 

 

22,946

 

 

 

21,855

 

Occupancy of premises, net

 

 

865

 

 

 

860

 

 

 

2,728

 

 

 

2,556

 

Furniture and equipment

 

 

787

 

 

 

701

 

 

 

2,334

 

 

 

2,262

 

Postage, stationery and supplies

 

 

190

 

 

 

196

 

 

 

549

 

 

 

560

 

Professional and legal

 

 

272

 

 

 

286

 

 

 

603

 

 

 

609

 

Marketing

 

 

441

 

 

 

373

 

 

 

1,164

 

 

 

1,200

 

FDIC insurance

 

 

5

 

 

 

189

 

 

 

465

 

 

 

493

 

Debit card processing

 

 

263

 

 

 

318

 

 

 

903

 

 

 

902

 

Charitable donations

 

 

337

 

 

 

119

 

 

 

1,316

 

 

 

1,792

 

Telecommunications

 

 

124

 

 

 

119

 

 

 

380

 

 

 

500

 

External data processing

 

 

649

 

 

 

579

 

 

 

1,821

 

 

 

1,563

 

Foreclosed real estate including provision for losses

 

 

10

 

 

 

13

 

 

 

144

 

 

 

33

 

Other

 

 

1,059

 

 

 

1,090

 

 

 

2,563

 

 

 

2,557

 

Total noninterest expense

 

 

12,851

 

 

 

12,002

 

 

 

37,916

 

 

 

36,882

 

Income before income taxes

 

 

6,635

 

 

 

6,437

 

 

 

17,959

 

 

 

19,241

 

Provision for income taxes

 

 

1,432

 

 

 

1,377

 

 

 

3,806

 

 

 

4,044

 

Net income

 

$

5,203

 

 

$

5,060

 

 

$

14,153

 

 

$

15,197

 

Net income per share, basic

 

$

0.53

 

 

$

0.51

 

 

$

1.43

 

 

$

1.54

 

Net income per share, diluted

 

$

0.52

 

 

$

0.51

 

 

$

1.42

 

 

$

1.53

 

 

See accompanying notes.

 

- 4 -

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

Unaudited

 

 

Three months ended
September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

Net income

 

$

5,203

 

 

$

5,060

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) arising during the period

 

 

 

 

 

 

 

 

(net of tax expense (benefit) of $164 and ($203), respectively)

 

 

619

 

 

 

(767

)

Reclassification adjustment for gains included in net income

 

 

 

 

 

 

 

 

(net of tax expense of $0 and $0, respectively) (a) (b)

 

 

(2

)

 

 

0

 

Net unrealized gains (losses)

 

 

617

 

 

 

(767

)

Comprehensive income

 

$

5,820

 

 

$

4,293

 

 

 

Nine months ended
September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

Net income

 

$

14,153

 

 

$

15,197

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) arising during the period

 

 

 

 

 

 

 

 

(net of tax expense (benefit) of $992 and ($788), respectively)

 

 

3,734

 

 

 

(2,967

)

Reclassification adjustment for losses included in net income

 

 

 

 

 

 

 

 

(net of tax benefit of $0 and $0, respectively) (a) (b)

 

 

1

 

 

 

0

 

Net unrealized gains (losses)

 

 

3,735

 

 

 

(2,967

)

Comprehensive income

 

$

17,888

 

 

$

12,230

 

 

 

(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 the provision for income taxes on the Consolidated Statements of Income.

 

See accompanying notes.

