10-Q 1 codorus131637_10q.htm FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

Table of Contents



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

 

 

 

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 


 

 

 

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

 

For the quarterly period ended March 31, 2013

 

or

 

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

 

For the transition period from____________to______________

Commission file number: 0-15536

 

 

 


 

 

 

 

CODORUS VALLEY BANCORP, INC.

 

 

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

 

 

 

 

 

 

Pennsylvania

 

 

 

23-2428543

 

 

 

(State or other jurisdiction of

 

(I.R.S. Employer

 

 

incorporation or organization)

 

Identification No.)

 


 

 

 

 

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

 

 

(Address of principal executive offices) (Zip code)

 


 

 

 

 

 

 

 

717-747-1519

 

 

(Registrant’s telephone number, including area code)


 

 

 

 

 

 

 

Not Applicable

 

 

(Former name, former address and former fiscal year,
if changed since the last report.)


 

 

 

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

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

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

 

 

 

 

Large accelerated filer o

Accelerated filer o

 

Non-accelerated filer o

Smaller reporting company x

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

APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On May 1, 2013, 4,501,627 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

33

 

 

 

 

 

Item 3.

Quantitative and qualitative disclosures about market risk

47

 

 

 

 

 

Item 4.

Controls and procedures

47

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal proceedings

47

 

 

 

 

 

Item 1A.

Risk factors

47

 

 

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

47

 

 

 

 

 

Item 3.

Defaults upon senior securities

47

 

 

 

 

 

Item 4.

Mine safety disclosures

47

 

 

 

 

 

Item 5.

Other information

48

 

 

 

 

 

Item 6.

Exhibits

48

 

 

 

 

 

SIGNATURES

49

 

- 2 -


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
Unaudited

 

 

 

 

 

 

 

 

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

 

March 31,
2013

 

December 31,
2012

 

Assets

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

26,340

 

$

34,866

 

Cash and due from banks

 

 

10,586

 

 

14,891

 

Total cash and cash equivalents

 

 

36,926

 

 

49,757

 

Securities, available-for-sale

 

 

221,777

 

 

234,062

 

Restricted investment in bank stocks, at cost

 

 

3,084

 

 

2,863

 

Loans held for sale

 

 

2,622

 

 

3,091

 

Loans (net of deferred fees of $1,407 - 2013 and $1,186 - 2012)

 

 

759,614

 

 

737,134

 

Less-allowance for loan losses

 

 

(9,486

)

 

(9,302

)

Net loans

 

 

750,128

 

 

727,832

 

Premises and equipment, net

 

 

12,746

 

 

11,493

 

Other assets

 

 

36,100

 

 

30,639

 

Total assets

 

$

1,063,383

 

$

1,059,737

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest bearing

 

$

88,137

 

$

88,476

 

Interest bearing

 

 

805,045

 

 

812,831

 

Total deposits

 

 

893,182

 

 

901,307

 

Short-term borrowings

 

 

19,243

 

 

19,356

 

Long-term debt

 

 

40,650

 

 

30,815

 

Other liabilities

 

 

7,123

 

 

6,928

 

Total liabilities

 

 

960,198

 

 

958,406

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred stock, par value $2.50 per share; $1,000 liquidation preference, 1,000,000 shares authorized; 25,000 Series B shares issued and outstanding - 2013 and 2012

 

 

25,000

 

 

25,000

 

Common stock, par value $2.50 per share; 15,000,000 shares authorized; shares issued and outstanding: 4,487,856 at March 31, 2013 and 4,482,319 at December 31, 2012

 

 

11,220

 

 

11,206

 

Additional paid-in capital

 

 

40,681

 

 

40,524

 

Retained earnings

 

 

20,973

 

 

18,868

 

Accumulated other comprehensive income

 

 

5,311

 

 

5,733

 

Total shareholders’ equity

 

 

103,185

 

 

101,331

 

Total liabilities and shareholders’ equity

 

$

1,063,383

 

$

1,059,737

 

See accompanying notes.

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Table of Contents

Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

(dollars in thousands, except per share data)

 

2013

 

2012

 

Interest income

 

 

 

 

 

 

 

Loans, including fees

 

$

10,068

 

$

9,870

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

 

645

 

 

907

 

Tax-exempt

 

 

628

 

 

597

 

Dividends

 

 

6

 

 

4

 

Other

 

 

14

 

 

15

 

Total interest income

 

 

11,361

 

 

11,393

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

 

2,009

 

 

2,456

 

Federal funds purchased and other short-term borrowings

 

 

28

 

 

24

 

Long-term debt

 

 

172

 

 

211

 

Total interest expense

 

 

2,209

 

 

2,691

 

Net interest income

 

 

9,152

 

 

8,702

 

Provision for loan losses

 

 

260

 

 

250

 

Net interest income after provision for loan losses

 

 

8,892

 

 

8,452

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

Trust and investment services fees

 

 

473

 

 

408

 

Income from mutual fund, annuity and insurance sales

 

 

249

 

 

188

 

Service charges on deposit accounts

 

 

634

 

 

611

 

Income from bank owned life insurance

 

 

166

 

 

156

 

Other income

 

 

166

 

 

162

 

Net gain on sales of loans held for sale

 

 

319

 

 

259

 

Net gain on sales of securities

 

 

0

 

 

49

 

Total noninterest income

 

 

2,007

 

 

1,833

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

Personnel

 

 

4,180

 

 

3,678

 

Occupancy of premises, net

 

 

511

 

 

508

 

Furniture and equipment

 

 

516

 

 

463

 

Postage, stationery and supplies

 

 

150

 

 

134

 

Professional and legal

 

 

137

 

 

159

 

Marketing and advertising

 

 

146

 

 

210

 

FDIC insurance

 

 

171

 

 

219

 

Debit card processing

 

 

178

 

 

177

 

Charitable donations

 

 

475

 

 

447

 

Telephone

 

 

134

 

 

132

 

External data processing

 

 

147

 

 

128

 

Foreclosed real estate including (gains) losses on sales

 

 

63

 

 

593

 

Impaired loan carrying costs

 

 

79

 

 

45

 

Other

 

 

366

 

 

377

 

Total noninterest expense

 

 

7,253

 

 

7,270

 

Income before income taxes

 

 

3,646

 

 

3,015

 

Provision for income taxes

 

 

984

 

 

725

 

Net income

 

 

2,662

 

 

2,290

 

Preferred stock dividends

 

 

63

 

 

188

 

Net income available to common shareholders

 

$

2,599

 

$

2,102

 

Net income per common share, basic

 

$

0.58

 

$

0.48

 

Net income per common share, diluted

 

$

0.57

 

$

0.47

 

See accompanying notes.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

(dollars in thousands)

 

2013

 

2012

 

Net income

 

$

2,662

 

$

2,290

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

Net unrealized holding (losses) gains arising during the period (net of tax (benefit) expense of $(217) and $61, respectively)

 

 

(422

)

 

117

 

Reclassification adjustment for (gains) included in net income (net of tax expense of $0 and $17, respectively)

 

 

0

 

 

(32

)

Net unrealized (losses) gains

 

 

(422

)

 

85

 

Comprehensive income

 

$

2,240

 

$

2,375

 

See accompanying notes.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

(dollars in thousands)

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

2,662

 

$

2,290

 

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

 

 

 

 

 

 

 

Depreciation/amortization

 

 

359

 

 

331

 

Net amortization of premiums on securities

 

 

380

 

 

337

 

Amortization of deferred loan origination fees and costs

 

 

(131

)

 

(54

)

Amortization of intangible assets

 

 

0

 

 

7

 

Provision for loan losses

 

 

260

 

 

250

 

Provision for losses on foreclosed real estate

 

 

0

 

 

707

 

Amortization of investment in real estate partnership

 

 

85

 

 

86

 

Increase in cash surrender value and death benefit on bank owned life insurance

 

 

(166

)

 

(156

)

Originations of loans held for sale

 

 

(19,172

)

 

(16,520

)

Proceeds from sales of loans held for sale

 

 

19,960

 

 

14,841

 

Net gain on sales of loans held for sale

 

 

(319

)

 

(259

)

Gain on disposal of premises and equipment

 

 

0

 

 

(8

)

Net gain on sales of securities available-for-sale

 

 

0

 

 

(49

)

Net (gain) loss on sales of foreclosed real estate

 

 

(14

)

 

1

 

Stock-based compensation

 

 

78

 

 

116

 

