Company Quick10K Filing
Codorus Valley Bancorp
Price23.12 EPS2
Shares10 P/E12
MCap231 P/FCF18
Net Debt-31 EBIT45
TEV200 TEV/EBIT4
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-03-11
10-Q 2019-09-30 Filed 2019-11-04
10-Q 2019-06-30 Filed 2019-08-05
10-Q 2019-03-31 Filed 2019-05-08
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-08
10-Q 2018-06-30 Filed 2018-08-06
10-Q 2018-03-31 Filed 2018-05-07
10-K 2017-12-31 Filed 2018-03-13
10-Q 2017-09-30 Filed 2017-11-06
10-Q 2017-06-30 Filed 2017-08-07
10-Q 2017-03-31 Filed 2017-05-08
10-K 2016-12-31 Filed 2017-03-15
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-08
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-03-08
10-Q 2015-09-30 Filed 2015-11-04
10-Q 2015-06-30 Filed 2015-08-05
10-Q 2015-03-31 Filed 2015-05-06
10-K 2014-12-31 Filed 2015-03-10
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-08-08
10-Q 2014-03-31 Filed 2014-05-09
10-K 2013-12-31 Filed 2014-03-25
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-13
10-K 2012-12-31 Filed 2013-03-28
10-Q 2012-09-30 Filed 2012-11-13
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-08
10-K 2011-12-31 Filed 2012-03-28
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-10
10-Q 2011-03-31 Filed 2011-05-12
10-K 2010-12-31 Filed 2011-03-28
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-11
10-Q 2010-03-31 Filed 2010-05-12
10-K 2009-12-31 Filed 2010-03-24
8-K 2020-07-23 Earnings, Exhibits
8-K 2020-07-14 Other Events, Exhibits
8-K 2020-05-19
8-K 2020-04-23
8-K 2020-04-14
8-K 2020-04-14
8-K 2020-04-07
8-K 2020-03-10
8-K 2020-03-10
8-K 2020-02-11
8-K 2020-01-16
8-K 2020-01-14
8-K 2019-10-17
8-K 2019-10-08
8-K 2019-10-08
8-K 2019-08-26
8-K 2019-08-06
8-K 2019-07-18
8-K 2019-07-09
8-K 2019-05-21
8-K 2019-05-02
8-K 2019-04-18
8-K 2019-04-10
8-K 2019-02-21
8-K 2019-01-29
8-K 2019-01-17
8-K 2019-01-08
8-K 2018-10-18
8-K 2018-10-09
8-K 2018-08-16
8-K 2018-08-09
8-K 2018-08-08
8-K 2018-08-06
8-K 2018-07-19
8-K 2018-07-10
8-K 2018-05-15
8-K 2018-04-19
8-K 2018-04-10
8-K 2018-02-13
8-K 2018-02-13
8-K 2018-02-13
8-K 2018-02-05
8-K 2018-01-18
8-K 2018-01-09

CVLY 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 2 - Securities
Note 3&Mdash;Restricted Investment in Bank Stocks
Note 4&Mdash;Loans
Note 5 - Allowance for Loan Losses
Note 6&Mdash;Deposits
Note 7&Mdash;Short - Term Borrowings and Long - Term Debt
Note 8&Mdash;Leases
Note 9 - Regulatory Matters
Note 10 - Shareholders’ Equity
Note 11 - Contingent Liabilities
Note 12 - Guarantees
Note 13 - Fair Value of Assets and Liabilities
Note 14&Mdash;Assets and Liabilities Subject To Offsetting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii&Mdash;Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-3.2 codorus200760_ex3-2.htm
EX-31.1 codorus200760_ex31-1.htm
EX-31.2 codorus200760_ex31-2.htm
EX-32 codorus200760_ex32.htm

Codorus Valley Bancorp Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 codorus200760_10q.htm FORM 10-Q

 

 

 

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 March 31, 2020

 

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 April 24, 2020, 9,763,713 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 37
     
Item 3. Quantitative and qualitative disclosures about market risk 54
     
Item 4. Controls and procedures 56
     
PART II – OTHER INFORMATION  
     
Item 1. Legal proceedings 56
     
Item 1A. Risk factors 56
     
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 57
     
Item 6. Exhibits 58
     
SIGNATURES 59

 

- 2 -

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

Unaudited

         
   March 31,   December 31, 
(dollars in thousands, except per share data)  2020   2019 
Assets          
Interest bearing deposits with banks  $169,689   $110,742 
Cash and due from banks   15,569    20,849 
Total cash and cash equivalents   185,258    131,591 
Securities, available-for-sale   171,738    159,675 
Restricted investment in bank stocks, at cost   3,951    4,551 
Loans held for sale   10,858    11,803 
Loans (net of deferred fees of $3,266 - 2020 and $3,463 - 2019)   1,476,661    1,505,135 
Less-allowance for loan losses   (22,838)   (21,066)
Net loans   1,453,823    1,484,069 
Premises and equipment, net   26,637    25,967 
Operating leases right-of-use assets   3,030    3,021 
Goodwill   2,301    2,301 
Other assets   64,363    63,567 
Total assets  $1,921,959   $1,886,545 
           
Liabilities          
Deposits          
Noninterest bearing  $274,382   $273,968 
Interest bearing   1,364,965    1,316,596 
Total deposits   1,639,347    1,590,564 
Short-term borrowings   6,196    7,925 
Long-term debt   71,627    81,632 
Operating leases liabilities   3,187    3,184 
Other liabilities   12,006    12,072 
Total liabilities   1,732,363    1,695,377 
           
Shareholders' equity          
Preferred stock, par value $2.50 per share;          
1,000,000 shares authorized;  shares issued and outstanding:          
0 at March 31, 2020 and 0 at December 31, 2019   0    0 
Common stock, par value $2.50 per share; 30,000,000 shares authorized;          
Shares issued: 9,769,150 at March 31, 2020 and 9,755,976 at December 31, 2019; and shares outstanding: 9,763,713 at March 31, 2020 and 9,755,976 at December 31, 2019.   24,423    24,390 
Additional paid-in capital   140,686    140,450 
Retained earnings   20,469    25,019 
Accumulated other comprehensive income   4,107    1,309 
Treasury stock, at cost; 5,437 shares at March 31, 2020   (89)   0 
Total shareholders' equity   189,596    191,168 
Total liabilities and shareholders' equity  $1,921,959   $1,886,545 

 

See accompanying notes.