 

- 5 -

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

Unaudited 

 

 

 

 

 

 

 

 

Nine months ended
September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

14,153

 

 

$

15,197

 

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

 

 

 

 

 

 

 

 

Depreciation/amortization

 

 

1,964

 

 

 

1,780

 

Net amortization of premiums on securities

 

 

232

 

 

 

335

 

Amortization of deferred loan origination fees and costs

 

 

(974

)

 

 

(1,264

)

Net amortization of operating lease right of use assets

 

 

446

 

 

 

0

 

Provision for loan losses

 

 

2,250

 

 

 

1,800

 

Provision for losses on foreclosed real estate

 

 

26

 

 

 

0

 

Increase in bank owned life insurance

 

 

(960

)

 

 

(730

)

Originations of mortgage loans held for sale

 

 

(27,789

)

 

 

(28,746

)

Originations of SBA loans held for sale

 

 

(6,766

)

 

 

(12,292

)

Proceeds from sales of mortgage loans held for sale

 

 

26,289

 

 

 

29,744

 

Proceeds from sales of SBA loans held for sale

 

 

3,286

 

 

 

10,352

 

Net gain on sales of mortgage loans held for sale

 

 

(596

)

 

 

(718

)

Gain on sales of SBA loans held for sale

 

 

(253

)

 

 

(718

)

Gain on disposal of premises and equipment

 

 

(15

)

 

 

(11

)

Loss on sales of securities, available-for-sale

 

 

1

 

 

 

0

 

Loss on sales of foreclosed real estate

 

 

0

 

 

 

3

 

Stock-based compensation

 

 

395

 

 

 

457

 

Decrease (increase) in interest receivable

 

 

577

 

 

 

(174

)

(Increase) decrease in other assets

 

 

(87

)

 

 

355

 

Increase in interest payable

 

 

28

 

 

 

239

 

Increase in other liabilities

 

 

701

 

 

 

1,830

 

Net cash provided by operating activities

 

 

12,908

 

 

 

17,439

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of securities, available-for-sale

 

 

(111,466

)

 

 

(10,946

)

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

 

 

90,859

 

 

 

20,616

 

Sales of securities, available-for-sale

 

 

11,776

 

 

 

0

 

Net decrease in restricted investment in bank stock

 

 

1,371

 

 

 

189

 

Net increase in loans made to customers

 

 

(4,222

)

 

 

(94,963

)

Purchases of premises and equipment

 

 

(2,747

)

 

 

(2,231

)

Investment in bank owned life insurance

 

 

(6,836

)

 

 

(7

)

Proceeds from sales of foreclosed real estate

 

 

111

 

 

 

155

 

Net cash used in investing activities

 

 

(21,154

)

 

 

(87,187

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net (decrease) increase in demand and savings deposits

 

 

(9,492

)

 

 

69,510

 

Net increase in time deposits

 

 

74,236

 

 

 

16,242

 

Net increase (decrease) increase in short-term borrowings

 

 

1,808

 

 

 

(11,871

)

Proceeds from issuance of long-term debt

 

 

0

 

 

 

30,000

 

Repayment of long-term debt

 

 

(20,000

)

 

 

(25,000

)

Cash dividends paid to shareholders

 

 

(4,533

)

 

 

(4,151

)

Treasury stock reissued

 

 

213

 

 

 

0

 

Treasury stock purchased

 

 

(3,530

)

 

 

0

 

Issuance of stock

 

 

108

 

 

 

842

 

Net cash provided by financing activities

 

 

38,810

 

 

 

75,572

 

Net increase in cash and cash equivalents

 

 

30,564

 

 

 

5,824

 

Cash and cash equivalents at beginning of year

 

 

96,782

 

 

 

79,524

 

Cash and cash equivalents at end of period

 

$

127,346

 

 

$

85,348

 

 

See accompanying notes.

 

- 6 -

 

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

Unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

 

 

Common

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

(dollars in thousands, except per share data)

 

Stock

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

(Loss) Income

 

 

Stock

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

 

$

0

 

 

$

23,629

 

 

$

134,506

 

 

$

22,837

 

 

$

(2,226

)

 

$

0

 

 

$

178,746

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,091

 

 

 

 

 

 

 

 

 

 

 

4,091

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,399

 

 

 

 

 

 

 

1,399

 

Cash dividends ($0.152 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,512

)

 

 

 

 

 

 

 

 

 

 

(1,512

)

Adoption of ASC topic 842 (leases)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(199

)

 

 

 

 

 

 

 

 

 

 

