UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-15536
Codorus Valley Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
(State of incorporation) (I.R.S. Employer ID No.)
105 Leader Heights Road, P.O. Box 2887 York, PA 17405
(Address of principal executive offices) (Zip Code)
(717) 235-6871 or (717) 846-1970
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes
since 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 _
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _ No _
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of 04/11/00, 2,339,283
shares of common stock, par value $2.50, were outstanding.
CODORUS VALLEY BANCORP, INC.
10Q INDEX
Page #
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition... 1
Consolidated Statements of Income................ 2
Consolidated Statements of Cash Flows............ 3
Notes to Consolidated Financial Statements....... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 19
PART II - OTHER INFORMATION
Item 1. Legal proceedings.................................. 20
Item 2. Changes in securities and use of proceeds.......... 20
Item 3. Defaults by the company on its senior securities... 20
Item 4. Results of votes of security holders............... 20
Item 5. Other information.................................. 20
Item 6. Exhibits and reports on Form 8-K................... 20
SIGNATURES................................................. 21
EXHIBIT 27, Financial Data Schedule........................ 22
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
March December
31, 31,
(dollars in thousands) 2000 1999
Assets --------- ---------
Cash and due from banks
Interest bearing deposits with banks $ 225 $ 226
Noninterest bearing deposits and cash 6,916 10,399
Federal funds sold 2,189 568
Securities available-for-sale 46,272 46,268
Securities held-to-maturity(market value $8,799
at 3/31/00 and $8,835 at 12/31/99) 9,360 9,361
Loans 206,499 207,318
Less-allowance for loan losses (2,037) (2,023)
-------- --------
Total net loans 204,462 205,295
Premises and equipment 9,405 9,547
Interest receivable 1,777 1,617
Other assets 8,039 7,875
-------- --------
Total assets............................. $288,645 $291,156
======== ========
Liabilities
Deposits
Noninterest bearing demand $ 25,182 $ 23,427
NOW 25,388 24,376
Money market 41,803 40,449
Savings 19,205 19,007
Time CDs less than $100,000 108,011 112,251
Time CDs $100,000 and above 17,630 18,948
-------- --------
Total deposits 237,219 238,458
Federal funds purchased 0 2,657
Other short-term borrowings 14,000 13,000
Long-term borrowings 10,267 10,342
Interest payable 747 731
Other liabilities 668 596
-------- --------
Total liabilities............................ 262,901 265,784
Stockholders' Equity
Series preferred stock, par value $2.50
per share; 1,000,000 shares authorized;
0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 2,340,283 shares
issued and outstanding at 3/31/00 and 2,343,183
at 12/31/99. 6,019 6,019
Additional paid-in capital 11,978 11,978
Retained earnings 9,500 9,050
Accumulated other comprehensive loss (559) (523)
Less: Treasury stock, 67,444 shares at 3/31/00
and 64,544 at 12/31/99. (1,194) (1,152)
-------- --------
Total stockholders' equity................... 25,744 25,372
-------- --------
Total liabilities and stockholders' equity... $288,645 $291,156
======== ========
See accompanying notes.
1
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three months ended
March 31,
(dollars in thousands, except per share data) 2000 1999
Interest Income ------ ------
Interest and fees from loans $4,519 $4,129
Interest from federal funds sold and interest
bearing deposits with banks 31 37
Interest and dividends from securities
Taxable interest income 705 625
Tax-exempt interest income 111 82
Dividend income 56 19
------ ------
Total interest income.............................. 5,422 4,892
Interest Expense
NOW 59 76
Money market 349 281
Savings 96 103
Time CDs less than $100,000 1,504 1,502
Time CDs $100,000 and above 260 243
------ ------
Total interest expense on deposits 2,268 2,205
Interest expense on short-term borrowings and
federal funds purchased 215 13
Interest expense on long-term borrowings 171 53
------ ------
Total interest expense............................ 2,654 2,271
------ ------
Net interest income................................ 2,768 2,621
Provision for Loan Losses 0 75
------ ------
Net interest income after provision for loan losses 2,768 2,546
Noninterest Income
Trust and investment services fees 175 124
Service charges on deposit accounts 162 127
Other income 257 201
Gain on sales of securities 0 37
Loss on sales of fixed assets (6) 0
------ ------
Total noninterest income 588 489
Noninterest Expense
Salaries and benefits 1,165 1,080
Occupancy of premises 210 208
Furniture and equipment 260 228
Postage, stationery and supplies 98 87
Professional and legal 31 73
Marketing and advertising 113 60
Other real estate owned, net 39 58
Other 453 401
------ ------
Total noninterest expense 2,369 2,195
Income before income taxes 987 840
Provision for Income Taxes 279 239
------ ------
Net income..........................................$ 708 $ 601
Net income per share ====== ======
Basic..............................................$0.30 $0.24
Diluted............................................$0.30 $0.24
See accompanying notes.