Decrease in accrued interest receivable

 

 

58

 

 

282

 

Increase in other assets

 

 

(117

)

 

(531

)

Decrease in accrued interest payable

 

 

(41

)

 

(30

)

Increase (decrease) in other liabilities

 

 

239

 

 

(681

)

Net cash provided by operating activities

 

 

4,121

 

 

960

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of securities, available-for-sale

 

 

(838

)

 

(14,012

)

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

 

 

12,104

 

 

7,472

 

Sales of securities, available-for-sale

 

 

0

 

 

8,047

 

(Purchase) redemption of restricted investment in bank stock

 

 

(221

)

 

178

 

Net increase in loans made to customers

 

 

(22,425

)

 

(9,953

)

Purchases of premises and equipment

 

 

(1,612

)

 

(260

)

Investment in bank owned life insurance

 

 

(5,300

)

 

(230

)

Investment in foreclosed real estate

 

 

0

 

 

(17

)

Proceeds from sales of foreclosed real estate

 

 

207

 

 

1,875

 

Net cash used in investing activities

 

 

(18,085

)

 

(6,900

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Net (decrease) increase in demand and savings deposits

 

 

(2,030

)

 

20,336

 

Net decrease in time deposits

 

 

(6,095

)

 

(137

)

Net (decrease) increase in short-term borrowings

 

 

(113

)

 

3,499

 

Proceeds from issuance of long-term debt

 

 

10,000

 

 

0

 

Repayment of long-term debt

 

 

(165

)

 

(10,260

)

Cash dividends paid to preferred shareholders

 

 

(63

)

 

(313

)

Cash dividends paid to common shareholders

 

 

(494

)

 

(378

)

Issuance of common stock

 

 

93

 

 

101

 

Net cash provided by financing activities

 

 

1,133

 

 

12,848

 

Net (decrease) increase in cash and cash equivalents

 

 

(12,831

)

 

6,908

 

Cash and cash equivalents at beginning of year

 

 

49,757

 

 

32,195

 

Cash and cash equivalents at end of period

 

$

36,926

 

$

39,103

 

See accompanying notes.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

Preferred
Stock

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total

 

 

Balance, January 1, 2013

 

$

25,000

 

$

11,206

 

$

40,524

 

$

18,868

 

$

5,733

 

$

101,331

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,662

 

 

 

 

 

2,662

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(422

)

 

(422

)

Common stock cash dividends ($0.11 per share)

 

 

 

 

 

 

 

 

 

 

 

(494

)

 

 

 

 

(494

)

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(63

)

 

 

 

 

(63

)

Stock-based compensation

 

 

 

 

 

 

 

 

78

 

 

 

 

 

 

 

 

78

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,537 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

14

 

 

79

 

 

 

 

 

 

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2013

 

$

25,000

 

$

11,220

 

$

40,681

 

$

20,973

 

$

5,311

 

$

103,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

$

25,000

 

$

10,507

 

$

37,253

 

$

14,558

 

$

5,924

 

$

93,242

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,290

 

 

 

 

 

2,290

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85

 

 

85

 

Common stock cash dividends ($0.086 per share, adjusted)

 

 

 

 

 

 

 

 

 

 

 

(378

)

 

 

 

 

(378

)

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(188

)

 

 

 

 

(188

)

Stock-based compensation

 

 

 

 

 

 

 

 

116

 

 

 

 

 

 

 

 

116

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,614 shares under the dividend reinvestment and stock purchase plan

 

 

 

 

 

16

 

 

52

 

 

 

 

 

 

 

 

68

 

3,466 shares under the stock option plan

 

 

 

 

 

9

 

 

24

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2012

 

$

25,000

 

$

10,532

 

$

37,445

 

$

16,282

 

$

6,009

 

$

95,268

 

See accompanying notes.

- 7 -


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2012 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.

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, 2012.

The consolidated financial statements include the accounts of Codorus Valley Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank), and its wholly owned nonbank subsidiary, SYC Realty Company, Inc. (collectively referred to as Codorus Valley or the Corporation). PeoplesBank has four wholly-owned subsidiaries, Codorus Valley Financial Advisors, Inc., SYC Settlement Services, Inc. and two subsidiaries whose purpose is to temporarily hold foreclosed properties pending eventual liquidation. All significant intercompany account balances and transactions have been eliminated in consolidation. The combined results of operations of the nonbank subsidiaries are not material to the consolidated financial statements.

The results of operations for the three month period ended March 31, 2013 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, 2013 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Note 2—Significant Accounting Policies

Loans

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

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

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Table of Contents

Allowance for Loan Losses

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

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

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

 

 

 

 

Changes in national and local economies and business conditions

 

Changes in the value of collateral for collateral dependent loans

 

Changes in the level of concentrations of credit

 

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

 

Changes in the nature and volume of the portfolio

 

Changes in collection, charge-off, and recovery procedures

 

Changes in underwriting standards and loan terms

 

Changes in the quality of the loan review system

 

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

 

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

 

Other pertinent environmental factors

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

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

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

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

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

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Banking regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to the Corporation. Based on a comprehensive analysis of the loan portfolio, the Corporation believes that the level of the allowance for loan losses at March 31, 2013 is adequate.

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals 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. 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, 2013, foreclosed real estate, net of allowance, was $3,440,000, compared to $3,633,000 for December 31, 2012.

Per Common Share Computations

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

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

(in thousands, except per share data)

 

2013

 

2012

 

Net income available to common shareholders

 

$

2,599

 

$

2,102

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (basic)

 

 

4,485

 

 

4,417

 

Effect of dilutive stock options

 

 

83

 

 

26

 

Weighted average shares outstanding (diluted)

 

 

4,568

 

 

4,443

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.58

 

$

0.48

 

Diluted earnings per common share

 

$

0.57

 

$

0.47

 

 

 

 

 

 

 

 

 

Anti-dilutive stock options and common stock warrants

 

 

28

 

 

87

 

Comprehensive Income

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

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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)

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

65

 

$

201

 

Interest

 

$

2,250

 

$

2,721

 

Noncash investing activities:

 

 

 

 

 

 

 

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

 

$

0

 

$

3,100

 

Reclassification

Certain amounts in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation, which did not impact net income or shareholders’ equity.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”. The ASU amends Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 810-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments were applied retrospectively for all comparative periods presented (See Note 14). The Corporation adopted this Update during the period ending March 31, 2013 and it did not have a material impact on the Corporation’s consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”. The ASU amends Update 2011-11 to clarify that the scope applies to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to master netting or similar arrangements. Other types of financial assets and liabilities subject to master netting or similar arrangements are not subject to the disclosure requirements in Update 2011-11. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods (See Note 14). The Corporation adopted this Update during the period ending March 31, 2013 and it did not have a material impact on the Corporation’s consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The objective of this ASU is to improve the reporting of reclassifications out of accumulated other comprehensive income. This ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income, by component, on the respective line items in the income statement if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. Reclassifications that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period are required to be cross-referenced to other U.S. GAAP disclosures that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income. The provisions of this ASU are effective for public entities prospectively for reporting periods beginning after December 15, 2012. The Corporation adopted this Update during the period ending March 31, 2013 and it had no impact on the Corporation’s consolidated financial statements.

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On July 13, 2012, the SEC published their final report on International Financial Reporting Standards (IFRS), which included an analysis of the issues related to possible incorporation of IFRS into the U.S. financial reporting regime. The SEC report was designed to inform the SEC commissioners for when they would come to decide whether, and if so, how, IFRS should be applied to the U.S. The next step for the SEC is to develop a recommendation on IFRS, but no timetable has been disclosed for completing this work. The Corporation will continue to monitor the development of the potential implementation of IFRS.