(199

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

135

 

Forfeiture of restricted stock and withheld shares

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(2

)

Issuance and reissuance of stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,646 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

 

17

 

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2019

 

$

0

 

 

$

23,646

 

 

$

134,775

 

 

$

25,217

 

 

$

(827

)

 

$

(4

)

 

$

182,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2019

 

$

0

 

 

$

23,646

 

 

$

134,775

 

 

$

25,217

 

 

$

(827

)

 

$

(4

)

 

$

182,807

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,859

 

 

 

 

 

 

 

 

 

 

 

4,859

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,719

 

 

 

 

 

 

 

1,719

 

Cash dividends ($0.152 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,513

)

 

 

 

 

 

 

 

 

 

 

(1,513

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

118

 

Forfeiture of restricted stock and withheld shares

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

0

 

Repurchased stock - 35,600 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(762

)

 

 

(762

)

Issuance and reissuance of stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,605 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

 

9

 

 

 

128

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

146

 

4,221 shares under the stock option plan

 

 

 

 

 

 

 

 

 

 

(69

)

 

 

 

 

 

 

 

 

 

 

88

 

 

 

19

 

6,694 shares under employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

141

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

$

0

 

 

$

23,655

 

 

$

134,943

 

 

$

28,563

 

 

$

892

 

 

$

(533

)

 

$

187,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2019

 

 

0

 

 

 

23,655

 

 

 

134,943

 

 

 

28,563

 

 

 

892

 

 

 

(533

)

 

 

187,520

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,203

 

 

 

 

 

 

 

 

 

 

 

5,203

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

617

 

 

 

 

 

 

 

617

 

Cash dividends ($0.152 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,508

)

 

 

 

 

 

 

 

 

 

 

(1,508

)

5% stock dividend, 465,473 shares at fair value

 

 

 

 

 

 

1,164

 

 

 

9,123

 

 

 

(10,287

)

 

 

 

 

 

 

 

 

 

 

0

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

142

 

Repurchased stock - 121,200 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,768

)

 

 

(2,768

)

Issuance and reissuance of stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,421 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

136

 

 

 

142

 

5,221 shares under the stock option plan

 

 

 

 

 

 

 

 

 

 

(86

)

 

 

 

 

 

 

 

 

 

 

111

 

 

 

25

 

679 shares of stock-based compensation awards

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

14

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2019

 

 

0

 

 

$

24,819

 

 

$

144,114

 

 

$

21,971

 

 

$

1,509

 

 

$

(3,040

)

 

$

189,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

$

0

 

 

$

22,265

 

 

$

120,052

 

 

$

22,860

 

 

$

(958

)

 

$

0

 

 

$

164,219

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,083

 

 

 

 

 

 

 

 

 

 

 

4,083

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,788

)

 

 

 

 

 

 

(1,788

)

Cash dividends ($0.141 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,381

)

 

 

 

 

 

 

 

 

 

 

(1,381

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

230

 

Forfeiture of restricted stock and withheld shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63

)

 

 

(63

)

Issuance and reissuance of stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,518 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

 

9

 

 

 

76

 

 

 

 

 

 

 

 

 

 

 

57

 

 

 

142

 

13,736 shares under the stock option plan

 

 

 

 

 

 

34

 

 

 

205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

239

 

1,816 shares of stock-based compensation awards

 

 

 

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

$

0

 

 

$

22,312

 

 

$

120,559

 

 

$

25,562

 

 

$

(2,746

)

 

$

(6

)

 

$

165,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2018

 

$

0

 

 

$

22,312

 

 

$

120,559

 

 

$

25,562

 

 

$

(2,746

)

 

$

(6

)

 

$

165,681

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,054

 

 

 

 

 

 

 

 

 

 

 

6,054

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(412

)

 

 

 

 

 

 

(412

)

Cash dividends ($0.141 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,383

)

 

 

 

 

 

 

 

 

 

 

(1,383

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 

Forfeiture of restricted stock

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

(2

)