2
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three months ended
March 31,
2000 1999
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 708 $ 601
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 218 198
Provision for loan losses 0 75
Provision for losses on other real estate owned 2 15
Net loss on sales of other real estate owned 0 4
Gain on sales of securities 0 (37)
Loss on sales of premises and equipment 6 0
Increase in interest receivable (160) (28)
Increase in other assets (160) (186)
Increase in interest payable 16 54
Increase in other liabilities 72 106
Other, net (28) 7
------- -------
Net cash provided by operating activities............. 674 809
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 0 3,030
Proceeds from maturities and calls of securities
available-for-sale 1,730 7,123
Purchase of securities available-for-sale (1,793) (1,748)
Net decrease(increase) in loans made to customers 749 (6,039)
Proceeds from loan sales 118 109
Proceeds from sales of premises and equipment 19 0
Purchases of premises and equipment (101) (348)
Proceeds from sales of other real estate owned 12 104
------- -------
Net cash provided by investing activities............ 734 2,231
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 4,319 2,662
Net decrease in time deposits (5,558) (661)
Net decrease in short-term borrowings and
federal funds purchased (1,657) (1,234)
Net (decrease) increase in long-term borrowings (75) 965
Dividends paid (258) (242)
Payment to repurchase common stock (42) (65)
------- -------
Net cash (used for)provided by financing activities...(3,271) 1,425
------- -------
Net (decrease)increase in cash and cash equivalents.. (1,863) 4,465
Cash and cash equivalents at beginning of year....... 11,193 11,092
------- -------
Cash and cash equivalents at March 31,...............$ 9,330 $15,557
======= =======
Supplemental Disclosures:
Interest payments $2,252 $2,151
Income tax payments $61 $0
See accompanying notes.
3
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1-General
The interim financial statements are unaudited. However, they reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the financial condition and results of operations for the reported
periods, and are of a normal and recurring nature.
These statements should be read in conjunction with notes to the audited
financial statements contained in the 1999 Annual Report to Stockholders.
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank, A Codorus
Valley Company, and its wholly owned nonbank subsidiary, SYC Realty Company,
Inc. All significant intercompany account balances and transactions have
been eliminated in consolidation.
No shares of common stock are reserved for issuance in the event of
conversions or the exercise of warrants, options or other rights, except
for 140,710 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan; 79,492 shares for the 1996 Stock Incentive Plan; 110,250
shares for the 1998 Independent Directors' Stock Option Plan; and those
shares reserved for the Shareholders' Rights Plan.
The results of operations for the three month period ended March 31, 2000
are not necessarily indicative of the results to be expected for the full
year.
Note 2-Summary of Significant Accounting Policies
Loans Held-for-Sale - Loans held-for-sale are reported at the lower of cost
or market value. The amount by which cost exceeds market value, if any, is
accounted for as a valuation allowance and is charged to expense in the
period of the change.
Per Share Computations - All per share computations include the retroactive
effect of stock dividends declared, including the 5% stock dividend declared
April 25, 2000. The weighted average number of shares of common stock
outstanding used was approximately 2,389,485 for the three month period
ended March 31, 2000 and 2,454,052 for the same period in 1999.
Reclassifications - Certain reclassifications have been made to the 1999
consolidated financial statements to conform with the 2000 presentation.
Comprehensive Income - As of January 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement No. 130 requires unrealized gains or
losses on available-for-sale securities, to be included in other
comprehensive income. Total comprehensive income was $672,000 for
the quarter ended March 31, 2000, compared to $386,000 for the same
period of 1999.