 

- 3 -

 

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

Unaudited

         
   Three months ended 
   March 31, 
(dollars in thousands, except per share data)  2020   2019 
Interest income          
Loans, including fees  $18,764   $19,510 
Investment securities:          
Taxable   820    676 
Tax-exempt   141    209 
Dividends   72    119 
Other   392    362 
Total interest income   20,189    20,876 
           
Interest expense          
Deposits   4,276    4,620 
Federal funds purchased and other short-term borrowings   9    9 
Long-term debt   537    716 
Total interest expense   4,822    5,345 
Net interest income   15,367    15,531 
Provision for loan losses   9,435    1,050 
Net interest income after provision for loan losses   5,932    14,481 
           
Noninterest income          
Trust and investment services fees   994    840 
Income from mutual fund, annuity and insurance sales   261    235 
Service charges on deposit accounts   1,130    1,158 
Income from bank owned life insurance   286    367 
Other income   439    409 
Gain on sales of loans held for sale   298    218 
Gain (loss) on sales of securities   15    (4)
 Total noninterest income   3,423    3,223 
           
Noninterest expense          
Personnel   7,805    7,706 
Occupancy of premises, net   926    963 
Furniture and equipment   853    772 
Postage, stationery and supplies   217    184 
Professional and legal   205    109 
Marketing   325    349 
FDIC insurance   167    237 
Debit card processing   389    323 
Charitable donations   872    845 
Telecommunications   121    126 
External data processing   704    556 
Foreclosed real estate including provision for losses   20    87 
Other   715    304 
Total noninterest expense   13,319    12,561 
(Loss) income before income taxes   (3,964)   5,143 
(Benefit) provision for income taxes   (975)   1,052 
Net (loss) income  $(2,989)  $4,091 
Net (loss) income per share, basic  $(0.31)  $0.41 
Net (loss) income per share, diluted  $(0.31)  $0.41 

 

See accompanying notes.

 

- 4 -

 

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

Unaudited

         
   Three months ended 
   March 31, 
(dollars in thousands)  2020   2019 
Net (loss) income  $(2,989)  $4,091 
Other comprehensive income (loss):          
Securities available for sale:          
Net unrealized holding gains arising during the period          
(net of tax expense of $747 and $370, respectively)   2,810    1,396 
Reclassification adjustment for (gains) losses included in net income          
(net of tax expense (benefit) of $3 and ($1), respectively) (a) (b)   (12)   3 
Net unrealized gains   2,798    1,399 
Comprehensive (loss) income  $(191)  $5,490 

 

(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

         
   Three months ended 
   March 31, 
(dollars in thousands)  2020   2019 
Cash flows from operating activities          
Net (loss) income  $(2,989)  $4,091 
Adjustments to reconcile net (loss) income to net cash provided by operations:          
Depreciation/amortization   684    651 
Net amortization of premiums on securities   151    65 
Amortization of deferred loan origination fees and costs   (403)   (229)
Net amortization of operating lease right of use assets   178    166 
Net amortization of finance lease right of use assets   12    0 
Repayment of lease obligations   (189)   0 
Provision for loan losses   9,435    1,050 
Increase in bank owned life insurance   (286)   (367)
Originations of mortgage loans held for sale   (9,797)   (7,627)
Originations of SBA loans held for sale   (4,431)   (1,595)
Proceeds from sales of mortgage loans held for sale   11,625    7,948 
Proceeds from sales of SBA loans held for sale   3,833    791 
Net gain on sales of mortgage loans held for sale   (290)   (165)
Gain on sales of SBA loans held for sale   (9)   (53)
Gain on disposal of premises and equipment   0    (11)
(Gain) loss on sales of securities, available-for-sale   (15)   4 
Stock-based compensation   120    135 
Decrease in interest receivable   144    370 
(Increase) in other assets   (1,156)   (647)
(Decrease) increase in interest payable   (55)   142 
(Decrease) increase in other liabilities   (11)   539 
Net cash provided by operating activities   6,551    5,258 
Cash flows from investing activities          
Purchases of securities, available-for-sale   (38,070)   (8,448)
Maturities, repayments and calls of securities, available-for-sale   9,561    5,561 
Sales of securities, available-for-sale   19,852    6,017 
Net decrease in restricted investment in bank stock   600    600 
Net decrease (increase) in loans made to customers   21,093    (9,166)
Purchases of premises and equipment   (1,352)   (1,759)
Investment in bank owned life insurance   0    (6,600)
Investment in foreclosed real estate   (121)   0 
Net cash provided by (used in) investing activities   11,563    (13,795)
Cash flows from financing activities          
Net increase (decrease) in demand and savings deposits   31,479    (20,669)
Net increase in time deposits   17,304    28,266 
Net (decrease) in short-term borrowings   (1,729)   (192)
Repayment of long-term debt   (10,000)   0 
Cash dividends paid to shareholders   (1,561)   (1,512)
Treasury stock purchased   (89)   0 
Issuance of stock   149    147 
Net cash provided by financing activities   35,553    6,040 
Net increase (decrease) in cash and cash equivalents   53,667    (2,497)
Cash and cash equivalents at beginning of year   131,591    96,782 
Cash and cash equivalents at end of period  $185,258   $94,285 

 

See accompanying notes.