Issuance and reissuance of stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,585 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

 

11

 

 

 

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

133

 

11,624 shares under the stock option plan

 

 

 

 

 

 

28

 

 

 

45

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

82

 

5,125 shares under employee stock purchase plan

 

 

 

 

 

 

9

 

 

 

105

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

$

0

 

 

$

22,360

 

 

$

120,938

 

 

$

30,233

 

 

$

(3,158

)

 

$

0

 

 

$

170,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2018

 

 

0

 

 

 

22,360

 

 

 

120,938

 

 

 

30,233

 

 

 

(3,158

)

 

 

0

 

 

 

170,373

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,060

 

 

 

 

 

 

 

 

 

 

 

5,060

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(767

)

 

 

 

 

 

 

(767

)

Cash dividends ($0.141 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,387

)

 

 

 

 

 

 

 

 

 

 

(1,387

)

5% stock dividend, 447,700 shares at fair value

 

 

 

 

 

 

1,119

 

 

 

12,907

 

 

 

(14,026

)

 

 

 

 

 

 

 

 

 

 

0

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125

 

Forfeiture of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Issuance and reissuance of stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,615 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

 

11

 

 

 

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

135

 

5,175 shares under the stock option plan

 

 

 

 

 

 

8

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63

 

2,401 shares of stock-based compensation awards

 

 

 

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

$

0

 

 

$

23,504

 

 

$

134,143

 

 

$

19,880

 

 

$

(3,925

)

 

$

(5

)

 

$

173,597

 

 

See accompanying notes.

 

- 7 -

 

Note 1—Summary of Significant Accounting Policies

 

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2018 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.

 

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). PeoplesBank operates two wholly-owned subsidiaries as of September 30, 2019. Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products and SYC Settlement Services, Inc., which provides real estate settlement services. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.

 

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended September 30, 2019. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

 

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, 2018.

 

The results of operations for the three and nine months ended September 30, 2019 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 September 30, 2019 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

 

- 8 -

 

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.

 

Generally, 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 may be currently performing. A past due 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, nonaccrual 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.

 

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 nonaccrual loans and troubled debt restructurings. 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 are shown below. 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.

 

- 9 -

 

 

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

 

The unallocated component is maintained to cover uncertainties that could affect the Corporation’s estimate of probable losses. For example, increasing credit risks and uncertainties, not yet reflected in current leading indicators, associated with prolonged low economic growth, or recessionary business conditions for certain industries or the broad economy, or the erosion of real estate values, represent risk factors, the occurrence of any or all of which can adversely affect a borrowers’ ability to service their loans.

 

As disclosed in Note 4—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. 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 higher risk to the Corporation because economic and housing market conditions can adversely affect the underlying value of the collateral, which could render the Corporation under-secured or unsecured. In addition, economic and housing market conditions can adversely affect 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 classified as impaired.

 

- 10 -

 

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 eliminates 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.

 

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 September 30, 2019 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, obtained from 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 write-down. 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 September 30, 2019 there was $1,618,000 of foreclosed real estate, none of which was residential real estate. Included within loans receivable as of September 30, 2019 was a recorded investment of $388,000 of consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

Mortgage Servicing Rights

The mortgage servicing rights (MSRs) associated with the sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an expected life commensurate with the expected life of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At September 30, 2019, the balance of residential mortgage loans serviced for third parties was $116,464,000 compared to $98,852,000 at December 31, 2018.

 

- 11 -

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Amortized cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

905

 

 

$

808

 

 

$

925

 

 

$

672

 

Originations of mortgage servicing rights

 

 

87

 

 

 

104

 

 

 

211

 

 

 

297

 

Amortization expense

 

 

(56

)

 

 

(36

)

 

 

(139

)

 

 

(93

)

Valuation allowance

 

 

(11

)

 

 

0

 

 

 

(72

)

 

 

0

 

Balance at end of period

 

$

925

 

 

$

876

 

 

$

925

 

 

$

876

 

 

Goodwill and Core Deposit Intangible Assets

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test. This test consists of a qualitative analysis. If the Corporation determines events or circumstances indicate that it is more likely than not that goodwill is impaired, a quantitative analysis must be completed. Analyses may also be performed between annual tests. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The Corporation completes its annual goodwill impairment test on October 1st of each year. Based upon a qualitative analysis of goodwill, the Corporation concluded that the amount of recorded goodwill was not impaired as of October 1, 2019.