Note 3-Securities

A summary of securities available-for-sale at March 31, 2013 and December 31, 2012 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. Also included in the portfolio are investments in the obligations of states and municipalities. With the exception of an approximately $14 million portfolio (fair value) of Texas municipal utility district bonds, which has its own criteria for investment (e.g., maximum debt to assessed valuation, minimum assessed valuation and district size, proximity to employment, etc.), the remaining municipal bonds were all rated A or above by a national rating service at March 31, 2013. 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, 2013, the fair value of the municipal bond portfolio was concentrated in the states of Pennsylvania at 42 percent and Texas at 17 percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Amortized
Cost

 

Gross Unrealized

 

Fair
Value

 

 

 

Gains

 

Losses

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

3,501

 

$

22

 

$

0

 

$

3,523

 

U.S. agency

 

 

34,953

 

 

1,037

 

 

(17

)

 

35,973

 

U.S. agency mortgage-backed, residential

 

 

76,959

 

 

3,116

 

 

(3

)

 

80,072

 

State and municipal

 

 

98,316

 

 

3,908

 

 

(15

)

 

102,209

 

Total debt securities

 

$

213,729

 

$

8,083

 

$

(35

)

$

221,777

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

5,001

 

$

31

 

$

0

 

$

5,032

 

U.S. agency

 

 

37,000

 

 

1,083

 

 

(25

)

 

38,058

 

U.S. agency mortgage-backed, residential

 

 

84,630

 

 

3,603

 

 

0

 

 

88,233

 

State and municipal

   

98,744

   

4,053

   

(58

)

 

102,739

 

Total debt securities

 

$

225,375

 

$

8,770

 

$

(83

)

$

234,062

 

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The amortized cost and estimated fair value of debt securities at March 31, 2013 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

(dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Due in one year or less

 

$

15,624

 

$

15,761

 

Due after one year through five years

 

 

173,079

 

 

179,649

 

Due after five years through ten years

 

 

21,205

 

 

22,322

 

Due after ten years

 

 

3,821

 

 

4,045

 

Total debt securities

 

$

213,729

 

$

221,777

 

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

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

(dollars in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Realized gains

 

$

0

 

$

50

 

Realized losses

 

 

0

 

 

(1

)

Net gains

 

$

0

 

$

49

 

Securities, issued by agencies of the federal government, with a carrying value of $140,942,000 and $135,348,000 on March 31, 2013 and December 31, 2012, 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, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

(dollars in thousands)

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

8,243

 

$

(17

)

$

0

 

$

0

 

$

8,243

 

$

(17

)

U.S. agency mortgage-backed, residential

 

 

1,617

 

 

(3

)

 

0

 

 

0

 

 

1,617

 

 

(3

)

State and municipal

 

 

6,637

 

 

(15

)

 

0

 

 

0

 

 

6,637

 

 

(15

)

Total temporarily impaired debt securities, available for sale

 

$

16,497

 

$

(35

)

$

0

 

$

0

 

$

16,497

 

$

(35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency

 

$

8,251

 

$

(25

)

$

0

 

$

0

 

$

8,251

 

$

(25

)

State and municipal

 

 

11,565

 

 

(58

)

 

0

 

 

0

 

 

11,565

 

 

(58

)

Total temporarily impaired debt securities, available for sale

 

$

19,816

 

$

(83

)

$

0

 

$

0

 

$

19,816

 

$

(83

)

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The unrealized losses of $35,000 at March 31, 2013 within the less than 12 months category were attributable to three U.S. agency securities, one U.S. agency mortgage-backed security, and fifteen state and municipal securities, all rated A or above by a national rating service.

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, 2013 were primarily the result of changes in market interest rates and that it has the ability to hold these investments for a time necessary to recover the amortized cost. Through March 31, 2013 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

Note 4—Restricted Investment in Bank Stocks

Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of March 31, 2013 and December 31, 2012, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (FHLBP) and, to a lesser degree, Atlantic Central Bankers Bank (ACBB). Under the FHLBP’s Capital Plan, PeoplesBank is required to maintain a minimum member stock investment, both as a condition of becoming and remaining a member and as a condition of obtaining borrowings from the FHLBP. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

The FHLBP paid dividends during the periods ended March 31, 2013 and 2012 but reported that future dividends will be dependent upon the condition of its private-label residential mortgage-backed securities portfolio, its overall financial performance, retained earnings and other factors. 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, 2013 and 2012.

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Note 5—Loans

The table below provides the composition of the loan portfolio at March 31, 2013 and December 31, 2012. 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 a multitude of industries, including health services, professional services, public administration, restaurant, service, transportation, finance, natural resources, recreation and religious organizations. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations.

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31,
2013

 

December 31,
2012

 

Builder & developer

 

$

97,195

 

$

96,936

 

Commercial real estate investor

 

 

124,917

 

 

122,714

 

Residential real estate investor

 

 

66,725

 

 

66,419

 

Hotel/Motel

 

 

68,903

 

 

64,948

 

Wholesale & retail

 

 

69,905

 

 

70,443

 

Manufacturing

 

 

37,923

 

 

40,258

 

Agriculture

 

 

27,935

 

 

20,928

 

Other

 

 

133,946

 

 

124,834

 

Total commercial related loans

 

 

627,449

 

 

607,480

 

Residential mortgages

 

 

23,538

 

 

23,511

 

Home equity

 

 

68,864

 

 

65,858

 

Other

 

 

39,763

 

 

40,285

 

Total consumer related loans

 

 

132,165

 

 

129,654

 

Total loans

 

$

759,614

 

$

737,134

 

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

The Corporation uses ten risk ratings to grade loans. The first seven ratings, representing the lowest risk, are combined and given a “pass” rating. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current net worth or paying capacity of the borrower or of the collateral pledged. A “substandard” loan has a well defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to loss if the deficiencies are not corrected. 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. Accordingly, 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 known loan losses.

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The table below presents a summary of loan risk ratings by loan class at March 31, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Pass

 

Special
Mention

 

Substandard

 

Nonaccrual

 

Total

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

84,364

 

$

4,629

 

$

7,817

 

$

385

 

$

97,195

 

Commercial real estate investor

 

 

115,368

 

 

3,837

 

 

2,295

 

 

3,417

 

 

124,917

 

Residential real estate investor

 

 

63,740

 

 

171

 

 

85

 

 

2,729

 

 

66,725

 

Hotel/Motel

 

 

68,903

 

 

0

 

 

0

 

 

0

 

 

68,903

 

Wholesale & retail

 

 

65,909

 

 

1,348

 

 

0

 

 

2,648

 

 

69,905

 

Manufacturing

 

 

37,235

 

 

0

 

 

688

 

 

0

 

 

37,923

 

Agriculture

 

 

27,466

 

 

0

 

 

469

 

 

0

 

 

27,935

 

Other

 

 

130,205

 

 

1,026

 

 

346

 

 

2,369

 

 

133,946

 

Total commercial related loans

 

 

593,190

 

 

11,011

 

 

11,700

 

 

11,548

 

 

627,449

 

Residential mortgage

 

 

23,450

 

 

5

 

 

31

 

 

52

 

 

23,538

 

Home equity

 

 

68,468

 

 

117

 

 

188

 

 

91

 

 

68,864

 

Other

 

 

38,884

 

 

261

 

 

145

 

 

473

 

 

39,763

 

Total consumer related loans

 

 

130,802

 

 

383

 

 

364

 

 

616

 

 

132,165

 

Total loans

 

$

723,992

 

$

11,394

 

$

12,064

 

$

12,164

 

$

759,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

79,101

 

$

6,567

 

$

11,013

 

$

255

 

$

96,936

 

Commercial real estate investor

 

 

107,415

 

 

9,563

 

 

2,459

 

 

3,277

 

 

122,714

 

Residential real estate investor

 

 

62,327

 

 

1,361

 

 

2,044

 

 

687

 

 

66,419

 

Hotel/Motel

 

 

64,948

 

 

0

 

 

0

 

 

0

 

 

64,948

 

Wholesale & retail

 

 

66,155

 

 

1,521

 

 

983

 

 

1,784

 

 

70,443

 

Manufacturing

 

 

39,559

 

 

0

 

 

699

 

 

0

 

 

40,258

 

Agriculture

 

 

20,457

 

 

0

 

 

471

 

 

0

 

 

20,928

 

Other

 

 

121,223

 

 

1,156

 

 

612

 

 

1,843

 

 

124,834

 

Total commercial related loans

 

 

561,185

 

 

20,168

 

 

18,281

 

 

7,846

 

 

607,480

 

Residential mortgage

 

 

23,421

 

 

5

 

 

32

 

 

53

 

 

23,511

 

Home equity

 

 

65,406

 

 

112

 

 

188

 

 

152

 

 

65,858

 

Other

 

 

39,318

 

 

325

 

 

351

 

 

291

 

 

40,285

 

Total consumer related loans

 

 

128,145

 

 

442

 

 

571

 

 

496

 

 

129,654

 

Total loans

 

$

689,330

 

$

20,610

 

$

18,852

 

$

8,342

 

$

737,134

 