4
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 3-Current Accounting Developments
During the fourth quarter of 1999, the Financial Accounting Standards Board
(FASB) issued an Exposure Draft on Business Combinations and Intangible
Assets. Under the proposed Draft, companies would be required to: account
for all business combinations using the purchase method; amortize goodwill
over its useful economic life, but in no event over a period longer than 20
years; present goodwill charges on a net-of-tax basis as the last component
of continuing operations on the income statement; recognize negative
goodwill as an extraordinary gain; and recognize all reliably measureable
identifiable intangible assets at their fair value, among other
recommendations. The FASB expects to issue a final statement in the fourth
quarter of 2000, applicable to business combinations and to intangible
assets acquired in transactions initiated after the issuance date of the
final statement.
5
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Impaired Loans
The Corporation records impaired loans in accordance with Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118, "Accounting by Creditors for
impairment of a Loan--Income Recognition and Disclosure." For all
reportable periods, impaired loans were comprised of collateral dependent
commercial loans and residential mortgage loans classified as
nonaccrual(cash basis). Additional information regarding impaired loans
is provided in the schedule that follows.
March 31, December 31,
dollars in thousands) 2000 1999
------ ------
Impaired loans $2,183 $1,892
Amount of impaired loans that have a related
allowance $2,183 $1,892
Amount of impaired loans with no related
allowance $0 $0
Allowance for impaired loans $471 $500
For the three months ended March 31, 2000 1999
------ ------
Average investment in impaired loans $1,903 $1,789
Interest income recognized on impaired loans
(all cash-basis) $14 $16
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the three month period
ended March 31, were as follows:
2000 1999
(dollars in thousands) ------ ------
Balance-January 1, $2,023 $1,865
Provision charged to operating expense 0 75
Loans charged off 0 (3)
Recoveries 14 6
------ ------
Balance-March 31, $2,037 $1,943
====== ======
6
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 6-Long-term Borrowings
March 31, December 31,
2000 1999
(dollars in thousands) ------- -------
Notes issued by PeoplesBank to FHLB Pittsburgh:
Due 2004, 5.12%, 5 year bullet $ 1,025 $ 1,025
Due 2007, 6.82%, 10 year amortizing 2,260 2,324
Due 2014, 6.43%, convertible quarterly after
July 2009, 15 year bullet (convertible select) 5,000 5,000
Note issued by Codorus Valley Bancorp, Inc.:
Due 2009, 7.35%, payment based on 20 year
amortization, 10 year bullet 1,982 1,993
------- -------
Total $10,267 $10,342
======= =======
The FHLBP notes payable are fixed rate and fixed/floating rate (convertible
select) instruments. The 15 year convertible select is fixed for 10 years.
During the remaining 5 years, the FHLBP has the option to convert the rate
to a floating rate based on the 3 month Libor plus 16 basis points. If the
FHLBP elects to exercise the conversion option, PeoplesBank can repay the
loan without a prepayment penalty. The note issued by Codorus Valley
Bancorp, Inc. is secured by a mortgage on the Codorus Valley Corporate
Center office building at 105 Leader Heights Road, York, Pennsylvania.
7
CODORUS VALLEY BANCORP, INC.
Item 2. Management's Discussion and Analysis of Consolidated 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 its
accompanying consolidated financial statements for Codorus Valley Bancorp,
Inc., a bank holding company (Codorus Valley or Corporation), 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.
Management has made forward-looking statements in this report, and in
documents that are incorporated by reference, that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of Codorus Valley or
PeoplesBank. Management is making forward-looking statements when it uses
words such as "believes," "expects," "anticipates" or other similar
expressions.
Readers should note that many factors, some of which are discussed elsewhere
in this document and in the documents that management incorporates by
reference, could affect the future financial results of Codorus Valley or
PeoplesBank and could cause those results to differ materially from those
expressed in forward-looking statements contained or incorporated by
reference in this document. These factors include:
* operating, legal and regulatory risks;
* economic, political and competitive forces affecting banking, securities,
asset management and credit services businesses; and
* the risk that management's analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date of this report. Readers should carefully review the risk
factors described in other documents that Codorus Valley files periodically
with the Securities and Exchange Commission.
8
CODORUS VALLEY BANCORP, INC.
