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 September 30, 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 10/24/00,
2,440,423 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...................................... 22
PART II - OTHER INFORMATION
Item 1. Legal proceedings.................................. 23
Item 2. Changes in securities and use of proceeds.......... 23
Item 3. Defaults by the company on its senior securities... 23
Item 4. Results of votes of security holders............... 23
Item 5. Other information.................................. 23
Item 6. Exhibits and reports on Form 8-K................... 23
SIGNATURES................................................. 24
EXHIBIT 27, Financial Data Schedule........................ 25
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
September December
30, 31,
(dollars in thousands) 2000 1999
Assets --------- ---------
Cash and due from banks
Interest bearing deposits with banks $ 205 $ 226
Noninterest bearing deposits and cash 5,842 10,399
Federal funds sold 2,262 568
Securities available-for-sale 45,259 46,268
Securities held-to-maturity(market value $8,471
at 9/30/00 and $8,835 at 12/31/99) 9,360 9,361
Loans 214,175 207,318
Less-allowance for loan losses (1,978) (2,023)
-------- --------
Total net loans 212,197 205,295
Premises and equipment 9,191 9,547
Interest receivable 1,712 1,617
Other assets 7,866 7,875
-------- --------
Total assets............................. $293,894 $291,156
======== ========
Liabilities
Deposits
Noninterest bearing demand $ 24,364 $ 23,427
NOW 22,711 24,376
Money market 49,189 40,449
Savings 17,164 19,007
Time CDs less than $100,000 112,235 112,251
Time CDs $100,000 and above 20,607 18,948
-------- --------
Total deposits 246,270 238,458
Federal funds purchased 0 2,657
Other short-term borrowings 9,500 13,000
Long-term borrowings 10,113 10,342
Interest payable 770 731
Other liabilities 514 596
-------- --------
Total liabilities............................ 267,167 265,784
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; 2,450,423 shares
issued and outstanding at 9/30/00 and 2,343,183
at 12/31/99. 6,137 6,019
Additional paid-in capital 12,447 11,978
Retained earnings 8,432 9,050
Accumulated other comprehensive loss (236) (523)
Less: Treasury stock, 4,500 shares at 9/30/00
and 64,544 at 12/31/99 (53) (1,152)
-------- --------
Total stockholders' equity................... 26,727 25,372
-------- --------
Total liabilities and stockholders' equity... $293,894 $291,156
======== ========
See accompanying notes.
1
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands, except per share data) 2000 1999 2000 1999
------ ------ ------ ------
Interest Income
Interest and fees from loans $4,522 $4,347 $13,558 $12,766
Interest from federal funds sold and interest
bearing deposits with banks 67 19 150 86
Interest and dividends from securities
Taxable interest income 672 636 2,049 1,844
Tax-exempt interest income 120 92 339 268
Dividend income 58 30 169 72
------ ------ ------ ------
Total interest income.............................. 5,439 5,124 16,265 15,036
Interest Expense
NOW 61 62 182 200
Money market 437 343 1,160 933
Savings 95 108 286 318
Time CDs less than $100,000 1,677 1,502 4,674 4,502
Time CDs $100,000 and above 314 242 826 721
------ ------ ------ ------
Total interest expense on deposits 2,584 2,257 7,128 6,674
Interest expense on short-term borrowings and
federal funds purchased 40 41 464 78
Interest expense on long-term borrowings 170 123 510 231
------ ------ ------ ------
Total interest expense............................ 2,794 2,421 8,102 6,983
------ ------ ------ ------
Net interest income................................ 2,645 2,703 8,163 8,053
Provision for Loan Losses 50 50 119 200
------ ------ ------ ------
Net interest income after provision for loan losses 2,595 2,653 8,044 7,853
Noninterest Income
Trust and investment services fees 156 124 493 385
Service charges on deposit accounts 164 145 497 418
Other income 232 192 754 599
Gain on sales of securities 0 182 0 225
Gains(losses), other 0 14 (3) 18
------ ------ ------ ------
Total noninterest income 552 657 1,741 1,645
Noninterest Expense
Salaries and benefits 1,212 1,156 3,591 3,414
Occupancy of premises 196 188 600 595
Furniture and equipment 248 231 775 710
Postage, stationery and supplies 78 89 286 297
Professional and legal 57 73 165 214
Marketing and advertising 39 114 224 287
Other real estate owned, net 41 48 93 126
Other 378 396 1,265 1,171
------ ------ ------ ------
Total noninterest expense 2,249 2,295 6,999 6,814
Income before income taxes 898 1,015 2,786 2,684
Provision for Income Taxes 251 293 784 762
------ ------ ------ ------
Net income..........................................$ 647 $ 722 2,002 $1,922
Net income per share ====== ====== ====== ======
Basic..............................................$0.27 $0.29 $0.83 $0.78
Diluted............................................$0.27 $0.29 $0.83 $0.78
See accompanying notes.