- 17 -


Table of Contents

The table below presents a summary of impaired loans at March 31, 2013 and December 31, 2012. Generally, impaired loans are loans risk rated substandard and nonaccrual or classified as troubled debt restructurings. An allowance is established for individual commercial related loans where the Corporation has doubt as to full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off obviating the need for a specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for charge-offs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

December 31, 2012

 

(dollars in thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Impaired loans with no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

9,254

 

$

9,254

 

 

 

$

12,211

 

$

12,211

 

 

 

Commercial real estate investor

 

 

5,712

 

 

5,812

 

 

 

 

5,736

 

 

5,836

 

 

 

Residential real estate investor

 

 

157

 

 

157

 

 

 

 

72

 

 

72

 

 

 

Hotel/Motel

 

 

0

 

 

0

 

 

 

 

0

 

 

0

 

 

 

Wholesale & retail

 

 

2,928

 

 

5,203

 

 

 

 

3,048

 

 

5,323

 

 

 

Manufacturing

 

 

688

 

 

688

 

 

 

 

699

 

 

699

 

 

 

Agriculture

 

 

0

 

 

0

 

 

 

 

0

 

 

0

 

 

 

Other commercial

 

 

1,745

 

 

1,873

 

 

 

 

1,483

 

 

1,611

 

 

 

Residential mortgage

 

 

83

 

 

109

 

 

 

 

85

 

 

111

 

 

 

Home equity

 

 

279

 

 

279

 

 

 

 

340

 

 

340

 

 

 

Other consumer

 

 

618

 

 

676

 

 

 

 

642

 

 

718

 

 

 

Total impaired loans with no related allowance

 

$

21,464

 

$

24,051

 

 

 

$

24,316

 

$

26,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

132

 

$

132

 

$

62

 

$

256

 

$

256

 

$

147

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Residential real estate investor

 

 

2,657

 

 

2,657

 

 

700

 

 

2,659

 

 

2,659

 

 

700

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Agriculture

 

 

469

 

 

469

 

 

100

 

 

471

 

 

471

 

 

100

 

Other commercial

 

 

969

 

 

969

 

 

170

 

 

972

 

 

972

 

 

215

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Home equity

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other consumer

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Total impaired loans with a related allowance

 

$

4,227

 

$

4,227

 

$

1,032

 

$

4,358

 

$

4,358

 

$

1,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

9,386

 

$

9,386

 

$

62

 

$

12,467

 

$

12,467

 

$

147

 

Commercial real estate investor

 

 

5,712

 

 

5,812

 

 

0

 

 

5,736

 

 

5,836

 

 

0

 

Residential real estate investor

 

 

2,814

 

 

2,814

 

 

700

 

 

2,731

 

 

2,731

 

 

700

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

2,928

 

 

5,203

 

 

0

 

 

3,048

 

 

5,323

 

 

0

 

Manufacturing

 

 

688

 

 

688

 

 

0

 

 

699

 

 

699

 

 

0

 

Agriculture

 

 

469

 

 

469

 

 

100

 

 

471

 

 

471

 

 

100

 

Other commercial

 

 

2,714

 

 

2,842

 

 

170

 

 

2,455

 

 

2,583

 

 

215

 

Residential mortgage

 

 

83

 

 

109

 

 

0

 

 

85

 

 

111

 

 

0

 

Home equity

 

 

279

 

 

279

 

 

0

 

 

340

 

 

340

 

 

0

 

Other consumer

 

 

618

 

 

676

 

 

0

 

 

642

 

 

718

 

 

0

 

Total impaired loans

 

$

25,691

 

$

28,278

 

$

1,032

 

$

28,674

 

$

31,279

 

$

1,162

 

- 18 -


Table of Contents

The tables below present a summary of average impaired loans and related interest income that was included in net income for the three months ended March 31, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2013

 

March 31, 2012

 

(dollars in thousands)

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Cash Basis
Interest
Income

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Cash Basis
Interest
Income

 

Impaired loans with no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

10,732

 

$

130

 

$

2

 

$

5,245

 

$

116

 

$

42

 

Commercial real estate investor

 

 

5,724

 

 

67

 

 

36

 

 

4,260

 

 

69

 

 

34

 

Residential real estate investor

 

 

115

 

 

2

 

 

1

 

 

463

 

 

1

 

 

1

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

2,988

 

 

(23

)

 

1

 

 

2,955

 

 

(3

)

 

1

 

Manufacturing

 

 

693

 

 

10

 

 

0

 

 

713

 

 

10

 

 

0

 

Agriculture

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other commercial

 

 

1,614

 

 

(2

)

 

1

 

 

5,373

 

 

(23

)

 

23

 

Residential mortgage

 

 

84

 

 

2

 

 

1

 

 

203

 

 

3

 

 

2

 

Home equity

 

 

310

 

 

3

 

 

1

 

 

246

 

 

2

 

 

1

 

Other consumer

 

 

630

 

 

6

 

 

6

 

 

295

 

 

3

 

 

3

 

Total impaired loans with no related allowance

 

$

22,890

 

$

195

 

$

49

 

$

19,753

 

$

178

 

$

107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

194

 

$

0

 

$

0

 

$

264

 

 

0

 

 

0

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

113

 

 

1

 

 

0

 

Residential real estate investor

 

 

2,658

 

 

(9

)

 

0

 

 

89

 

 

0

 

 

0

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Agriculture

 

 

470

 

 

8

 

 

0

 

 

488

 

 

9

 

 

0

 

Other commercial

 

 

971

 

 

1

 

 

0

 

 

925

 

 

(1

)

 

0

 

Residential mortgage

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Home equity

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Other consumer

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Total impaired loans with a related allowance

 

$

4,293

 

$

0

 

$

0

 

$

1,879

 

$

9

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

10,926

 

$

130

 

$

2

 

$

5,509

 

$

116

 

$

42

 

Commercial real estate investor

 

 

5,724

 

 

67

 

 

36

 

 

4,373

 

 

70

 

 

34

 

Residential real estate investor

 

 

2,773

 

 

(7

)

 

1

 

 

552

 

 

1

 

 

1

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Wholesale & retail

 

 

2,988

 

 

(23

)

 

1

 

 

2,955

 

 

(3

)

 

1

 

Manufacturing

 

 

693

 

 

10

 

 

0

 

 

713

 

 

10

 

 

0

 

Agriculture

 

 

470

 

 

8

 

 

0

 

 

488

 

 

9

 

 

0

 

Other commercial

 

 

2,585

 

 

(1

)

 

1

 

 

6,298

 

 

(24

)

 

23

 

Residential mortgage

 

 

84

 

 

2

 

 

1

 

 

203

 

 

3

 

 

2

 

Home equity

 

 

310

 

 

3

 

 

1

 

 

246

 

 

2

 

 

1

 

Other consumer

 

 

630

 

 

6

 

 

6

 

 

295

 

 

3

 

 

3

 

Total impaired loans

 

$

27,183

 

$

195

 

$

49

 

$

21,632

 

$

187

 

$

107

 

- 19 -


Table of Contents

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule which shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at March 31, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

30-59
Days Past
Due

 

60-89
Days Past
Due

 

> 90 Days
Past Due
and Accruing

 

Nonaccrual

 

Total Past
Due and
Nonaccrual

 

Current

 

Total Loans

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

0

 

$

0

 

$

0

 

$

385

 

$

385

 

$

96,810

 

$

97,195

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

3,417

 

 

3,417

 

 

121,500

 

 

124,917

 

Residential real estate investor

 

 

0

 

 

268

 

 

0

 

 

2,729

 

 

2,997

 

 

63,728

 

 

66,725

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

68,903

 

 

68,903

 

Wholesale & retail

 

 

0

 

 

0

 

 

0

 

 

2,648

 

 

2,648

 

 

67,257

 

 

69,905

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

37,923

 

 

37,923

 

Agriculture

 

 

375

 

 

0

 

 

0

 

 

0

 

 

375

 

 

27,560

 

 

27,935

 

Other

 

 

0

 

 

0

 

 

0

 

 

2,369

 

 

2,369

 

 

131,577

 

 

133,946

 

Total commercial related loans

 

 

375

 

 

268

 

 

0

 

 

11,548

 

 

12,191

 

 

615,258

 

 

627,449

 

Residential mortgage

 

 

397

 

 

0

 

 

0

 

 

52

 

 

449

 

 

23,089

 

 

23,538

 

Home equity

 

 

0

 

 

0

 

 

0

 

 

91

 