 

- 6 -

 

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

Unaudited

                         
               Accumulated         
       Additional       Other         
   Common   Paid-in   Retained   Comprehensive   Treasury     
(dollars in thousands, except per share data)  Stock   Capital   Earnings   Income (Loss)   Stock   Total 
                         
Balance, January 1, 2020  $24,390   $140,450   $25,019   $1,309   $0   $191,168 
Net loss             (2,989)             (2,989)
Other comprehensive income, net of tax                  2,798         2,798 
Cash dividends ($0.160 per share)             (1,561)             (1,561)
Stock-based compensation        120                   120 
Repurchased stock - 5,335 shares                       (87)   (87)
Withheld stock - 102 shares                       (2)   (2)
Issuance and reissuance of stock:                              
6,706 shares under the dividend reinvestment and stock purchase plan   17    132                   149 
6,468 shares of stock-based compensation awards   16    (16)                  0 
                               
Balance, March 31, 2020  $24,423   $140,686   $20,469   $4,107   $(89)  $189,596 
                               
                               
Balance, January 1, 2019  $23,629   $134,506   $22,837   $(2,226)  $0   $178,746 
Adoption of ASC topic 842 (leases)             (199)             (199)
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)
Stock-based compensation        135                   135 
Forfeiture and withheld shares of restricted stock        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  $23,646   $134,775   $25,217   $(827)  $(4)  $182,807 
                               

 

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, 2019 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”).  As of March 31, 2020, PeoplesBank operates one wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit products.  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 March 31, 2020.  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, 2019.

 

The results of operations for the three months ended March 31, 2020 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 March 31, 2020 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin.  In March 2020, the WHO classified the coronavirus as a pandemic, based on the rapid increase in exposure globally.

 

The full impact of the coronavirus continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Corporation’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the coronavirus and the global responses to curb its spread, the Corporation is not able to estimate the effects of the coronavirus on its results of operations, financial condition, or liquidity for fiscal year 2020.

 

- 8 -

 

In addition, the adverse economic effects of the coronavirus may lead to an increase in credit risk on the Corporation’s commercial and residential loan portfolios.  Likewise, the Corporation is also monitoring the fluctuations in the markets as it pertains to interest rates and fair value of our investments for OTTI. To curtail the spread of the virus, we are currently restricting branch access to the drive-through window or appointment-only at all locations.

 

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.  

 

The CARES Act includes a provision for the Corporation to opt out of applying the TDR accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019.

 

While the Corporation continues to evaluate the disruption caused by the pandemic and impact of the CARES Act, these events may have a material adverse impact on the Corporation’s results of future operations, financial position, capital, and liquidity in fiscal year 2020. Further, a decrease in results of future operations may place a strain on the Corporation’s capital reserve ratios.

 

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. 

 

- 9 -

 

The allowance for loan losses is maintained at a level considered by management to be adequate to provide for probable incurred losses. 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 and general 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.

 

 

Changes in international, US 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

 

Impact of imposed tariffs

 

Impact of COVID-19 pandemic

 

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. 

 

- 10 -

 

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. 

 

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. 

 

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 March 31, 2020 there was $918,000 of foreclosed real estate, $121,000 of which was residential real estate.  Included within loans receivable as of March 31, 2020 was a recorded investment of $348,000 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.

 

- 11 -

 

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 estimate of future net servicing income 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 March 31, 2020, the balance of residential mortgage loans serviced for third parties was $114,169,000 compared to $115,620,000 at December 31, 2019.

 

 

 

Three months ended

 

 

 

March 31,

 

(dollars in thousands)

 

2020

 

 

2019

 

Amortized cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

965

 

 

$

925

 

Originations of mortgage servicing rights

 

 

13

 

 

 

50

 

Amortization expense

 

 

(66

)

 

 

(36

)

Valuation allowance

 

 

(173

)

 

 

(17

)

Balance at end of period

 

$

739

 

 

$

922

 

 

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 March 31, 2020, the Corporation does not have any indicators of potential impairment of either goodwill or core deposit intangibles. 

 

- 12 -

 

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:

 

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.

 

- 13 -

 

Per Share Data

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

 

 

 

Three months ended

 

 

 

March 31,

 

(in thousands, except per share data)

 

2020

 

 

2019

 

Net (loss) income

 

$

(2,989

)

 

$

4,091

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (basic)

 

 

9,759

 

 

 

9,927

 

Effect of dilutive stock options

 

 

53

 

 

 

70

 

Weighted average shares outstanding (diluted)

 

 

9,812

 

 

 

9,997

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(0.31

)

 

$

0.41

 

Diluted (loss)earnings per share

 

$

(0.31

)

 

$

0.41

 

 

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.

 

 

 

Three months ended

 

 

 

March 31,

 

(dollars in thousands)

 

2020

 

 

2019

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

0

 

 

$

300

 

Interest

 

$

4,877

 

 

$

5,203

 

 

 

 

 

 

 

 

 

 

Noncash investing  and financing activities:

 

 

 

 

 

 

 

 

Transfer of loans to foreclosed real estate

 

$

121

 

 

$

0

 

Initial recognition of financing lease right-of-use assets

 

$

0

 

 

$

1,358

 

Initial recognition of financing lease liabilities

 

$

0

 

 

$

1,480

 

Initial recognition of operating lease right-of-use assets

 

$

186

 

 

$

2,958

 

Initial recognition of operating lease liabilities

 

$

186

 

 

$

3,035

 

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

 

$

0

 

 

$

1,004

 

 

- 14 -

 

 

Recent Accounting Pronouncements

 

Pronouncements Adopted in 2020

 

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. The Corporation adopted this standard effective with its January 1, 2020 goodwill impairment test. The adoption of this standard did not have a material impact on its consolidated financial statements.

 

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 did not have a material impact on its consolidated financial statements.

 

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 did not have a material impact on its consolidated financial statements.

 

Pronouncements Not Yet Effective

 

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 2018-14, 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.