2
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine months ended
September 30,
2000 1999
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 2,002 $ 1,922
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 672 630
Provision for loan losses 119 200
Provision for losses on other real estate owned 22 39
Net(gain)loss on sales of other real estate owned (39) (3)
Gain on sales of securities 0 (225)
Gain on sales of loans 0 (3)
Loss(gain)on sales of premises and equipment 3 (15)
Increase in interest receivable (95) (147)
Increase in other assets (253) (794)
Increase in interest payable 39 53
(Decrease)increase in other liabilities (82) 235
Other, net (158) 10
------- -------
Net cash provided by operating activities............. 2,230 1,902
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 0 7,281
Proceeds from maturities and calls of securities
available-for-sale 10,876 12,661
Purchase of securities available-for-sale (9,435) (11,099)
Purchase of securities held-to-maturity 0 (7,404)
Net increase in loans made to customers (7,449) (16,532)
Proceeds from loan sales 358 474
Proceeds from sales of premises and equipment 36 15
Purchases of premises and equipment (355) (1,121)
Proceeds from sales of other real estate owned 363 479
------- -------
Net cash used for investing activities................ (5,606) (15,246)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 6,169 2,477
Net increase (decrease)in time deposits 1,643 (1,437)
Net (decrease) increase in short-term borrowings and
federal funds purchased (6,157) 2,266
Net (decrease) increase in long-term borrowings (229) 7,842
Dividends paid (810) (748)
Payment to repurchase common stock (121) (417)
Cash paid in lieu of fractional shares (3) (5)
------- -------
Net cash provided by financing activities............ 492 9,978
------- -------
Net decrease in cash and cash equivalents............ (2,884) (3,366)
Cash and cash equivalents at beginning of year....... 11,193 11,092
------- -------
Cash and cash equivalents at September 30, .......... $8,309 $ 7,726
======= =======
Supplemental Disclosures:
Interest payments $7,089 $6,621
Income tax payments $772 $752
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; 100,000
shares for the 2000 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 nine month period ended September 30,
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 paid
June 23, 2000. The weighted average number of shares of common stock
outstanding used was approximately 2,411,076 for the nine-month period
ended September 30, 2000 and 2,450,370 for the same period in 1999.
Reclassifications - Certain reclassifications have been made to the 1999
consolidated financial statements to conform to the 2000 presentation.
Comprehensive Income - Total comprehensive income was $893,000 for
the quarter ended September 30, 2000, compared to $556,000 for the same
period of 1999. Year to date total comprehensive income was $2,289,000 for
2000, compared to $1,136,000 for 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. A final statement is expected to be issued by the FASB in
the first quarter of 2001, 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. Subsequent to the date of this
report, PeoplesBank acquired title to real estate supporting a $1,171,000
impaired commercial loan. The loan was reclassified to other real estate
owned, pending liquidation.