 

91

 

 

68,773

 

 

68,864

 

Other

 

 

553

 

 

27

 

 

0

 

 

473

 

 

1,053

 

 

38,710

 

 

39,763

 

Total consumer related loans

 

 

950

 

 

27

 

 

0

 

 

616

 

 

1,593

 

 

130,572

 

 

132,165

 

Total loans

 

$

1,325

 

$

295

 

$

0

 

$

12,164

 

$

13,784

 

$

745,830

 

$

759,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Builder & developer

 

$

400

 

$

0

 

$

0

 

$

255

 

$

655

 

$

96,281

 

$

96,936

 

Commercial real estate investor

 

 

0

 

 

0

 

 

0

 

 

3,277

 

 

3,277

 

 

119,437

 

 

122,714

 

Residential real estate investor

 

 

2,044

 

 

0

 

 

0

 

 

687

 

 

2,731

 

 

63,688

 

 

66,419

 

Hotel/Motel

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

64,948

 

 

64,948

 

Wholesale & retail

 

 

1,067

 

 

0

 

 

0

 

 

1,784

 

 

2,851

 

 

67,592

 

 

70,443

 

Manufacturing

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

40,258

 

 

40,258

 

Agriculture

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

20,928

 

 

20,928

 

Other

 

 

456

 

 

0

 

 

0

 

 

1,843

 

 

2,299

 

 

122,535

 

 

124,834

 

Total commercial related loans

 

 

3,967

 

 

0

 

 

0

 

 

7,846

 

 

11,813

 

 

595,667

 

 

607,480

 

Residential mortgage

 

 

474

 

 

129

 

 

0

 

 

53

 

 

656

 

 

22,855

 

 

23,511

 

Home equity

 

 

62

 

 

0

 

 

0

 

 

152

 

 

214

 

 

65,644

 

 

65,858

 

Other

 

 

842

 

 

195

 

 

186

 

 

291

 

 

1,514

 

 

38,771

 

 

40,285

 

Total consumer related loans

 

 

1,378

 

 

324

 

 

186

 

 

496

 

 

2,384

 

 

127,270

 

 

129,654

 

Total loans

 

$

5,345

 

$

324

 

$

186

 

$

8,342

 

$

14,197

 

$

722,937

 

$

737,134

 

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 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 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 with respect to which management believes that future loan payments are reasonably assured under the modified terms.

- 20 -


Table of Contents

The table below shows loans whose terms have been modified under TDRs during the three months ended March 31, 2013 and 2012. There was no impairment loss recognized on any of these TDRs, and they are all performing under their modified terms. There were no defaults during the three months ended March 31, 2013 for TDRs entered into for the last 12 months.

 

 

 

 

 

 

 

 

 

 

 

 

 

Modifications

 

(dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investments

 

Post-Modification
Outstanding
Recorded
Investments

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

Commercial related loans accruing

 

 

1

 

$

208

 

$

208

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

Commercial related loans nonaccrual

 

 

1

 

$

286

 

$

286

 

- 21 -


Table of Contents

NOTE 6 – Allowance for Loan Losses

The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three months ended March 31, 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Builder &
developer

 

Commercial
real estate
investor

 

Residential real
estate investor

 

Hotel/ Motel

 

Wholesale
& retail

 

Manufacturing

 

Agriculture

 

Other

 

Total
commercial
related

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

$

1,571

 

$

1,259

 

$

1,195

 

$

485

 

$

1,913

 

$

237

 

$

202

 

$

1,170

 

$

8,032

 

Charge-offs

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Recoveries

 

 

0

 

 

0

 

 

0

 

 

0

 

 

4

 

 

0

 

 

0

 

 

0

 

 

4

 

Provisions

 

 

(37

)

 

27

 

 

1

 

 

29

 

 

(85

)

 

(13

)

 

35

 

 

(14

)

 

(57

)

Balance, March 31, 2013

 

$

1,534

 

$

1,286

 

$

1,196

 

$

514

 

$

1,832

 

$

224

 

$

237

 

$

1,156

 

$

7,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

$

2,170

 

$

2,003

 

$

505

 

$

394

 

$

1,806

 

$

151

 

$

184

 

$

907

 

$

8,120

 

Charge-offs

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Recoveries

 

 

0

 

 

0

 

 

0

 

 

0

 

 

6

 

 

0

 

 

0

 

 

0

 

 

6

 

Provisions

 

 

(191

)

 

10

 

 

(5

)

 

49

 

 

(96

)

 

0

 

 

9

 

 

108

 

 

(116

)

Balance, March 31, 2012

 

$

1,979

 

$

2,013

 

$

500

 

$

443

 

$

1,716

 

$

151

 

$

193

 

$

1,015

 

$

8,010

 

 

(dollars in thousands)

 

Residential
mortgage

 

Home equity

 

Other

 

Total
consumer
related

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

$

124

 

$

237

 

$

238

 

$

599

 

$

671

 

$

9,302

 

 

 

 

 

 

 

 

 

 

Charge-offs

 

 

0

 

 

(75

)

 

(32

)

 

(107

)

 

0

 

 

(107

)

 

 

 

 

 

 

 

 

 

Recoveries

 

 

0

 

 

1

 

 

26

 

 

27

 

 

0

 

 

31

 

 

 

 

 

 

 

 

 

 

Provisions

 

 

(76

)

 

152

 

 

(35

)

 

41

 

 

276

 

 

260

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2013

 

$

48

 

$

315

 

$

197

 

$

560

 

$

947

 

$

9,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

$

88

 

$

86

 

$

171

 

$

345

 

$

237

 

$

8,702

 

 

 

 

 

 

 

 

 

 

Charge-offs

 

 

(39

)

 

0

 

 

(51

)

 

(90

)

 

0

 

 

(90

)

 

 

 

 

 

 

 

 

 

Recoveries

 

 

17

 

 

0

 

 

4

 

 

21

 

 

0

 

 

27

 

 

 

 

 

 

 

 

 

 

Provisions

 

 

51

 

 

1

 

 

39

 

 

91

 

 

275

 

 

250

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2012

 

$

117

 

$

87

 

$

163

 

$

367

 

$

512

 

$

8,889

 

 

 

 

 

 

 

 

 

 

- 22 -


Table of Contents

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment at March 31, 2013 and 2012 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Builder &
developer

 

Commercial
real estate
investor

 

Residential
real estate
investor

 

Hotel/Motel

 

Wholesale
& retail

 

Manufacturing

 

Agriculture

 

Other

 

Total
commercial
related

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

62

 

$

0

 

$

700

 

$

0

 

$

0

 

$

0

 

$

100

 

$

170

 

$

1,032

 

Collectively evaluated for impairment

 

 

1,472

 

 

1,286

 

 

496

 

 

514

 

 

1,832

 

 

224

 

 

137

 

 

986

 

 

6,947

 

Balance, March 31, 2013

 

$

1,534

 

$

1,286

 

$

1,196

 

$

514

 

$

1,832

 

$

224

 

$

237

 

$

1,156

 

$

7,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

147

 

$

0

 

$

700

 

$

0

 

$

0

 

$

0

 

$

100

 

$

215

 

$

1,162

 

Collectively evaluated for impairment

 

 

1,424

 

 

1,259

 

 

495

 

 

485

 

 

1,913

 

 

237

 

 

102

 

 

955

 

 

6,870

 

Balance, December 31, 2012

 

$

1,571

 

$

1,259

 

$

1,195

 

$

485

 

$

1,913

 

$

237

 

$

202

 

$

1,170

 

$

8,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

147

 

$

100

 

$

30

 

$

0

 

$

0

 

$

0

 

$

100

 

$

210

 

$

587

 

Collectively evaluated for impairment

 

 

1,832

 

 

1,913

 

 

470

 

 

443

 

 

1,716

 

 

151

 

 

93

 

 

805

 

 

7,423

 

Balance, March 31, 2012

 

$

1,979

 

$

2,013

 

$

500

 

$

443

 

$

1,716

 

$

151

 

$

193

 

$

1,015

 

$

8,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

9,386

 

$

5,712

 

$

2,814

 

$

0

 

$

2,928

 

$

688

 

$

469

 

$

2,714

 

$

24,711

 

Collectively evaluated for impairment

 

 

87,809

 

 

119,205

 

 

63,911

 

 

68,903

 

 

66,977

 

 

37,235

 

 

27,466

 

 

131,232

 

 

602,738

 