 

- 15 -

 

 

Note 2 – Securities

 

A summary of securities available-for-sale at March 31, 2020 and December 31, 2019 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 March 31, 2020, while 90 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
March 31, 2020            
  Debt securities:                    
U.S. Treasury notes  $4,998   $88   $0   $5,086 
U.S. agency mortgage-backed, residential   135,895    4,809    (2)   140,702 
State and municipal   24,656    256    0    24,912 
Corporate debt   990    48    0    1,038 
Total debt securities  $166,539   $5,201   $(2)  $171,738 
December 31, 2019                    
  Debt securities:                    
U.S. Treasury notes  $9,834   $119   $0   $9,953 
U.S. agency   15,000    0    (77)   14,923 
U.S. agency mortgage-backed, residential   106,799    1,443    (87)   108,155 
State and municipal   26,385    260    (1)   26,644 
Total debt securities  $158,018   $1,822   $(165)  $159,675 

 

The amortized cost and estimated fair value of debt securities at March 31, 2020 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
   Amortized  Fair
(dollars in thousands)  Cost  Value
Due in one year or less  $6,671   $6,761 
Due after one year through five years   102,796    105,798 
Due after five years through ten years   34,313    35,189 
Due after ten years   22,759    23,990 
Total debt securities  $166,539   $171,738 

 

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. Proceeds from the sale of securities were $19,852,000, with a related tax expense of $3,000 for the three months ended March 31, 2020. Proceeds from the sale of securities were $6,017,000, with a related tax benefit of $1,000 for the three months ended March 31, 2019.

 

- 16 -

 

  

   Three months ended
   March 31,
(dollars in thousands)  2020  2019
Realized gains  $74   $3 
Realized losses   (59)   (7)
Net gains (losses)  $15   $(4)

 

Investment securities having a carrying value of $126,161,000 and $128,427,000 on March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019.

 

   Less than 12 months  12 months or more  Total
   Number of  Fair  Unrealized  Number of  Fair  Unrealized  Number of  Fair  Unrealized
(dollars in thousands)  Securities  Value  Losses  Securities  Value  Losses  Securities  Value  Losses
March 31, 2020                           
Debt securities:                                             
U.S. agency mortgage-backed, residential   2    773    (2)   0    0    0    2    773    (2)
Total temporarily impaired debt                                             
securities, available-for-sale   2   $773   $(2)   0   $0   $0    2   $773   $(2)
December 31, 2019                                             
  Debt securities:                                             
U.S. agency   1    4,983    (17)   2    9,940    (60)   3    14,923    (77)
U.S. agency mortgage-backed, residential   12    21,821    (82)   2    1,163    (5)   14    22,984    (87)
State and municipal   1    466    (1)   0    0    0    1    466    (1)
Total temporarily impaired debt                                             
securities, available-for-sale   14   $27,270   $(100)   4   $11,103   $(65)   18   $38,373   $(165)

 

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.

 

The Corporation believes that unrealized losses at March 31, 2020 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through March 31, 2020 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 3—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 March 31, 2020 and December 31, 2019, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLBP”) and, to a lesser degree, Atlantic Community Bancshares, Inc. (“ACBI”), the parent company of Atlantic Community Bankers Bank (“ACBB”). Under the FHLBP’s Capital Plan member banks, including PeoplesBank, are required to maintain a minimum stock investment. 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.

 

- 17 -

 

 

The FHLBP paid dividends during the periods ended March 31, 2020 and 2019. The 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 March 31, 2020 and 2019.

 

Note 4—Loans

 

Loan Portfolio Composition

 

The table below provides the composition of the loan portfolio at March 31, 2020 and December 31, 2019. 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.

 

   March 31,  % Total  December 31,  % Total
(dollars in thousands)  2020  Loans  2019  Loans
Builder & developer  $152,432    10.3   $159,312    10.6 
Commercial real estate investor   207,397    14.0    207,227    13.8 
Residential real estate investor   254,817    17.3    247,969    16.5 
Hotel/Motel   79,729    5.4    80,260    5.3 
Wholesale & retail   99,484    6.7    109,238    7.3 
Manufacturing   82,351    5.6    86,511    5.7 
Agriculture   78,792    5.3    80,719    5.4 
Other   303,120    20.5    313,371    20.7 
  Total commercial related loans   1,258,122    85.1    1,284,607    85.3 
Residential mortgages   92,624    6.3    94,868    6.3 
Home equity   101,547    6.9    100,827    6.7 
Other   24,368    1.7    24,833    1.7 
  Total consumer related loans   218,539    14.9    220,528    14.7 
    Total loans  $1,476,661    100.0   $1,505,135    100.0 

 

- 18 -

 

 

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 $500,000, 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 (the ‘Committee’), which includes senior management. The Committee, which typically meets at least quarterly, 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. In addition to review by the Committee, existing loans are monitored by the primary loan officer and loan review to determine if any changes, upward or downward, in risk ratings are appropriate. An external consultant is also used to review a portion of the existing portfolio and recommend rating changes as appropriate. Primary loan officers and internal loan review may downgrade existing loans, except to nonaccrual status. Only the Committee, Executive Chairman or President/CEO may upgrade a loan that is classified.

 

The Corporation uses ten risk ratings to grade commercial 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. 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,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses.

 

- 19 -

 

 

The table below presents a summary of loan risk ratings by loan class at March 31, 2020 and December 31, 2019.

                     
       Special             
(dollars in thousands)  Pass   Mention   Substandard   Nonaccrual   Total 
March 31, 2020                         
Builder & developer  $145,847   $5,063   $293   $1,229   $152,432 
Commercial real estate investor   201,223    4,849    1,100    225    207,397 
Residential real estate investor   245,249    3,418    194    5,956    254,817 
Hotel/Motel   67,219    12,510    0    0    79,729 
Wholesale & retail   80,750    9,813    1,821    7,100    99,484 
Manufacturing   75,673    988    4,653    1,037    82,351 
Agriculture   71,321    3,690    403    3,378    78,792 
Other   275,555    6,383    13,777    7,405    303,120 
Total commercial related loans   1,162,837    46,714    22,241    26,330    1,258,122 
Residential mortgage   92,268    129    74    153    92,624 
Home equity   100,820    60    0    667    101,547 
Other   24,142    0    7    219    24,368 
Total consumer related loans   217,230    189    81    1,039    218,539 
Total loans  $1,380,067   $46,903   $22,322   $27,369   $1,476,661 
                          
December 31, 2019                         
Builder & developer  $151,672   $6,503   $252   $885   $159,312 
Commercial real estate investor   201,967    3,890    1,145    225    207,227 
Residential real estate investor   238,216    3,780    202    5,771    247,969 
Hotel/Motel   67,732    12,528    0    0    80,260 
Wholesale & retail   89,556    10,513    1,954    7,215    109,238 
Manufacturing   76,721    1,058    7,597    1,135    86,511 
Agriculture   76,350    1,123    404    2,842    80,719 
Other   277,634    16,490    13,748    5,499    313,371 
Total commercial related loans   1,179,848    55,885    25,302    23,572    1,284,607 
Residential mortgage   94,388    131    74    275    94,868 
Home equity   100,089    61    0    677    100,827 
Other   24,600    0    7    226    24,833 
Total consumer related loans   219,077    192    81    1,178    220,528 
Total loans  $1,398,925   $56,077   $25,383   $24,750   $1,505,135 

  

- 20 -

 

 

Impaired Loans

 

The table below presents a summary of impaired loans at March 31, 2020 and December 31, 2019. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for individual loans that are commercial related where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs. 