Three months ended March 31, 2000
compared to three months ended March 31, 1999
INCOME STATEMENT ANALYSIS
Overview
A growing economy, and continued emphasis on sales and risk management were
factors that contributed to an increase in net income. Net income for the
current three month period was $708,000 or $.30 per share, compared to
$601,000 or $0.24 per share, for the same period in 1999. All per share
amounts were adjusted for stock dividends. The increase in current period
net income was caused by a $147,000 increase in net interest income, a
$99,000 increase in noninterest income, and a $75,000 decrease in the
provision for loan losses. The favorable effect of these three income
statement categories more than offset a $174,000 increase in noninterest
operating expense. For the three-month period (annualized) of 2000, the
return on average assets was approximately 0.98 percent compared to 0.89
percent for 1999. For the same periods, the return on average equity was
approximately 11.1 percent for 2000 compared to 9.2 percent for 1999.
On March 31, 2000, total assets were approximately $289 million, reflecting
a small decline from $291 million on December 31, 1999. Book value per share
was $10.78 on March 31, 2000, compared to $10.66 on March 31, 1999. As of
March 31, 2000, management believes that Codorus Valley meets all capital
requirements to which it is subject. PeoplesBank's capital ratios exceed the
quantitative federal regulatory minimums for well-capitalized commercial
banks.
An explanation of the factors and trends that caused changes between the two
periods, by earnings category, is provided below.
Net interest income
Net interest income for the current three-month period was $2,768,000, an
increase of $147,000 or 5.6 percent above the same period in 1999. The
increase in net interest income was due primarily to a greater volume of
interest earning assets. Total interest earning assets averaged $262 million
with a weighted average tax equivalent yield of 8.05 percent for the first
three months of 2000 compared to $245 million and 7.93 percent,
respectively, for the first three months of 1999. Growth in the average
volume of interest earning assets occurred primarily in the commercial loan
and investment securities portfolios. Net interest income continues to be
constrained by a flat/inverse U.S. treasury yield curve, competitive price
pressures and higher funding costs.
9
CODORUS VALLEY BANCORP, INC.
Total deposits averaged $237 million with a weighted average rate of 3.85
percent for the first three months of 2000 compared to $238 million and 3.75
percent, respectively, for the same period of 1999. The average balances of
noninterest and interest bearing demand deposits increased 6 percent above
1999, while savings deposits declined 8 percent and CD deposits declined 3
percent. Deposit growth remains a challenge for PeoplesBank and the
financial services industry, due to the popularity of higher yield/risk
market alternatives.
Total borrowings averaged $25 million with a weighted average cost of 6.10
percent for the first three months of 2000 compared to $4 million and 6.07
percent, respectively, for the same period of 1999. The increase in
borrowings compensated for a lack of deposit growth.
Provision for loan losses
For the current period, management believes the allowance for possible loan
losses to be adequate and a loss provision unnecessary as there were no net
charge-offs in the current quarter and overall credit quality continues to
be strong.
Noninterest income
Total noninterest income for the current three-month period was $588,000, an
increase of $99,000 or 20 percent above the same period in 1999. Income
increased in all categories except for gains from asset sales. Trust and
investment services fees increased $51,000 or 41 percent due to growth in
assets under management and a price increase effective July 1, 1999. Service
charges on deposit accounts increased $35,000 or 28 percent due primarily to
selected price increases. Other income increased $56,000 or 28 percent due
to fee income from PeoplesBank subsidiaries, principally SYC Insurance
Services, Inc., which began operations in January 2000. The other income
category was positively impacted by an increase in rental income from
leased space in the corporate center. During the current period, rising
market interest rates constrained asset sales and gains thereon. For the
year 2000, noninterest income is expected to exceed the 1999 level, with the
exception of gains from asset sales. The expected increase is based on the
following presumptions: normal business growth, added revenue from the fee-
based bank subsidiary SYC Insurance, and a full year's impact of selected
price increases.
Fee-based subsidiary
In January 2000, PeoplesBank subsidiary, SYC Insurance Services, Inc., began
operations. First quarter sales and fee income met management's
expectations. PeoplesBank created SYC Insurance, at nominal cost, to
generate fee income by facilitating the sale of investment products through
a third-party marketing
10
CODORUS VALLEY BANCORP, INC.
arrangement. The initial product offering is a fixed rate annuity. Variable
rate annuities and mutual fund products will be offered later this year.
Licensed sales representatives throughout PeoplesBank's branch offices and
divisions conduct sales of investment products. Products sold by SYC
Insurance are not FDIC insured, not obligations of, nor guaranteed by
PeoplesBank, and are subject to market risks including the possible loss of
principal.