Balance, March 31, 2013

 

$

97,195

 

$

124,917

 

$

66,725

 

$

68,903

 

$

69,905

 

$

37,923

 

$

27,935

 

$

133,946

 

$

627,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

12,467

 

$

5,736

 

$

2,731

 

$

0

 

$

3,048

 

$

699

 

$

471

 

$

2,455

 

$

27,607

 

Collectively evaluated for impairment

 

 

84,469

 

 

116,978

 

 

63,688

 

 

64,948

 

 

67,395

 

 

39,559

 

 

20,457

 

 

122,379

 

 

579,873

 

Balance, December 31, 2012

 

$

96,936

 

$

122,714

 

$

66,419

 

$

64,948

 

$

70,443

 

$

40,258

 

$

20,928

 

$

124,834

 

$

607,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

8,128

 

$

4,782

 

$

552

 

$

0

 

$

2,128

 

$

711

 

$

486

 

$

8,096

 

$

24,883

 

Collectively evaluated for impairment

 

 

91,569

 

 

114,679

 

 

61,069

 

 

59,462

 

 

56,385

 

 

25,616

 

 

18,583

 

 

122,333

 

 

549,696

 

Balance, March 31, 2012

 

$

99,697

 

$

119,461

 

$

61,621

 

$

59,462

 

$

58,513

 

$

26,327

 

$

19,069

 

$

130,429

 

$

574,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Residential
mortgage

 

Home equity

 

Other

 

Total
consumer
related

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

1,032

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

 

48

 

 

315

 

 

197

 

 

560

 

 

947

 

 

8,454

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2013

 

$

48

 

$

315

 

$

197

 

$

560

 

$

947

 

$

9,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

1,162

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

 

124

 

 

237

 

 

238

 

 

599

 

 

671

 

 

8,140

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

124

 

$

237

 

$

238

 

$

599

 

$

671

 

$

9,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

587

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

 

117

 

 

87

 

 

163

 

 

367

 

 

512

 

 

8,302

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2012

 

$

117

 

$

87

 

$

163

 

$

367

 

$

512

 

$

8,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

83

 

$

279

 

$

618

 

$

980

 

 

 

 

$

25,691

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

 

23,455

 

 

68,585

 

 

39,145

 

 

131,185

 

 

 

 

 

733,923

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2013

 

$

23,538

 

$

68,864

 

$

39,763

 

$

132,165

 

 

 

 

$

759,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

85

 

$

340

 

$

642

 

$

1,067

 

 

 

 

$

28,674

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

 

23,426

 

 

65,518

 

 

39,643

 

 

128,587

 

 

 

 

 

708,460

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

23,511

 

$

65,858

 

$

40,285

 

$

129,654

 

 

 

 

$

737,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

202

 

$

269

 

$

320

 

$

791

 

 

 

 

$

25,674

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

 

22,448

 

 

58,413

 

 

47,228

 

 

128,089

 

 

 

 

 

677,785

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2012

 

$

22,650

 

$

58,682

 

$

47,548

 

$

128,880

 

 

 

 

$

703,459

 

 

 

 

 

 

 

 

 

 

- 23 -


Table of Contents

Note 7—Deposits

The composition of deposits as of March 31, 2013 and December 31, 2012 is shown below.

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31,
2013

 

December 31,
2012

 

Noninterest bearing demand

 

$

88,137

 

$

88,476

 

NOW

 

 

84,161

 

 

77,531

 

Money market

 

 

277,804

 

 

289,149

 

Savings

 

 

37,395

 

 

34,372

 

Time deposits less than $100,000

 

 

233,177

 

 

236,683

 

Time deposits $100,000 or more

 

 

172,508

 

 

175,096

 

Total deposits

 

$

893,182

 

$

901,307

 

Note 8—Long-term Debt

A summary of long-term debt as of March 31, 2013 and December 31, 2012 is shown below.

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31,
2013

 

December 31,
2012

 

PeoplesBank’s obligations:

 

 

 

 

 

 

 

FHLBP

 

 

 

 

 

 

 

Due May 2013, 3.46%, amortizing

 

$

98

 

$

245

 

Due July 2015, 1.90%

 

 

5,000

 

 

5,000

 

Due July 2016, 2.35%

 

 

5,000

 

 

5,000

 

Due March 2018, 1.17%

 

 

10,000

 

 

0

 

Due June 2018, 1.87%

 

 

5,000

 

 

5,000

 

Due June 2019, 2.10%

 

 

5,000

 

 

5,000

 

Total FHLBP

 

 

30,098

 

 

20,245

 

Capital lease obligation

 

 

242

 

 

260

 

Codorus Valley Bancorp, Inc. obligations:

 

 

 

 

 

 

 

Junior subordinated debt

 

 

 

 

 

 

 

Due 2034, 2.30%, floating rate based on 3 month

 

 

 

 

 

 

 

LIBOR plus 2.02%, callable quarterly

 

 

3,093

 

 

3,093

 

Due 2036, 1.84% floating rate based on 3 month

 

 

 

 

 

 

 

LIBOR plus 1.54%, callable quarterly

 

 

7,217

 

 

7,217

 

Total long-term debt

 

$

40,650

 

$

30,815

 

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

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

- 24 -


Table of Contents

Note 9—Regulatory Matters

Codorus Valley and PeoplesBank are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if imposed, could have a material effect on Codorus Valley’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Codorus Valley and PeoplesBank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators.

Quantitative measures established by regulators to ensure capital adequacy require Codorus Valley and PeoplesBank to maintain minimum ratios, as set forth below, to total and Tier 1 capital as a percentage of risk-weighted assets, and of Tier 1 capital to quarter-to-date average assets (leverage ratio). Management believes that Codorus Valley and PeoplesBank were well capitalized on March 31, 2013 based on regulatory capital guidelines.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Minimum for
Capital Adequacy

 

Well Capitalized
Minimum*

 

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Codorus Valley Bancorp, Inc. (consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

107,874

 

 

13.52

%

$

31,926

 

 

4.00

%

 

n/a

 

 

n/a

 

Total risk based

 

 

117,360

 

 

14.70

 

 

63,852

 

 

8.00

 

 

n/a

 

 

n/a

 

Leverage

 

 

107,874

 

 

10.29

 

 

41,939

 

 

4.00

 

 

n/a

 

 

n/a

 

at December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

105,597

 

 

13.59

%

$

31,074

 

 

4.00

%

 

n/a

 

 

n/a

 

Total risk based

 

 

114,899

 

 

14.79

 

 

62,147

 

 

8.00

 

 

n/a

 

 

n/a

 

Leverage

 

 

105,597

 

 

10.02

 

 

42,143

 

 

4.00

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PeoplesBank, A Codorus Valley Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

104,430

 

 

13.13

%

$

31,811

 

 

4.00

%

$

47,716

 

 

6.00

%

Total risk based

 

 

113,916

 

 

14.32

 

 

63,621

 

 

8.00

 

 

79,527

 

 

10.00

 

Leverage

 

 

104,430

 

 

9.99

 

 

41,824

 

 

4.00

 

 

52,280

 

 

5.00

 

at December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk based

 

$

102,120

 

 

13.20

%

$

30,951

 

 

4.00

%

$

46,427

 

 

6.00

%

Total risk based

 

 

111,422

 

 

14.40

 

 

61,902

 

 

8.00

 

 

77,378

 

 

10.00

 

Leverage

 

 

102,120

 

 

9.72

 

 

42,020

 

 

4.00

 

 

52,526

 

 

5.00

 

* To be well capitalized under prompt corrective action provisions.