                             
   With No Allowance   With A Related Allowance   Total 
   Recorded   Unpaid   Recorded   Unpaid   Related   Recorded   Unpaid 
(dollars in thousands)  Investment   Principal   Investment   Principal   Allowance   Investment   Principal 
March 31, 2020                            
Builder & developer  $1,293   $1,332   $142   $143   $52   $1,435   $1,475 
Commercial real estate investor   1,325    1,325    0    0    0    1,325    1,325 
Residential real estate investor   953    975    5,003    5,124    1,906    5,956    6,099 
Hotel/Motel   0    0    0    0    0    0    0 
Wholesale & retail   271    271    7,069    7,760    3,363    7,340    8,031 
Manufacturing   12    12    1,025    1,170    487    1,037    1,182 
Agriculture   2,412    2,439    966    966    537    3,378    3,405 
Other commercial   3,771    11,413    3,634    3,789    1,506    7,405    15,202 
Total impaired commercial related loans   10,037    17,767    17,839    18,952    7,851    27,876    36,719 
Residential mortgage   153    153    0    0    0    153    153 
Home equity   667    667    0    0    0    667    667 
Other consumer   219    225    0    0    0    219    225 
Total impaired consumer related loans   1,039    1,045    0    0    0    1,039    1,045 
Total impaired loans  $11,076   $18,812   $17,839   $18,952   $7,851   $28,915   $37,764 
                             
December 31, 2019                            
Builder & developer  $621   $651   $473   $474   $238   $1,094   $1,125 
Commercial real estate investor   1,370    1,371    0    0    0    1,370    1,371 
Residential real estate investor   734    753    5,037    5,137    1,873    5,771    5,890 
Hotel/Motel   0    0    0    0    0    0    0 
Wholesale & retail   273    273    7,184    7,811    2,537    7,457    8,084 
Manufacturing   13    13    1,122    1,220    463    1,135    1,233 
Agriculture   1,784    1,791    1,058    1,058    701    2,842    2,849 
Other commercial   1,864    1,974    3,635    3,888    1,608    5,499    5,862 
Total impaired commercial related loans   6,659    6,826    18,509    19,588    7,420    25,168    26,414 
Residential mortgage   275    277    0    0    0    275    277 
Home equity   677    677    0    0    0    677    677 
Other consumer   226    231    0    0    0    226    231 
Total impaired consumer related loans   1,178    1,185    0    0    0    1,178    1,185 
Total impaired loans  $7,837   $8,011   $18,509   $19,588   $7,420   $26,346   $27,599 

 

- 21 -

 

 

The table below presents a summary of average impaired loans and related interest income that was included in net income for the three months ended March 31, 2020 and 2019. 

                         
   With No Related Allowance   With A Related Allowance   Total 
   Average   Total   Average   Total   Average   Total 
   Recorded   Interest   Recorded   Interest   Recorded   Interest 
(dollars in thousands)  Investment   Income   Investment   Income   Investment   Income 
Three months ended March 31, 2020                        
Builder & developer  $957    12    308    0   $1,265   $12 
Commercial real estate investor   1,347    22    0    0    1,347    22 
Residential real estate investor   844    6    5,020    0    5,864    6 
Hotel/Motel   0    0    0    0    0    0 
Wholesale & retail   272    2    7,127    0    7,399    2 
Manufacturing   13    3    1,073    0    1,086    3 
Agriculture   2,098    19    1,012    0    3,110    19 
Other commercial   2,817    31    3,634    0    6,451    31 
Total impaired commercial related loans   8,348    95    18,174    0    26,522    95 
Residential mortgage   214    3    0    0    214    3 
Home equity   672    21    0    0    672    21 
Other consumer   223    3    0    0    223    3 
Total impaired consumer related loans   1,109    27    0    0    1,109    27 
Total impaired loans  $9,457   $122   $18,174   $0   $27,631   $122 
                               
Three months ended March 31, 2019                              
Builder & developer  $1,124   $14   $69   $0   $1,193   $14 
Commercial real estate investor   3,610    34    0    0    3,610    34 
Residential real estate investor   615    5    4,346    0    4,961    5 
Hotel/Motel   0    0    0    0    0    0 
Wholesale & retail   2,723    3    7,402    0    10,125    3 
Manufacturing   669    5    1,642    0    2,311    5 
Agriculture   658    13    0    0    658    13 
Other commercial   7,601    0    4,870    0    12,471    0 
Total impaired commercial related loans   17,000    74    18,329    0    35,329    74 
Residential mortgage   548    6    0    0    548    6 
Home equity   604    6    0    0    604    6 
Other consumer   277    4    0    0    277    4 
Total impaired consumer related loans   1,429    16    0    0    1,429    16 
Total impaired loans  $18,429   $90   $18,329   $0   $36,758   $90 

 

- 22 -

 

 

Past Due and Nonaccrual

 

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that 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 March 31, 2020 and December 31, 2019. 