Noninterest expense
Total noninterest expense for the current three-month period was $2,369,000,
an increase of $174,000 or 8 percent above the same period in 1999. The
increase in noninterest expense primarily reflects increases in salaries and
benefits, equipment, marketing and advertising, and other operating expense.
The $85,000 or 8 percent increase in salaries and benefit expense reflects
merit raises, higher replacement costs and fewer unfilled positions. The
$32,000 or 14 percent increase in equipment expense reflects increased
investment in technology. The $53,000 or 88 percent increase in marketing
and advertising reflects ad campaigns for bank products and the Internet
banking system, and branding research. The $52,000 or 13 percent increase in
other operating expense was due primarily to increases in employee training
costs and charitable donations. The $42,000 or 58 percent decrease in
professional and legal expense reflects termination of a temporary
investment management arrangement by the Trust and Investment Services
Division of PeoplesBank.
Noninterest expense is expected to increase in the period ahead due to
normal business growth and implementation of strategic initiatives such as
staff additions, branch office expansion and technology investments.
Branch office expansion
In May 2000, PeoplesBank filed regulatory documents to establish a community
banking office in Penn Township, Hanover, Pennsylvania. Plans call for the
construction of a 1,850 square foot office to be located adjacent to a soon-
to-be-constructed Rutter's Farm Store. Subject to regulatory approval and
negotiation with the landlord, PeoplesBank plans to secure a long-term lease
and begin banking operations during the fourth quarter of this year. As more
information becomes available on this project it will be reported in future
Form 10-Q filings.
Capital investment in technology
In January 2000, PeoplesBank introduced an internet banking system with on-
line bill payment to its customers. To date, customer response has been very
positive and usage has met management's expectations. Capital investment in
the internet banking system, exclusive of marketing and maintenance
expenses,
11
CODORUS VALLEY BANCORP, INC.
was approximately $61,000. Annual depreciation is approximately $20,000
based on an expected three-year useful life.
In April 2000, PeoplesBank upgraded its IBM AS400 host computer system,
which was nearing the limits of its processing capacity. The upgrade, which
cost approximately $90,000, proceeded smoothly and is expected to extend
system life by three years. Annual depreciation is approximately $30,000.
The benefits of this investment include increased processing capacity and
speed, which translate to better customer service and increased processing
efficiencies.
For the remainder of 2000, PeoplesBank will focus on several technology
initiatives as defined in the Corporation's strategic technology plan. One
key initiative is to develop a new bank website that is interactive and
flexible. Resources will also be focused on improving on-line systems
security through intruder detection and security upgrades. Other initiatives
include improving the technology infrastructure by expanding the local area
network to branch banking offices and decentralizing access to imaging
technology.
Sales and product training
In January 1998, PeoplesBank contracted with a national sales training and
consulting firm to implement a sales and product training program. The
program is focused on the retail banking staff and has two primary
objectives: first, to expedite the transformation of PeoplesBank to a
customer-focused corporate culture, based upon superior sales and service;
second, to increase sales through improved selling skills, increased product
knowledge and confidence, and sales incentives. Formal training of the
retail banking staff began in May 1998 and is expected to be completed by
December 2000. Through March 31, 2000, PeoplesBank expended approximately
$163,000 on this program ($36,000 in 2000, to date; $32,000 in 1999; and
$95,000 in 1998).
Income taxes
The provision for federal income taxes was $279,000 for the current three-
month period, compared to $239,000 for the same period in 1999. The increase
in federal taxes was due to an increase in taxable income.
12
CODORUS VALLEY BANCORP, INC.
BALANCE SHEET REVIEW
Investment securities, Loans, & Deposits
On March 31, 2000, investment securities, loans and deposits approximated
the level at December 31, 1999.
Short-Term and Long-Term Borrowings
In order to meet short-term funding needs PeoplesBank can borrow from larger
correspondent banks in the form of funds purchased. PeoplesBank also
utilizes available credit through the Federal Home Loan Bank of Pittsburgh
(FHLBP). The rate is established daily based on prevailing market conditions
for overnight funds. PeoplesBank's maximum borrowing capacity, as
established quarterly by the FHLBP, was approximately $60 million, on
December 31, 1999, the most recent available date.