- 25 -


Table of Contents

Note 10—Shareholders’ Equity

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

On August 18, 2011, as part of the Treasury Small Business Lending Fund (SBLF) program, the Corporation entered into a Securities Purchase Agreement (SBLF Purchase Agreement) with the United States Department of the Treasury (Treasury) pursuant to which the Corporation sold to the Treasury, for an aggregate purchase price of $25 million, 25,000 shares of senior non-cumulative, perpetual preferred stock, Series B, $1,000 liquidation value, $2.50 par value. Generally, the preferred stock is non-voting and qualifies as Tier 1 regulatory capital. The SBLF agreement imposes limits on the ability of the Corporation to pay dividends and repurchase shares of common stock if it fails to declare and pay quarterly dividends on the SBLF preferred stock. The dividend rate can fluctuate on a quarterly basis during the first 10 quarters during which the SBLF preferred stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QSBL” (as defined in the Purchase Agreement) by the Bank. Based upon the increase in the Bank’s level of QSBL over the baseline level calculated under the terms of the Purchase Agreement, the dividend rate for the initial dividend period was set at 5 percent. For the second through ninth calendar quarters, the dividend rate may be adjusted between one percent (1%) and five percent (5%) per annum to reflect the amount of change in the Bank’s level of QSBL. The annualized dividend rate was 1 percent for the quarters ended March 31, 2013 and December 31, 2012, and approximately 3 percent for the quarter ended March 31, 2012. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the increase in QSBL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to 9% (including a quarterly lending incentive fee of 0.5%). Additional information about SBLF preferred stock is disclosed in Note 10—Shareholders’ Equity in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

Common stock dividend

Periodically, the Corporation distributes stock dividends on its common stock. The Corporation distributed a 5 percent common stock dividend on December 11, 2012 which resulted in the issuance of 211,564 additional common shares.

Note 11—Contingent Liabilities

There are no legal proceedings pending against Codorus Valley Bancorp, Inc. or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation other than routine litigation incidental to the business. Management is not aware of any proceedings known or contemplated by government authorities.

Note 12—Guarantees

Codorus Valley does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by PeoplesBank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $17,467,000 of standby letters of credit outstanding on March 31, 2013, compared to $17,064,000 on December 31, 2012. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The amount of the liability as of March 31, 2013 and December 31, 2012, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.

- 26 -


Table of Contents

Note 13—Fair Value of Assets and Liabilities

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

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

 

 

 

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

 

 

 

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

 

 

 

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

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

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

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

- 27 -


Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

(dollars in thousands)

 

Total

 

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

 

(Level 2)
Significant Other
Observable Inputs

 

(Level 3)
Significant Other
Unobservable Inputs

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

3,523

 

$

3,523

 

$

0

 

$

0

 

U.S. agency

 

 

35,973

 

 

0

 

 

35,973

 

 

0

 

U.S. agency mortgage-backed, residential

 

 

80,072

 

 

0

 

 

80,072

 

 

0

 

State and municipal

 

 

102,209

 

 

0

 

 

102,209

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

5,032

 

$

5,032

 

$

0

 

$

0

 

U.S. agency

 

 

38,058

 

 

0

 

 

38,058

 

 

0

 

U.S. agency mortgage-backed, residential

 

 

88,233

 

 

0

 

 

88,233

 

 

0

 

State and municipal

 

 

102,739

 

 

0

 

 

102,739

 

 

0

 

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans
Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At March 31, 2013, the fair value consists of loan balances of $4,256,000, net of valuation allowances of $1,032,000 and charge-offs of $2,587,000, compared to loan balances of $4,493,000, net of valuation allowances of $1,162,000 and charge-offs of $2,605,000, at December 31, 2012.

Foreclosed Real Estate
Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. At March 31, 2013, the carrying value of foreclosed real estate with valuation allowances was $2,661,000 ($6,372,000 less $3,711,000 of allowances). At December 31, 2012, the carrying value of foreclosed real estate with valuation allowances was $2,779,000 ($6,491,000 less $3,712,000 of allowances).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

(dollars in thousands)

 

Total

 

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

 

(Level 2)
Significant Other
Observable Inputs

 

(Level 3)
Significant Other
Unobservable Inputs

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

4,256

 

$

0

 

$

0

 

$

4,256

 

Foreclosed real estate

 

 

2,661

 

 

0

 

 

0

 

 

2,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

4,493

 

$

0

 

$

0

 

$

4,493

 

Foreclosed real estate

 

 

2,779

 

 

0

 

 

0

 

 

2,779

 

- 28 -


Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

(dollars in thousands)

 

Fair Value
Estimate

 

Valuation
Techniques

 

Unobservable
Input

 

Range    

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

4,256

 

 

Appraisal (1

)

 

Appraisal adjustments (2

)

 

20% - 30

%

Foreclosed real estate

 

 

2,661

 

 

Appraisal (1), (3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decenber 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

4,493

 

 

Appraisal (1

)

 

Appraisal adjustments (2

)

 

20% - 30

%

Foreclosed real estate

 

 

2,779

 

 

Appraisal (1), (3

)

 

 

 

 

 

 


 

 

 

 

(1)

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

 

(2)

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

 

(3)

May include qualitative adjustments by the Corporation’s management and estimated liquidation expenses.

Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments as of March 31, 2013 and December 31, 2012:

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

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

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

Loans held for sale
The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

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

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

- 29 -


Table of Contents

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

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

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

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

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

- 30 -


Table of Contents

The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of March 31, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Estimates

 

 

 

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

(dollars in thousands)

 

 

Carrying
Amount

 

 

Estimated
Fair Value

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

 

Significant Other
Observable
Inputs

 

 

Significant Other
Unobservable
Inputs

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,926

 

$

36,926

 

$

36,926

 

$

0

 

$

0

 

Securities available-for-sale

 

 

221,777

 

 

221,777

 

 

3,523

 

 

218,254

 

 

0

 

Restricted investment in bank stocks

 

 

3,084

 

 

3,084

 

 

0

 

 

3,084

 

 

0

 

Loans held for sale

 

 

2,622

 

 

2,675

 

 

0

 

 

2,675

 

 

0

 

Loans, net

 

 

750,128

 

 

776,915

 

 

0

 

 

0

 

 

776,915

 

Interest receivable

 

 

3,521

 

 

3,521

 

 

0

 

 

3,521

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

893,182

 

$

898,423

 

$

0

 

$

898,423

 

$

0

 

Short-term borrowings

 

 

19,243

 

 

19,243

 

 

0

 

 

19,243

 

 

0

 

Long-term debt

 

 

40,650

 

 

36,325

 

 

0

 

 

31,059

 

 

5,266

 

Interest payable

 

 

429

 

 

429

 

 

0

 

 

429

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,757

 

$

49,757

 

$

49,757

 

$

0

 

$

0

 

Securities available-for-sale

 

 

234,062

 

 

234,062

 

 

5,032

 

 

229,030

 

 

0

 

Restricted investment in bank stocks

 

 

2,863

 

 

2,863

 

 

0

 

 

2,863

 

 

0

 

Loans held for sale

 

 

3,091

 

 

3,151

 

 

0

 

 

3,151

 

 

0

 

Loans, net

 

 

727,832

 

 

753,299

 

 

0

 

 

0

 

 

753,299

 

Interest receivable

 

 

3,579

 

 

3,579

 

 

0

 

 

3,579

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

901,307

 

$

907,439

 

$

0

 

$

907,439

 

$

0

 

Short-term borrowings

 

 

19,356

 

 

19,356

 

 

0

 

 

19,356

 

 

0

 

Long-term debt

 

 

30,815

 

 

26,568

 

 

0

 

 

21,289

 

 

5,279

 

Interest payable

 

 

470

 

 

470

 

 

0

 

 

470

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 31 -


Table of Contents

Note 14—Assets and Liabilities Subject to Offsetting

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross
Amounts of
Recognized
Liabilities

 

 

Gross Amounts
Offset in the
Statements of
Condition

 

 

Net Amounts
of Liabilities
Presented in the
Statements of
Condition

 

Gross amounts Not Offset in the
Statements of Condition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

dollars in thousands

 

 

 

 

 

 

 

 

Financial
Instruments

 

 

Cash Collateral
Pledged

 

 

Net Amount

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements (1)

 

$

19,243

 

$

0

 

$

19,243

 

$

(19,243

)

$

0

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements (1)

 

$

19,356

 

$

0

 

$

19,356

 

$

(19,356

)

$

0

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As of March 31, 2013 and December 31, 2012, the fair value of securities pledged was $23,718,000 and $25,876,000, respectively.

- 32 -


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for Codorus Valley Bancorp, Inc. (Codorus Valley or the Corporation), a bank holding company, and its wholly owned subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided below. Codorus Valley’s consolidated financial condition and results of operations consist almost entirely of PeoplesBank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

Forward-looking statements

Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When words such as “believes,” “expects,” “anticipates” or similar expressions occur in the Form 10-Q, management is making forward-looking statements.

Note that many factors, some of which are discussed elsewhere in this report and in the documents that are incorporated by reference, could affect the future financial results of the Corporation and its subsidiaries, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q. These factors include, but are not limited to, the following:

 

 

operating, legal and regulatory risks;

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

a prolonged economic downturn;

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

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

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

interest rate fluctuations which could increase our cost of funds or decrease our yield on earning

assets and therefore reduce our net interest income;

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

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

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

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

the risk that management’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.