September 30, December 31,
(dollars in thousands) 2000 1999
------ ------
Impaired loans $3,233 $1,892
Amount of impaired loans that have a related
allowance $3,096 $1,892
Amount of impaired loans with no related
allowance $137 $0
Allowance for impaired loans $569 $500
For the nine months ended September 30, 2000 1999
------ ------
Average investment in impaired loans $2,749 $2,149
Interest income recognized on impaired loans
(all cash-basis) $34 $50
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the nine months ended
September 30, were as follows:
2000 1999
(dollars in thousands) ------ ------
Balance-January 1, $2,023 $1,865
Provision charged to operating expense 119 200
Loans charged off (204) (42)
Recoveries 40 14
------ ------
Balance-September 30, $1,978 $2,037
====== ======
6
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 6-Long-term Borrowings
September 30, 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 2,127 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 1,961 1,993
------- -------
Total $10,113 $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 three-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
or Bank) 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.
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 September 30, 2000
compared to three months ended September 30, 1999
INCOME STATEMENT ANALYSIS
Overview
Net income for the current three-month period ended September 30, 2000, was
$647,000 or $.27 per share, compared to $722,000 or $.29 per share for the
same period in 1999. The third quarter of 1999 was unusually high because
it included $196,000 in gains from the periodic sale of assets, principally
investment securities. Operating earnings for the current quarter, which
exclude periodic gains and losses from asset sales, increased approximately
$54,000 or 9 percent above the same period in 1999. While net interest
income decreased due to higher funding costs, noninterest income increased
in all categories except gains from asset sales, and noninterest expense
and federal income taxes decreased from the same quarter in 1999.
An explanation of the factors and trends that caused changes between the
two periods, by earnings category, follows.
Net interest income
Net interest income for the current three-month period was $2,645,000, or
$58,000 below the $2,703,000 recorded for the third quarter of 1999 due
primarily to increased funding costs. Total interest earning assets
averaged $257 million with a weighted average tax equivalent yield of 8.24
percent for the third quarter of 2000 compared to $256 million and 7.85
percent, respectively, for the same quarter of 1999. Improved yields, due
to rising market interest rates, caused interest income to increase above
the prior year. However, this increase was more than offset by the increase
in funding costs. Interest rate sensitive liabilities averaged $235
million with a weighted average rate of 4.72 percent for the third quarter
of 2000 compared to $231 million and 4.14 percent, respectively, for the
same period of 1999.
During June and July of 2000, management ran a two-year CD promotion, based
on a competitive rate, to generate funds to permanently finance loan
growth, which was being temporarily funded by overnight borrowings. Also in
June, PeoplesBank began offering its money market deposit account to
individuals and lowered the minimum balance from $50,000 to $20,000. Prior
to June, this product was marketed only to businesses. Both strategies
generated new deposits, provided cross-sell opportunities, helped to retain
existing deposits, and increased funding costs.
On September 29, 2000, PeoplesBank purchased, in the form of a loan
participation, a portfolio of commercial loans for $14.6 million. The
purchase had the effect of replacing commercial loan volume that was lost
9
CODORUS VALLEY BANCORP, INC.
during the year due to anticipated early loan payoffs. The loan purchase
transaction is described in the balance sheet review section of this report
under the heading "Investment securities, loans & deposits."
Generally, net interest income continues to be constrained by a
flat/inverse U.S. treasury yield curve, competitive price pressures and
higher funding costs.
Provision for loan losses
A $50,000 provision expense for possible loan losses was recorded in the
third quarter of 2000 to support a higher level of impaired loans and net
charge-offs. Comparatively, a $50,000 provision was recorded for the same
period of 1999 to support growth in the commercial loan portfolio.
Noninterest income
Total noninterest income for the current three-month period was $552,000, a
decrease of $105,000 or 16 percent below the third quarter of 1999. The
third quarter of 1999 was unusually high because it included $196,000 in
gains from the periodic sale of assets, principally investment securities.