On March 31, 2000, long-term borrowings were $10.3 million, approximately
the same as December 31, 1999. A listing of long-term borrowing agreements
is provided in Note 6 of this report.
Stockholders' Equity
Stockholders' equity, or capital, is a source of funds which enables Codorus
Valley to maintain asset growth and to absorb losses. Total stockholders'
equity was $25.7 million on March 31, 2000, approximately the same as
December 31, 1999. Unrealized holding losses on available-for-sale
investment securities caused by rising market interest rates, and stock
repurchases which partially offset the positive impact from earnings,
constrained equity growth. Book value per share, as adjusted, was $10.78 on
March 31, 2000, compared to $10.66 on December 31, 1999.
The level of capital for Codorus Valley and PeoplesBank remained sound for
both periods. PeoplesBank exceeded all minimum regulatory requirements for
well-capitalized commercial banks as established by the FDIC, its primary
federal regulator. The FDIC's minimum quantitative standards for a well-
capitalized institution are as follows: tier I risk-based capital, 6
percent; total risk-based capital, 10 percent; and tier I leverage ratio, 5
percent. At the state level, the Pennsylvania Department of Banking uses a
leverage ratio guideline of 6 percent. Codorus Valley's and PeoplesBank'S
capital amounts and classification are also subject to qualitative judgments
by regulators. The table below depicts capital ratios for Codorus Valley and
PeoplesBank on March 31, 2000, and December 31, 1999.
13
CODORUS VALLEY BANCORP, INC.
Capital Ratios
Codorus Valley
Consolidated PeoplesBank
3/31/00 12/31/99 3/31/00 12/31/99
Tier I risk-based capital 11.3 11.2 9.4 9.2
Total risk-based capital 12.2 12.1 10.3 10.1
Tier I leverage 9.1 9.3 7.5 7.6
Capital investments made in earlier periods, as described in previous SEC
filings, and future investments will impact current and future earnings and
capital growth. Possible future investments could include expansion of the
community office franchise, technology, and acquisition of financial
services companies. Management and the board of directors believe that
capital investments, guided by a long range strategic plan, are necessary to
develop an infrastructure to grow market share and net income over the long-
term, and are important components of the overall strategy of enhancing
long-term shareholder value.
On April 11, 2000, the board declared a quarterly cash dividend of $.11
cents per share, payable May 9, 2000, to shareholders of record April 25,
2000. This follows a $.11 cents per share cash dividend paid in February
2000. On April 25, 2000, the board declared a 5 percent stock dividend,
payable June 23, 2000, to shareholders of record May 9, 2000.
In February 1999, Codorus Valley publicly announced that its board
authorized the purchase, in open market and privately negotiated
transactions, of up to 112,500 shares or 4.9 percent of Codorus Valley's
then outstanding common stock. Purchases are authorized periodically when
market conditions warrant, and are expected to be funded from operations
using available retained capital. As of March 31, 2000, Codorus Valley
purchased 78,322 shares of its common stock for approximately $1,396,000. Of
this total, 10,878 shares were reissued to partially satisfy the 5 percent
stock dividend paid in June 1999. As of March 31, 2000, 67,444 shares were
held in treasury.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends declared through April 2000, was approximately 2,389,485
shares for the three month period ended March 31, 2000, and 2,454,052 for
the same period in 1999.
RISK MANAGEMENT
Nonperforming assets
Table 1 of this report provides a summary of nonperforming assets and past
due loans, and related ratios. The paragraphs below contain an explanation
of changes within each classification for March 31, 2000, compared to
December 31, 1999.
14
CODORUS VALLEY BANCORP, INC.
A major component of nonperforming assets is impaired loans. For all
reporting periods, impaired loans were principally comprised of collateral
dependent commercial loans and residential mortgage loans classified as
nonaccrual. Accordingly, Codorus Valley uses the cash basis method to
recognize interest income on loans that are impaired. On March 31, 2000, the
impaired loan portfolio was $2,183,000, reflecting a $291,000 or 15 percent
increase since year-end 1999. On March 31, 2000, the impaired loan portfolio
was comprised of twenty-five unrelated accounts, primarily commercial loan
relationships, ranging in size from $8,000 to $488,000. These loan
relationships vary by industry and are generally collateralized with real
estate assets. A loss allowance, which is evaluated at least quarterly, has
been established for accounts that appear to be under-collateralized.