Critical accounting policies

We have identified critical accounting policies for the Corporation to include allowance for loan losses, valuation of foreclosed real estate and evaluation of other-than-temporary impairment losses of securities.

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There were no material changes made to the critical accounting policies disclosed in the 2012 Annual Report on Form 10-K in regards to application or related judgments and estimates used. A detailed disclosure pertaining to critical accounting estimates is provided in Item 7 of the Corporation’s 2012 Annual Report on Form 10-K.

Three months ended March 31, 2013,
compared to three months ended March 31, 2012

FINANCIAL HIGHLIGHTS

The Corporation earned net income available to common shareholders (earnings) totaling $2,599,000 for the quarter ended March 31, 2013, compared to $2,102,000 for the quarter ended March 31, 2012. The $497,000 or 24 percent increase in earnings for the first quarter of 2013, compared to the first quarter of 2012, was primarily the result of increases in net interest income and noninterest income, and a decrease in preferred stock dividends, which more than offset an increase in the provision for income taxes, as described below.

The $450,000 or 5 percent pretax increase in net interest income was due primarily to a decrease in funding costs resulting from a larger proportion of low cost core deposits to total deposits and lower rates generally paid on all deposit products, which reflected unusually low market interest rates. The average balance of interest earning assets, principally commercial loans, increased approximately $51 million or 5 percent for the first quarter of 2013, compared to the same quarter of 2012. While the volume of earning assets increased, its effect on interest income was largely offset by lower yields, a reflection of the low interest rate environment.

The $174,000 or 9 percent increase in noninterest income was primarily the result of increases in income from wealth management services (i.e., trust fees and income from mutual funds, annuity and insurance sales) due to increased sales and appreciation in the market value of managed accounts, upon which some fees are based. An increase in gains from the sale of loans held for sale (i.e., residential mortgage loans) also contributed to the increase in noninterest income as a result of greater loan origination volumes due to increased refinancing activity.

The $125,000 or 66 percent decrease in preferred stock dividends was the result of a decrease in the dividend rate caused by the addition of loans that qualified for the U.S. Treasury’s Small Business Lending Fund Program. The annualized dividend rate in effect for the quarter ended March 31, 2013 was 1 percent, compared to approximately 3 percent for the quarter ended March 31, 2012.

Total noninterest expense for the quarter ended March 31, 2013, was $7,253,000, slightly less than the $7,270,000 recorded for the quarter ended March 31, 2012. Personnel expense during the current quarter increased $502,000 or 14 percent above the first quarter of 2012 due to increases in planned staff additions, employee benefits costs and normal business growth. However, for the same periods, foreclosed real estate costs decreased $530,000 or 89 percent due primarily to a decrease in provisioning for impairment losses. Consequently, the overall level of noninterest expense for the first quarter of 2013, compared to the first quarter of 2012, was basically flat.

The provision for income taxes for the first quarter of 2013 was $984,000, compared to $725,000 for the first quarter of 2012. The $259,000 or 36 percent increase in income taxes was primarily the result of the 21 percent increase in income before income taxes.

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The schedule below presents selected performance metrics for the first quarter of 2013 and 2012.

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.58

 

$

0.48

 

Diluted earnings per share

 

$

0.57

 

$

0.47

 

Cash dividend payout ratio

 

 

19.0

%

 

18.0

%

Return on average assets

 

 

1.01

%

 

0.91

%

Return on average equity

 

 

10.39

%

 

9.61

%

Net interest margin (tax equivalent)

 

 

3.86

%

 

3.85

%

Net overhead ratio

 

 

1.99

%

 

2.17

%

Efficiency ratio

 

 

63.85

%

 

66.40

%

Average equity to average assets

 

 

9.73

%

 

9.42

%

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

INCOME STATEMENT ANALYSIS

Net interest income

Net interest income for the three-month period ended March 31, 2013, was $9,152,000, an increase of $450,000 or 5 percent above the first quarter of 2012. The increase in net interest income was due primarily to a decrease in funding costs resulting from a larger proportion of low cost core deposits to total deposits and lower rates generally paid on all deposit products, which reflected unusually low market interest rates. Net interest income (tax equivalent basis) as a percentage of interest earning assets, i.e., net interest margin, was 3.86 percent for the first quarter of 2013, compared to 3.85 percent for the first quarter of 2012.

The $32,000 or 0.3 percent decrease in total interest income for the current quarter, compared to the first quarter of 2012, was due primarily to a decrease in yields on earning assets, which was reflective of the long duration of historically low market interest rates. Interest earning assets averaged $998 million and yielded 4.76 percent (tax equivalent basis) for the current quarter, compared to $947 million and 4.99 percent, respectively, for the first quarter of 2012. The average balance of interest earning assets, principally commercial loans, increased approximately $51 million or 5 percent for the first quarter of 2013, compared to the same quarter of 2012. While the volume of earning assets increased, its effect on interest income was largely offset by lower yields, a reflection of the low interest rate environment.

The $482,000 or 18 percent decrease in total interest expense for the current quarter, compared to the first quarter of 2012 resulted from a larger proportion of low cost core deposits to total deposits and lower rates generally paid on all deposit products, which reflected historically low market interest rates. Total interest bearing liabilities averaged $862 million at an average rate of 1.04 percent for the current quarter, compared to $836 million and 1.29 percent, respectively, for the first quarter of 2012. The $26 million or 3 percent increase in the average volume of interest bearing liabilities reflected growth in core deposits, principally money market and interest bearing demand deposits. The growth of core deposits is a particular focus of the Corporation because the rates are relatively low, are a source of fee income and provide the opportunity to cross-sell other financial products and services. For internal purposes, the Corporation excludes time deposits in its definition of core deposits.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

2013

 

2012

(dollars in thousands)

 

Average
Balance

 

Interest

 

Yield/
Rate

 

Average
Balance

 

Interest

 

Yield/
Rate

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$

22,651

 

$

14

 

 

0.25

%

$

24,366

 

$

15

 

 

0.25

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

127,832

 

 

651

 

 

2.07

 

 

147,440

 

 

911

 

 

2.49

 

Tax-exempt

 

 

95,046

 

 

931

 

 

3.97

 

 

78,887

 

 

883

 

 

4.50

 

Total investment securities

 

 

222,878

 

 

1,582

 

 

2.88

 

 

226,327

 

 

1,794

 

 

3.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable (1)

 

 

741,583

 

 

9,967

 

 

5.45

 

 

681,343

 

 

9,724

 

 

5.74

 

Tax-exempt

 

 

10,635

 

 

151

 

 

5.76

 

 

14,531

 

 

216

 

 

5.98

 

Total loans

 

 

752,218

 

 

10,118

 

 

5.46

 

 

695,874

 

 

9,940

 

 

5.75

 

Total earning assets

 

 

997,747

 

 

11,714

 

 

4.76

 

 

946,567

 

 

11,749

 

 

4.99

 

Other assets (2)

 

 

56,263

 

 

 

 

 

 

 

 

64,991

 

 

 

 

 

 

 

Total assets

 

$

1,054,010

 

 

 

 

 

 

 

$

1,011,558

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand

 

$

365,246

 

$

334

 

 

0.37

%

$

324,492

 

$

328

 

 

0.41

%

Savings

 

 

35,727

 

 

22

 

 

0.25

 

 

31,814

 

 

20

 

 

0.25

 

Time

 

 

406,250

 

 

1,653

 

 

1.65

 

 

426,641

 

 

2,108

 

 

1.99

 

Total interest bearing deposits

 

 

807,223

 

 

2,009

 

 

1.01

 

 

782,947

 

 

2,456

 

 

1.26

 

Short-term borrowings

 

 

20,127

 

 

28

 

 

0.56

 

 

14,559

 

 

24

 

 

0.66

 

Long-term debt

 

 

34,169

 

 

172

 

 

2.04

 

 

38,262

 

 

211

 

 

2.22

 

Total interest bearing liabilities

 

 

861,519

 

 

2,209

 

 

1.04

 

 

835,768

 

 

2,691

 

 

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

 

83,227

 

 

 

 

 

 

 

 

74,217

 

 

 

 

 

 

 

Other liabilities

 

 

6,747

 

 

 

 

 

 

 

 

6,273

 

 

 

 

 

 

 

Shareholders’ equity

 

 

102,517