 

Core deposit intangibles represent the value assigned to demand, interest checking, money market, and savings accounts acquired as part of an acquisition. The core deposit intangible value represents the future economic benefit of potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources and the alternative cost to grow a similar core deposit base. The core deposit intangible asset resulting from the merger with Madison Bancorp, Inc. was determined to have a definite life and is being amortized using the sum of the years’ digits method over ten years. All intangible assets must be evaluated for impairment if certain events or changes in circumstances occur. Any impairment write-downs would be recognized as expense on the consolidated statements of income.

 

At September 30, 2019, the Corporation does not have any indicators of potential impairment of either goodwill or core deposit intangibles.

 

Revenue from Contracts with Customers

Revenue from contracts with customers that are required to be recognized under FASB ASC Topic 606 - Revenue from Contracts with Customers (ASC 606) is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Corporation recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

 

The majority of the Corporation’s revenue-generating transactions are not within the scope of ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other U.S. Generally Accepted Accounting Principles (GAAP) discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of income as components of non-interest income are as follows:

 

- 12 -

 

Trust and investment service fees – The Corporation provides trust, investment management custody and irrevocable life insurance trust services to customers. Such services are rendered in accordance with the underlying contracts for which fees are earned. The Corporation’s performance obligations are generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for services rendered is primarily received in the following month.

 

Income from mutual fund, annuity and insurance sales – The Corporation sells mutual funds, annuity and insurance products to its customers. The Corporation’s performance obligation is met upon the signing of the product agreement and, in certain cases, a time component may exist when the customer has the right to rescind the agreement with or without penalty. The Corporation recognizes revenues upon delivery of the product or service unless there is a time component in which case revenues are recognized utilizing the expected value method. Payment for services rendered is primarily received in the following month.

 

Service charges on deposits accounts – These represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Other service charges include revenue from processing wire transfers, cashier’s checks and other services. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to the customers’ accounts.

 

Other noninterest income – The Corporation evaluated individual components of other noninterest income, such as credit card merchant fees, credit and gift card fees and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through payment networks, such as Visa. Credit and gift card income is realized through a third party provider who issues cards as private label in the Corporation’s name. ATM fees are primarily generated when a non-Corporation cardholder uses a Corporation ATM. The income is primarily comprised as a percentage of interchange fees earned whenever the issuer’s card is processed through card payment networks, such as Visa or Pulse. Merchant services income is realized through a third party service provider who is contracted by the Corporation under a referral arrangement. Such fees represent fees charged to merchants to process their debit card transactions. The Corporation’s performance obligation for these fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received within a one to three day lag or in the following month.

 

Per Share Data

All per share computations include the effect of stock dividends declared, including the 5 percent stock dividend declared October 8, 2019. The computation of net income per share is provided in the table below.

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands, except per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

5,203

 

 

$

5,060

 

 

$

14,153

 

 

$

15,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (basic)

 

 

9,860

 

 

 

9,868

 

 

 

9,904

 

 

 

9,848

 

Effect of dilutive stock options

 

 

63

 

 

 

112

 

 

 

67

 

 

 

102

 

Weighted average shares outstanding (diluted)

 

 

9,923

 

 

 

9,980

 

 

 

9,971

 

 

 

9,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.53

 

 

$

0.51

 

 

$

1.43

 

 

$

1.54

 

Diluted earnings per share

 

$

0.52

 

 

$

0.51

 

 

$

1.42

 

 

$

1.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

30

 

 

 

1

 

 

 

30

 

 

 

2

 

 

- 13 -

 

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.

 

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.