To achieve comparability in noninterest income from normal operations,
infrequent gains and losses from the sale of assets should be excluded. On
an adjusted basis, total noninterest income for the third quarter of 2000
exceeded the third quarter of 1999 by $91,000 or 20 percent. Explanations
for the increase in noninterest income can be found under the subheading
noninterest income within the nine-month analysis section of this report.
Noninterest expense
Total noninterest expense for the current three-month period was
$2,249,000,
a decrease of $46,000 or 2 percent below the third quarter of 1999. The
decrease in noninterest expense primarily reflects a decrease in marketing
and advertising expense which was due to the timing of services provided.
Explanations for changes in selected expense categories can be found under
the subheading noninterest expense within the nine-month analysis section
of this report.
Capital investment in technology
In July, PeoplesBank expanded its local area network (LAN) to include all
eight financial centers and the credit services department. Email, internet
access, centralized file backup, file sharing and other benefits of a LAN
environment are now available bankwide. Total costs for the LAN expansion
10
CODORUS VALLEY BANCORP, INC.
project were approximately $90,000 and are being depreciated over a three-
year expected useful life.
Income taxes
The provision for federal income taxes was $251,000 for the current three-
month period, compared to $293,000 for the third quarter of 1999. The
decrease in federal taxes was due to a decrease in taxable income.
Nine months ended September 30, 2000
compared to nine months ended September 30, 1999
INCOME STATEMENT ANALYSIS
Overview
Net income for the current nine-month period was $2,002,000 or $.83 per
share, compared to $1,922,000 or $0.78 per share, for the same period in
1999. Operating earnings for the current nine-month period, which exclude
periodic gains and losses from asset sales, increased approximately
$242,000 or 14 percent above the same period in 1999. The increase in
current period net income was caused by a $110,000 increase in net interest
income, a $96,000 increase in noninterest income, and a $81,000 decrease in
the provision for loan losses. The favorable effect of these three income
statement categories more than offset a $185,000 increase in noninterest
operating expense. For the nine-month period (annualized) of 2000, the
return on average assets was approximately 0.93 percent, the same as 1999.
For the same periods, the return on average equity was approximately 10.3
percent for 2000 compared to 9.8 percent for 1999.
On September 30, 2000, total assets were $294 million, an increase of
approximately $3 million or 1 percent above December 31, 1999. The increase
in total assets occurred primarily in the consumer loan portfolio. Book
value per share was $10.90 on September 30, 2000, compared to $10.61 on
December 31, 1999. As of September 30, 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.
Management received regulatory approval to open a full service financial
center in Hanover, Pennsylvania. Details can be found in the "Financial
center expansion" section of this report.
11
CODORUS VALLEY BANCORP, INC.
In accordance with its strategic technology plan, PeoplesBank continues to
invest in technology to provide better, faster service to its clients, and
to improve productivity. Technology project accomplishments and plans can
be found in the "Capital investment in technology" section of this report.
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 nine-month period was $8,163,000, an
increase of $110,000 or 1 percent above the same period in 1999. The
increase in net interest income was due primarily to a greater volume of
interest earning assets, which more than offset a decrease in the net yield
on earning assets. Total interest earning assets averaged $259 million for
the first nine months of 2000 compared to $250 million for the first nine
months of 1999. The net yield on earning assets averaged 4.26 percent for
the first nine months of 2000 compared to 4.36 percent for the same period
of 1999. Growth in the average volume of interest earning assets occurred
primarily in commercial and consumer loans, and investment securities. Net
interest income continues to be constrained by a flat/inverse U.S. treasury
yield curve, competitive price pressures and higher funding costs.
Total deposits averaged $240 million with a weighted average rate of 3.96
percent for the first nine months of 2000 compared to $242 million and 3.68
percent, respectively, for the same period of 1999. The average balances of
noninterest and interest bearing demand deposits increased 3.7 percent
above 1999, while savings deposits declined 11 percent and CD deposits
declined 2 percent. Deposit funding costs are expected to increase in the
period ahead based on the presumption that the current level of interest
rates will prevail and competition will remain strong. 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 $20 million with a weighted average cost of 6.33
percent for the first nine months of 2000 compared to $7 million and 5.96
percent, respectively, for the same period of 1999. The increase in
borrowings compensated for the lack of deposit growth.