                             
           ≥ 90 Days                 
   30-59   60-89   Past Due       Total Past         
   Days   Days   and       Due and       Total 
(dollars in thousands)  Past Due   Past Due   Accruing   Nonaccrual   Nonaccrual   Current   Loans 
March 31, 2020                                   
Builder & developer  $775   $0   $40   $1,229   $2,044   $150,388   $152,432 
Commercial real estate investor   0    0    0    225    225    207,172    207,397 
Residential real estate investor   0    0    0    5,956    5,956    248,861    254,817 
Hotel/Motel   0    0    0    0    0    79,729    79,729 
Wholesale & retail   200    0    0    7,100    7,300    92,184    99,484 
Manufacturing   394    0    0    1,037    1,431    80,920    82,351 
Agriculture   403    0    0    3,378    3,781    75,011    78,792 
Other   123    0    680    7,405    8,208    294,912    303,120 
Total commercial related loans   1,895    0    720    26,330    28,945    1,229,177    1,258,122 
Residential mortgage   1,494    0    103    153    1,750    90,874    92,624 
Home equity   601    10    0    667    1,278    100,269    101,547 
Other   1,404    6    7    219    1,636    22,732    24,368 
Total consumer related loans   3,499    16    110    1,039    4,664    213,875    218,539 
Total loans  $5,394   $16   $830   $27,369   $33,609   $1,443,052   $1,476,661 
                                    
December 31, 2019                                   
Builder & developer  $0   $0   $43   $885   $928   $158,384   $159,312 
Commercial real estate investor   0    0    0    225    225    207,002    207,227 
Residential real estate investor   295    0    0    5,771    6,066    241,903    247,969 
Hotel/Motel   0    0    0    0    0    80,260    80,260 
Wholesale & retail   0    0    0    7,215    7,215    102,023    109,238 
Manufacturing   409    0    0    1,135    1,544    84,967    86,511 
Agriculture   14    0    0    2,842    2,856    77,863    80,719 
Other   463    1,865    120    5,499    7,947    305,424    313,371 
Total commercial related loans   1,181    1,865    163    23,572    26,781    1,257,826    1,284,607 
Residential mortgage   0    70    104    275    449    94,419    94,868 
Home equity   249    276    0    677    1,202    99,625    100,827 
Other   750    68    13    226    1,057    23,776    24,833 
Total consumer related loans   999    414    117    1,178    2,708    217,820    220,528 
Total loans  $2,180   $2,279   $280   $24,750   $29,489   $1,475,646   $1,505,135 

 

- 23 -

 

 

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. TDRs included as impaired loans totaled $1,598,000 and $1,650,000 as of March 31, 2020 and March 31, 2019, respectively. There are no commitments to lend additional amounts to these TDRs as of March 31, 2020 and March 31, 2019.

 

The table below shows loans whose terms have been modified under TDRs during the three months ended March 31, 2020 and 2019. There were no impairment losses recognized on these TDRs. There were no defaults during the three months ended March 31, 2020 and March 31, 2019 for TDRs entered into during the previous 12 month period. As of March 31, 2020, there were no modifications completed under the CARES Act. As of April 30, 2020, there have been modifications to 35 consumer loans totaling approximately $2,000,000 and 13 commercial loans totaling approximately $41,000,000 under the CARES Act, which are not considered TDRs. 

                 
   Modifications 
       Pre-Modification   Post-Modification     
   Number   Outstanding   Outstanding   Recorded 
   of   Recorded   Recorded   Investment 
(dollars in thousands)  Contracts   Investments   Investments   at Period End 
Three months ended:                
                 
March 31, 2020                    
None                    
                     
 March 31, 2019                    
Commercial related loans accruing   1   $63   $63   $61 

 

- 24 -

 

 

NOTE 5 – 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 months ended March 31, 2020 and 2019.  

 

   Allowance for Loan Losses
    January 1, 2020                   March 31, 2020 
(dollars in thousands)   Balance    Charge-offs    Recoveries    Provision    Balance 
Builder & developer  $2,263   $(170)  $0   $133   $2,226 
Commercial real estate investor   2,565    0    0    117    2,682 
Residential real estate investor   4,632    0    3    124    4,759 
Hotel/Motel   742    0    0    314    1,056 
Wholesale & retail   3,575    0    7    976    4,558 
Manufacturing   1,252    0    0    64    1,316 
Agriculture   1,304    0    0    (164)   1,140 
Other commercial   4,204    (7,511)   0    7,772    4,465 
Total commercial related loans   20,537    (7,681)   10    9,336    22,202 
Residential mortgage   158    0    0    77    235 
Home equity   203    0    0    101    304 
Other consumer   167    (5)   13    (78)   97 
Total consumer related loans   528    (5)   13    100    636 
Unallocated   1    0    0    (1)   0 
Total  $21,066   $(7,686)  $23   $9,435   $22,838 

 

   Allowance for Loan Losses
    January 1, 2019                    March 31, 2019 
(dollars in thousands)   Balance    Charge-offs    Recoveries    Provision    Balance 
Builder & developer  $2,835   $0   $0   $132   $2,967 
Commercial real estate investor   2,636    0    0    16    2,652 
Residential real estate investor   3,945    0    3    62    4,010 
Hotel/Motel   732    0    0    67    799 
Wholesale & retail   1,813    0    0    (12)   1,801 
Manufacturing   1,287    0    0    (21)   1,266 
Agriculture   579    0    0    (1)   578 
Other commercial   4,063    (46)   0    1,168    5,185 
Total commercial related loans   17,890    (46)   3    1,411    19,258 
Residential mortgage   126    0    0    6    132 
Home equity   265    (20)   1    (51)   195 
Other consumer   144    (60)   9    106    199 
Total consumer related loans   535    (80)   10    61    526 
Unallocated   719    0    0    (422)   297 
Total  $19,144   $(126)  $13   $1,050   $20,081 

 

- 25 -

 

 

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for March 31, 2020, December 31, 2019 and March 31, 2019. 