Efforts to modify contractual terms for individual accounts, based on
prevailing market conditions, or liquidate collateral assets, are proceeding
as quickly as potential buyers can be located and legal constraints permit.
Other real estate owned (OREO), net of allowance, totaled $1,365,000 on
March 31, 2000, approximately the same as December, 31, 1999. On March 31,
2000, the OREO portfolio was comprised of real estate assets from four
former commercial loan relationships. The largest property has a carrying
value of $992,000, which makes up 73 percent of the OREO portfolio.
Management believes that the net realizable value of this property is
sufficiently greater than its carrying value based on a recent external
appraisal. A loss allowance, which is evaluated at least quarterly, has been
established for assets whose estimated market value, less selling expenses,
are below their financial carrying costs. On March 31, 2000, the OREO
allowance was $43,000. For the first three months of 2000, a $2,000 loss
provision was recorded to reflect a loss on the decline in fair value.
Comparatively, a $15,000 loss provision was deemed necessary for the same
period in 1999. Efforts to liquidate OREO are proceeding as quickly as
potential buyers can be located and legal constraints permit.
On March 31, 2000, loans past due 90 days or more and still accruing
interest were $1,186,000, compared to $13,000 on December 31, 1999.
Approximately $1,173,000 of total loans past due 90 days and still accruing
interest on March 31, 2000, were associated with a single commercial loan.
Subsequent to March 31, 2000, circumstances arose which caused management to
doubt the near-term collectability of this loan. As a result, the loan was
reclassified to nonaccrual and approximately $27,000 in previously recorded
interest income was reversed in the May 2000 financials. Generally, loans in
the past due category are adequately collateralized and in the process of
collection. On March 31, 2000, management had not identified any potential
problem loans, as defined by the Securities and Exchange Commission. However,
management was monitoring loans of approximately $7.6 million for which the
ability of the borrower to comply with present repayment terms was
uncertain. These loans were not included in the Table 1 disclosure. They are
monitored closely, and management presently believes that the allowance for
loan losses is adequate to cover anticipated losses that may be attributable
to these loans.
15
CODORUS VALLEY BANCORP, INC.
Comparatively, management was monitoring loans of approximately $7.5 million
on December 31, 1999.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses depicts a $2,037,000
allowance on March 31, 2000, which was 0.98 percent of total loans. The
current period allowance increased above 1999 primarily to support a larger
portfolio of commercial loans. The provision expense for the current three-
month period was $0, compared to $75,000 for the same period in 1999. Based
on a recent evaluation of potential loan losses and the current portfolio,
management believes that the allowance is adequate to support losses
inherent in the loan portfolio on March 31, 2000.
Liquidity
Management believes that Codorus Valley's liquidity is adequate. Principal
funding sources include maturing investment securities, the ability to
borrow from the Federal Home Loan Bank of Pittsburgh, and deposit growth.
The loan-to-deposit ratio was approximately 87 percent on March 31, 2000,
and December 31, 1999. In the period ahead the loan-to-deposit ratio could
increase due to competitive forces which may constrain deposit growth. By
necessity, short-term and long-term borrowings will play an increasingly
important role in funding.
Market risk management
In the normal course of conducting business, Codorus Valley is exposed to
market risk, principally interest rate risk, through the operations of its
banking subsidiary. Interest rate risk arises from market driven
fluctuations in interest rates, which may affect cash flows, income, expense
and values of financial instruments. An asset-liability management committee
comprised of members of senior management and an outside director manages
interest rate risk. No material changes in market risk strategy occurred
during the current period. A detailed discussion of market risk is provided
in the SEC Form 10-K for period ended December 31, 1999.
Other risks
Periodically, federal and state legislators propose legislation that could
result in additional regulation of, or restrictions on, the business of
Codorus Valley and its subsidiaries. Other than as discussed below,
management cannot predict whether such legislation will be adopted or, if
adopted, how the legislation would affect the business of Codorus Valley and
its subsidiaries.