Provision for loan losses
A $119,000 provision expense for possible loan losses was recorded for the
current nine-month period to support a higher level of impaired loans and
net charge-offs. Comparatively, a $200,000 provision was recorded for the
same period of 1999 to support growth in the commercial loan portfolio.
12
CODORUS VALLEY BANCORP, INC.
Noninterest income
Total noninterest income for the current nine-month period was $1,741,000,
an increase of $96,000 or 6 percent above the same period in 1999. Income
increased in all categories except for gains from asset sales. The prior
year included $246,000 more in gains from the periodic sale of assets,
principally investment securities. To achieve comparability in noninterest
income from normal operations, infrequent gains and losses from the sale of
assets should be excluded. On an adjusted basis, total noninterest income
for the current nine-month period exceeded the same period of 1999 by
$342,000 or 24 percent.
Trust and investment services fees increased $108,000 or 28 percent due
primarily to a price increase effective July 1, 1999. Service charges on
deposit accounts increased $79,000 or 19 percent due primarily to selected
price increases. Other income increased $155,000 or 26 percent due to fee
income from PeoplesBank subsidiaries, principally SYC Insurance Services,
Inc., (SYC Insurance) which began operations in January 2000.
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 Bank's fee-based 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. To date, sales and fee income have 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 arrangement. The initial product offering was a
fixed rate annuity. Mutual fund products will be promoted in October of
this year and variable rate annuities in early 2001. Licensed PeoplesBank
employees, registered as representatives of the third-party product
provider, sell these 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 nine-month period was $6,999,000,
an increase of $185,000 or 3 percent above the same period in 1999. The
increase in noninterest expense primarily reflects increases in salaries
and benefits, equipment and other operating expense. The $177,000 or 5
percent increase in salary and benefit expense reflects planned staff
additions, merit raises, and higher replacement costs. The $65,000 or 9
percent increase in equipment expense reflects increased investment in
technology. The $94,000
13
CODORUS VALLEY BANCORP, INC.
or 8 percent increase in other operating expense was caused by a $49,000
increase in problem loan carrying costs due to a higher level of impaired
loans, and a one-time $30,000 loss associated with an error made by a
former employee. The $49,000 or 23 percent decrease in professional and
legal expense reflects termination of a temporary investment management
arrangement by the trust and investment services division of PeoplesBank.
The $63,000 or 22 percent decrease in marketing and advertising expense is
partly attributable to the timing of expenditures. Advertising expense is
expected to increase in the fourth quarter of this year due to costs
associated with promoting the Bank's image. Noninterest expense is expected
to increase in the period ahead due to normal business growth and
implementation of strategic initiatives such as staff additions, franchise
expansion and technology investments.
Financial center expansion
PeoplesBank received regulatory approval to establish a full-service
financial center in Penn Township, Hanover, Pennsylvania. Plans include
leasing a 1,850 square foot office to be located adjacent to a soon-to-be
constructed Rutter's Farm Store. PeoplesBank plans to have this financial
center operational in the first quarter of 2001.
Capital investment in technology
In January 2000, PeoplesBank introduced internet banking with on-line bill
payment available 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, 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.
In July 2000, PeoplesBank expanded its local area network to include all
eight financial centers. Project detail is provided in the third quarter
review under the "Capital investment in technology" section of this report.
For the remainder of 2000, PeoplesBank will focus on two technology
initiatives pursuant to the Corporation's strategic technology plan. One
key initiative is to develop a new internet website that is interactive,
flexible
14
CODORUS VALLEY BANCORP,INC.
and database driven. The second initiative is to determine the feasibility
of investing in software that will interface with the Bank's imaging and
internet banking systems. This would enable clients who use the Bank's
popular internet banking system to access images of their checks and
statements online.