 

   Allowance for Loan Losses   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated For   Evaluated For        Evaluated For   Evaluated For      
(dollars in thousands)  Impairment   Impairment   Balance   Impairment   Impairment   Balance 
March 31, 2020                              
Builder & developer  $52   $2,174   $2,226   $1,435   $150,997   $152,432 
Commercial real estate investor   0    2,682    2,682    1,325    206,072    207,397 
Residential real estate investor   1,906    2,853    4,759    5,956    248,861    254,817 
Hotel/Motel   0    1,056    1,056    0    79,729    79,729 
Wholesale & retail   3,363    1,195    4,558    7,340    92,144    99,484 
Manufacturing   487    829    1,316    1,037    81,314    82,351 
Agriculture   537    603    1,140    3,378    75,414    78,792 
Other commercial   1,506    2,959    4,465    7,405    295,715    303,120 
Total commercial related   7,851    14,351    22,202    27,876    1,230,246    1,258,122 
Residential mortgage   0    235    235    153    92,471    92,624 
Home equity   0    304    304    667    100,880    101,547 
Other consumer   0    97    97    219    24,149    24,368 
Total consumer related   0    636    636    1,039    217,500    218,539 
Unallocated   0    0    0    0    0    0 
Total  $7,851   $14,987   $22,838   $28,915   $1,447,746   $1,476,661 
                         
December 31, 2019                              
Builder & developer  $238   $2,025   $2,263   $1,094   $158,218   $159,312 
Commercial real estate investor   0    2,565    2,565    1,370    205,857    207,227 
Residential real estate investor   1,873    2,759    4,632    5,771    242,198    247,969 
Hotel/Motel   0    742    742    0    80,260    80,260 
Wholesale & retail   2,537    1,038    3,575    7,457    101,781    109,238 
Manufacturing   463    789    1,252    1,135    85,376    86,511 
Agriculture   701    603    1,304    2,842    77,877    80,719 
Other commercial   1,608    2,596    4,204    5,499    307,872    313,371 
Total commercial related   7,420    13,117    20,537    25,168    1,259,439    1,284,607 
Residential mortgage   0    158    158    275    94,593    94,868 
Home equity   0    203    203    677    100,150    100,827 
Other consumer   0    167    167    226    24,607    24,833 
Total consumer related   0    528    528    1,178    219,350    220,528 
Unallocated   0    1    1    0    0    0 
Total  $7,420   $13,646   $21,066   $26,346   $1,478,789   $1,505,135 

 

- 26 -

 

 

Note 6—Deposits 

 

The composition of deposits as of March 31, 2020 and December 31, 2019 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $68,000 at March 31, 2020, compared to $86,000 at December 31, 2019. 

 

   March 31,   December 31, 
(dollars in thousands)  2020   2019 
Noninterest bearing demand  $274,382   $273,968 
Interest bearing demand   182,414    174,248 
Money market   531,925    513,948 
Savings   90,411    85,489 
Time deposits less than $100   309,597    303,527 
Time deposits $100 to $250   183,820    175,477 
Time deposits $250 or more   66,798    63,907 
Total deposits  $1,639,347   $1,590,564 

 

Note 7—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 March 31, 2020, the balance of securities sold under agreements to repurchase was $6,196,000 compared to $7,925,000 at December 31, 2019. At March 31, 2020 and December 31, 2019, there were no other short-term borrowings. 

 

The following table presents a summary of long-term debt as of March 31, 2020 and December 31, 2019. 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. 

 

   March 31,   December 31, 
(dollars in thousands)  2020   2019 
PeoplesBank’s obligations:          
  Federal Home Loan Bank of Pittsburgh (FHLBP)          
Due March 2020, 1.86%   0    10,000 
Due June 2020, 1.87%   15,000    15,000 
Due June 2020, 2.70%   10,000    10,000 
Due June 2021, 2.81%   10,000    10,000 
Due June 2021, 2.14%   15,000    15,000 
Due May 2022, 2.93%   10,000    10,000 
  Total FHLBP   60,000    70,000 
Codorus Valley Bancorp, Inc. obligations:          
  Junior subordinated debt          
Due 2034, 2.76%, floating rate based on 3 month          
   LIBOR plus 2.02%, callable quarterly   3,093    3,093 
Due 2036, 3.37% floating rate based on 3 month          
   LIBOR plus 1.54%, callable quarterly   7,217    7,217 
  Total junior subordinated debt   10,310    10,310 
Lease obligations included in long-term debt:          
Finance lease liabilities   1,317    1,322 
Total long-term debt  $71,627   $81,632 

 

- 27 -

 

 

At March 31, 2020 and December 31, 2019, municipal deposit letters of credit issued by the FHLBP on behalf of PeoplesBank naming applicable municipalities as beneficiaries were $42,000,000. The letters of credit took the place of securities pledged to the municipalities for their deposits maintained at PeoplesBank. 

 

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. 

 

Note 8—Leases 

 

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Corporation adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 affected the accounting treatment for operating lease agreements in which the Corporation is the lessee. 

 

Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property, ATM locations, and office space. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Corporation has one finance lease for one financial center. 

 

Leases with an initial term of 12 months or less are not recorded on the consolidated statement of condition. All other leases have remaining lease terms of 1 year to 25 years, some of which include options to extend. Upon opening a new financial center, we typically install brand-specific leasehold improvements which are depreciated over the shorter of the useful life or length of the lease. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and, taking into consideration the dollar amount of the improvements, we conclude that it is reasonably certain that a renewal option will be exercised, the renewal period is included in the lease term, and the related payments are reflected in the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on an amortizing and collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Corporation’s financing leases, the Corporation utilized its incremental borrowing rate at lease inception. 

 

All of our leases include fixed rental payments. We commonly enter into leases under which the lease payments increase at pre-determined dates based on the change in the consumer price index. While the majority of our leases are gross leases, we also have a number of leases in which we make separate payments to the lessor based on the lessor’s property and casualty insurance cost and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and nonlease components for all of our building leases. 