 

 

Nine months ended

 

 

 

September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

3,610

 

 

$

3,115

 

Interest

 

$

16,062

 

 

$

11,128

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer of loans to foreclosed real estate

 

$

0

 

 

$

1,709

 

Initial recognition of financing lease right-of-use assets

 

$

1,358

 

 

$

0

 

Initial recognition of financing lease liabilities

 

$

1,480

 

 

$

0

 

Initial recognition of operating lease right-of-use assets

 

$

2,958

 

 

$

0

 

Initial recognition of operating lease liabilities

 

$

3,035

 

 

$

0

 

Increase in other liabilities for purchase of securities settling after quarter end

 

$

0

 

 

$

1,258

 

 

Recent Accounting Pronouncements

 

Pronouncements Adopted in 2019

 

In February 2016, the FASB issued ASU 2016-02, Leases and in July 2018 issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases. From the lessee’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessees. From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Corporation adopted the new standard effective January 1, 2019, which resulted in an increase in assets to recognize the present value of the lease obligations (right-of-use assets) with a corresponding increase in liabilities as discussed in Note 8-Leases. The adoption did not have an overall material impact on the Corporation’s consolidated financial statements of income.

 

- 14 -

 

In July 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This standard expands the scope of Topic 718, Compensation – Stock Compensation to include share-based payment transactions for acquiring goods and services from nonemployees. This standard requires application of Topic 718 to nonemployee awards for specific guidance on inputs to an option pricing model and the attribution of costs (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments in the Update are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Corporation adopted the new standard on January 1, 2019 and the adoption of this standard did not have a material impact on the Corporation’s consolidated financial statements.

 

Pronouncements Not Yet Effective

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard simplifies the test for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill, which currently is Step 2 of the goodwill impairment test. Instead, the goodwill impairment test will consist of a single quantitative step comparing the fair value of the reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and any interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standard effective with its January 1, 2020 goodwill impairment test and the adoption of this standard is not expected to have a material impact on its consolidated financial statements based on current circumstances.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This standard adds a new Topic 326 which requires companies to measure and record impairment on financial instruments at the time of origination using the expected credit loss (CECL) model. The CECL model calculates impairment based on historical experience, current conditions, and reasonable and supportable forecasts, and reflects the organization’s current estimate of all expected credit losses over the contractual term of its financial assets. The new standard was delayed and is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation expects the provisions of ASU No. 2016-13 to impact the Corporation’s consolidated financial statements, in particular, the level of the reserve for credit losses. The Corporation is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed: the amount of and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The following disclosure requirements were modified: for investments in certain entities that calculate net asset value, and entity is required to disclose the timing of liquidation of investee’s assets and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The update is effective for fiscal years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on its consolidated financial statements based on current circumstances.

 

- 15 -

 

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The update is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Corporation is currently evaluating the impact of the adoption of this update on its disclosures.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. This standard requires application of Subtopic 350-40 to determine which costs to implement the service contract would be capitalized as an asset and which costs would be expensed. The amendments in the Update are effective for the years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on its consolidated financial statements based on current circumstances.

 

Note 2-Securities

 

A summary of securities available-for-sale at September 30, 2019 and December 31, 2018 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 September 30, 2019, while 88 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania, the portfolio was intentionally distributed to limit exposure with the largest issuer at $2.3 million. 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

(dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

17,804

 

 

$

187

 

 

$

(37

)

 

$

17,954

 

U.S. agency

 

 

15,000

 

 

 

37

 

 

 

(96

)

 

 

14,941

 

U.S. agency mortgage-backed, residential

 

 

101,179

 

 

 

1,610

 

 

 

(60

)

 

 

102,729

 

State and municipal

 

 

27,025

 

 

 

271

 

 

 

(2

)

 

 

27,294

 

Total debt securities

 

$

161,008

 

 

$

2,105

 

 

$

(195

)

 

$

162,918

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

19,780

 

 

$

29

 

 

$

(806

)

 

$

19,003