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 June 30, 2000, PeoplesBank expended approximately
$165,000 on this program ($38,000 in 2000 to date; $32,000 in 1999; and
$95,000 in 1998).
Income taxes
The provision for federal income taxes was $784,000 for the current nine-
month period, compared to $762,000 for the same period in 1999. The
increase in federal taxes was due to an increase in taxable income.
BALANCE SHEET REVIEW
Investment securities, loans & deposits
On September 30, 2000, total loans were 3 percent above December 31, 1999,
primarily in the consumer loan category. On September 29, 2000, PeoplesBank
purchased, in the form of a loan participation, a portfolio of commercial
loans for $14.6 million on a nonrecourse basis, at par value, directly from
another commercial bank. The portfolio was comprised of twelve loans,
primarily fixed rate instruments, with a weighted average yield of 8.79
percent and a weighted average remaining term of four years. The purchase
had the effect of replacing commercial loan volume that was lost during the
year from anticipated early payoffs. The loan purchase was temporarily
funded by overnight borrowings from the Federal Home Loan Bank of
Pittsburgh.
Total deposits increased $7.8 million or 3 percent since year-end 1999.
Most of the increase occurred in money market deposits. In June, as
described in the three-month section of this report, money market deposits
were offered to individuals (prior to June they were offered only to
businesses) and the minimum balance was lowered significantly.
15
CODORUS VALLEY BANCORP,INC.
Short-Term and Long-Term Borrowings
In order to meet short-term funding needs PeoplesBank may borrow from
larger correspondent banks in the form of funds purchased. PeoplesBank also
uses 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 $58 million, on
June 30, 2000, the most recent available date. On September 30, 2000,
PeoplesBank had approximately $18 million in total borrowings, comprised of
short-term and long-term borrowings, from the FHLBP.
On September 30, long-term borrowings were $10.1 million, representing a
slight decline from year-end 1999. In the period ahead, long-term
borrowings may increase as a possible funding source for the recent
commercial loan purchase. A listing of long-term borrowing agreements and
terms 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 $26.7 million on September 30, 2000, an increase
of $1.3 million above December 31, 1999. The increase was caused primarily
by profitable operations. Book value per share, as adjusted, was $10.90 on
September 30, 2000, compared to $10.61 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 September 30, 2000, and December 31, 1999.
Capital Ratios
Codorus Valley
Consolidated PeoplesBank
9/30/00 12/31/99 9/30/00 12/31/99
Tier I risk-based capital 11.3 11.2 9.5 9.2
Total risk-based capital 12.1 12.1 10.4 10.1
Tier I leverage 9.4 9.1 7.9 7.4
Capital investments made in earlier periods, as described in previous SEC
16
CODORUS VALLEY BANCORP,INC.
filings, and future investments will impact current and future earnings and
capital growth. Possible future investments may be made for expanding the
Bank's 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 October 10, 2000, the board declared a quarterly cash dividend of $.12
cents per share, payable on or before November 14, 2000, to shareholders of
record October 24, 2000. This follows a $.12 cents per share cash dividend
paid in August, and a $.11 cents per share cash dividend paid in May and
February 2000, respectively. Additionally, a 5 percent stock dividend was
paid in June 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 September 30, 2000, Codorus Valley
purchased and settled 84,822 shares of its common stock for approximately
$1,474,000. Of this amount, 80,322 were reissued to partially satisfy the
payment of stock dividends. The remaining 4,500 shares are retained as
treasury stock. On October 4, 2000, Codorus Valley purchased 10,000 shares
of its stock for $110,000.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends paid in June 2000, was approximately 2,411,076 shares
for the nine-month period ended September 30, 2000, and 2,450,370 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 explain the changes
within each classification for September 30, 2000, compared to December 31,
1999.