 

- 28 -

 

 

The components of lease expense were as follows: 

 

   Three Months Ended 
   March 31, 
(dollars in thousands)  2020   2019 
Operating lease cost  $203   $188 
           
Finance lease cost:          
Amortization of right-of-use assets  $12   $17 
Interest on lease liability   12    13 
Total finance lease cost  $24   $30 
           
Total lease cost  $227   $218 

 

Supplemental cash flow information related to leases was as follows:

 

   Three Months Ended 
   March 31, 
   2020   2019 
Operating cash flows from operating leases  $208   $193 
Operating cash flows from financing leases   12    13 
Financing cash flows from financing leases   6    11 
           
Right-of-use assets obtained in exchange for new lease obligations:          
Operating leases   186    0 
Finance leases   0    0 

 

Amounts recognized as right-of-use assets related to finance leases are included in fixed assets in the accompanying statement of financial position, while related lease liabilities are included in long-term debt. Supplemental balance sheet information related to leases was as follows:

 

   March 31,   December 31, 
   2020   2019 
Assets:        
Operating leases right-of-use assets  $3,030   $3,021 
Finance leases assets   1,123    1,134 
Total lease assets  $4,153   $4,155 
           
Liabilities:          
Operating  $3,187   $3,184 
Financing   1,317    1,322 
Total lease liabilities  $4,504   $4,506 
           
Weighted Average Remaining Lease Term (years)          
Operating leases   5.5    5.6 
Finance leases   23.9    24.2 
           
Weighted Average Discount Rate          
Operating leases   2.71%   2.72%
Finance leases   3.69%   3.69%

 

- 29 -

 

Future minimum payments for financing leases and operating leases as of March 31, 2020 and December 31, 2019 were as follows:

 

 

 

 

 

 

 

(dollars in thousands:)

 

March 31, 2020

 

Year Ending December 31,

 

Operating Leases

 

 

Finance Leases

 

2020

 

$

622

 

 

$

56

 

2021

 

 

768

 

 

 

75

 

2022

 

 

609

 

 

 

75

 

2023

 

 

491

 

 

 

75

 

2024

 

 

413

 

 

 

75

 

Thereafter

 

 

508

 

 

 

1,669

 

Total lease payments

 

 

3,411

 

 

 

2,025

 

Less imputed interest

 

 

(224

)

 

 

(708

)

Total

 

$

3,187

 

 

$

1,317

 

 

(dollars in thousands:)

 

December 31, 2019

 

Year Ending December 31,

 

Operating Leases

 

 

Finance Leases

 

 2020

 

$

767

 

 

$

74

 

 2021

 

 

706

 

 

 

75

 

 2022

 

 

545

 

 

 

75

 

 2023

 

 

491

 

 

 

75

 

 2024

 

 

413

 

 

 

75

 

Thereafter

 

 

507

 

 

 

1,668

 

Total lease payments

 

 

3,429

 

 

 

2,042

 

Less imputed interest

 

 

(245

)

 

 

(720

)

Total

 

$

3,184

 

 

$

1,322

 

 

Note 9—Regulatory Matters

 

The Corporation and PeoplesBank are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action that, if imposed, could have a material adverse effect on the Corporation’s financial statements.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes as of March 31, 2020, the Corporation and PeoplesBank meet all capital adequacy requirements to which they are subject.

 

Prompt corrective action regulations provide five classifications:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.  As of March 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized PeoplesBank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the institution’s category.

 

- 30 -

 

The table below provides a comparison of the Corporation’s and PeoplesBank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirement for the periods indicated.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum for Basel III

 

 

Well Capitalized

 

 

Actual

 

 

 

Capital Adequacy

 

 

Minimum (1)

(dollars in thousands)

 

Amount

 

Ratio

 

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

Codorus Valley Bancorp, Inc. (consolidated)

at March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1

$

182,956

 

12.24

%

 

$

104,598

 

7.00

%

 

 

n/a

 

n/a

 

Tier 1 risk based

 

192,956

 

12.91

 

 

 

127,012

 

8.50

 

 

 

n/a

 

n/a

 

Total risk based

 

211,686

 

14.17

 

 

 

156,867

 

10.50

 

 

 

n/a

 

n/a

 

Leverage

 

192,956

 

10.18

 

 

 

75,787

 

4.00

 

 

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1

$

 187,312

 

12.45

%

 

$

105,359

 

7.00

%

 

 

n/a

 

n/a

 

Tier 1 risk based

 

 197,312

 

13.11

 

 

 

127,936

 

8.50

 

 

 

n/a

 

n/a

 

Total risk based

 

 216,154

 

14.36

 

 

 

158,039

 

10.50

 

 

 

n/a

 

n/a

 

Leverage

 

 197,312

 

10.55

 

 

 

74,820

 

4.00

 

 

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PeoplesBank, A Codorus Valley Company

at March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1

$

189,263

 

12.70

%

 

$

104,356

 

7.00

%

 

$

96,974

 

6.50

%

Tier 1 risk based

 

189,263

 

12.70

 

 

 

126,717

 

8.50

 

 

 

119,352

 

8.00

 

Total risk based

 

207,950

 

13.95

 

 

 

156,533

 

10.50

 

 

 

149,191

 

10.00

 

Leverage

 

189,263

 

10.01

 

 

 

75,648

 

4.00

 

 

 

94,561

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1

$

 193,421

 

12.88

%

 

$

105,118

 

7.00

%

 

$

97,610

 

6.50

%

Tier 1 risk based

 

 193,421

 

12.88

 

 

 

 127,643

 

8.50

 

 

 

 120,135

 

8.00

 

Total risk based

 

212,220

 

14.13

 

 

 

157,677

 

10.50

 

 

 

150,169

 

10.00

 

Leverage

 

193,421

 

10.36

 

 

 

74,673

 

4.00

 

 

 

93,341

 

5.00

 

 

(1) To be “well capitalized” under the prompt corrective action provisions in the Basel III framework.  “Well capitalized” applies to PeoplesBank only.

 

Note 10—Shareholders’ Equity

 

Stock Dividend

 

Periodically, the Corporation distributes stock dividends on its common stock. The Corporation distributed 5 percent stock dividends on December 10, 2019 and December 11, 2018, which resulted in the issuance of 463,193 and 447,092 additional shares, respectively.

 

Share Repurchase

 

The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in March 2020. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program.  During the first quarter of 2020 the Corporation repurchased 5,335 shares at an average price of $16.37.  Shortly after the Program began, and in response to COVID-19, the Corporation suspended the Program.

 

- 31 -

 

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 client 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 clients.  The Corporation generally holds collateral and/or personal guarantees supporting these commitments.  The Corporation had $20,059,000 of standby letters of credit outstanding on March 31, 2020, compared to $17,253,000 on December 31, 2019. Management believes that the proc