16
CODORUS VALLEY BANCORP, INC.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act of 1999, which is also known as the Financial Services
Modernization Act. The act repeals Depression-era banking laws and permits
banks, insurance companies and securities firms to engage in each other's
businessess after complying with certain conditions and regulations which
are yet to be finalized. The act grants to community banks the power to
enter new financial markets as a matter of right that larger institutions
have managed to do on an ad hoc basis. At this time, Codorus valley has no
plans to pursue these additional possibilities. Management does not believe
that the Financial Services Modernization Act will have an immediate
positive or negative material effect on Codorus Valley's operations.
However, the act may result in increased competition from larger financial
services companies, many of who have substantially more financial resources
than Codorus Valley, and now may offer banking services in addition to
insurance and brokerage services.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation which, if implemented, would
have a material adverse effect upon the liquidity, capital resources, or
results of operations. Although the general cost of compliance with numerous
and multiple federal and state laws and regulations does have, and in the
future may have, a negative impact on Codorus Valley's results of
operations.
17
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
March 31, December 31,
(dollars in thousands) 2000 1999
------ ------
Impaired loans (1) $2,183 $1,892
Other real estate owned, net(2) 1,365 1,385
------ ------
Total nonperforming assets $3,548 $3,277
====== ======
Accruing loans that are contractually past
due 90 days or more as to principal or
interest $1,186 $13
Ratios:
Impaired loans as a % of
total period-end loans 1.06% .91%
Nonperforming assets as a % of total
period-end loans and other real estate
owned, net of reserve 1.71% 1.57%
Nonperforming assets as a % of
total period-end stockholders' equity 13.78% 12.92%
Allowance for loan losses as a
multiple of impaired loans .9x 1.1x
Interest not recognized on impaired loans at period-end: (3)
- ------------------------------------------------------------
Contractual interest due $227 $240
Interest revenue recognized 14 49
---- ----
Interest not recognized in operations $213 $191
==== ====
(1) Comprised solely of nonaccrual loans.
(2) Net of related allowance(reserve).
(3) This table includes interest not recognized on loans which were
classified as impaired at period-end. While every effort is being
made to collect this interest revenue, it is probable a portion will
never be recovered.
18
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 2000 1999
------ ------
Balance-January 1, $2,023 $1,865
Provision charged to operating expense 0 75
Loans charged off:
Commercial 0 1
Real estate-mortgage 0 0
Consumer 0 2
------ ------
Total loans charged off 0 3
Recoveries:
Commercial 9 3
Real estate-mortgage 0 0
Consumer 5 3
------ ------
Total recoveries 14 6
------ ------
Net (recoveries)chargeoffs (14) (3)
Balance-March 31, $2,037 $1,943
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans .00% .00%
Allowance for loan losses to total loans
at period-end .98% 1.00%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 60.5% 82.4%
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the market risk strategy as discussed
in the Form 10-K for the period ended December 31, 1999. (SEC file number
000-15536, "Item 7A: Quantitative and Qualitative Disclosures About Market
Risk," pages 9 and 10 of Form 10-K.)
19
CODORUS VALLEY BANCORP, INC.
PART II - OTHER INFORMATION:
Item 1. Legal proceedings
In the opinion of the management of the Corporation, there are no
proceedings pending to which the Corporation and PeoplesBank are a party or
to which its property is subject, which, if determined adversely to the
Corporation and PeoplesBank, would be material in relation to the
Corporation's and PeoplesBank's financial condition. There are no
proceedings pending other than ordinary routine litigation incident to the
business of the Corporation and PeoplesBank. In addition, no material
proceedings are pending or are known to be threatened or contemplated
against the Corporation and PeoplesBank by government authorities.
Item 2. Changes in securities and use of proceeds - nothing to report.
Item 3. Defaults by the company on its senior securities - nothing to
report.
Item 4. Results of votes of security holders - nothing to report.
Item 5. Other information - nothing to report.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits-The following exhibit is being filed as part of this
Report:
Exhibit No. Description
27 Financial Data Schedule as of March 31, 2000.
(b) Reports on Form 8-K- none.
20
CODORUS VALLEY BANCORP, INC.
Signatures
The undersigned are authorized to sign this report on behalf of Codorus
Valley Bancorp, Inc., in accordance with the Securities Exchange Act of
1934.
Codorus Valley Bancorp, Inc.
(Registrant)
May 10, 2000 /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
May 10, 2000 /s/ Jann A. Weaver
Date Jann A. Weaver,
Assistant Treasurer & Assistant Secretary
(principal financial and accounting officer)
21