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 recognizes interest income on a
cash basis for impaired loans. On September 30, 2000, the impaired loan
portfolio was $3,233,000, reflecting a $1,341,000 or 71 percent increase
since year-end
17
CODORUS VALLEY BANCORP, INC.
1999. The increase was caused primarily by the addition of a $1,171,000
commercial loan during the second quarter which appears adequately
collateralized. Subsequent to the date of this report, PeoplesBank acquired
title to the collateral for this account and reclassified it to other real
estate owned, pending liquidation. On September 30, 2000, the impaired loan
portfolio was comprised of twenty-eight unrelated accounts, primarily
commercial loan relationships, ranging in size from $5,000 to $1,171,000.
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 $1,277,000 on
September 30, 2000, representing a $108,000 or 8 percent decrease from
December, 31, 1999. The decrease was due to the liquidation of several
acquired assets. On September 30, 2000, the OREO portfolio included real
estate assets from five former commercial loan relationships. The highest
value property has a carrying value of $1,010,000, which accounts for 78
percent of the OREO portfolio. Management believes that the net realizable
value of this property is greater than its carrying value based on an
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
September 30, 2000, the OREO allowance was $20,000. For the first nine
months of 2000, a $22,000 loss provision was recorded to reflect a loss on
the decline in fair value. Comparatively, a $39,000 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 September 30, 2000, and December 31, 1999, the volume of loans past due
90 days or more and still accruing interest was insignificant. Generally,
loans in the past due category are adequately collateralized and in the
process of collection.
On September 30, 2000, management was monitoring loans of approximately
$9.1 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. Comparatively, management was
monitoring loans of approximately $7.5 million on December 31, 1999.
18
CODORUS VALLEY BANCORP, INC.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses depicts a $1,978,000
allowance on June 30, 2000, which was 0.92 percent of total loans. The
current period allowance declined below 1999 due to an increase in loan
charge-offs and a decrease in the loss provision. Of the total net charge-
offs during the current period, $107,000 was attributable to one commercial
account. The provision expense for the current nine-month period was
$119,000, compared to $200,000 for the same period in 1999. Based on a
recent evaluation of potential loan losses in the current portfolio,
management believes that the allowance is adequate to support losses
inherent in the loan portfolio on September 30, 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 other sources, and
deposit growth.
The loan-to-deposit ratio was approximately 87 percent on September 30,
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 the 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.
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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. 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 material effect on Codorus
Valley's operations. However, the act may result in increased competition
from larger financial services companies, many of which 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 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.
Other information
Barry A. Keller, a director of Codorus Valley and Chairman of the Board of
Directors of PeoplesBank, announced his retirement, effective August 22,
2000. Mr. Keller concluded a distinguished career that began as director of
Peoples Bank of Glen Rock in 1977.
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CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
September 30, December 31,
(dollars in thousands) 2000 1999
------ ------
Impaired loans (1) $3,233 $1,892
Other real estate owned, net(2) 1,277 1,385
------ ------
Total nonperforming assets $4,510 $3,277
====== ======
Accruing loans that are contractually past
due 90 days or more as to principal or
interest $60 $13
Ratios:
Impaired loans as a % of
total period-end loans 1.51% .91%
Nonperforming assets as a % of total
period-end loans and other real estate
owned, net of reserve 2.09% 1.57%
Nonperforming assets as a % of
total period-end stockholders' equity 16.87% 12.92%
Allowance for loan losses as a
multiple of impaired loans .6x 1.1x
Interest not recognized on impaired loans at period-end: (3)
- ------------------------------------------------------------
Contractual interest due $350 $240
Interest revenue recognized 34 49
---- ----
Interest not recognized in operations $316 $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.
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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 119 200
Loans charged off:
Commercial 160 2
Real estate-mortgage 15 0
Consumer 29 40
------ ------
Total loans charged off 204 42
Recoveries:
Commercial 25 10
Real estate-mortgage 0 0
Consumer 15 4
------ ------
Total recoveries 40 14
------ ------
Net charge-offs(recoveries) 164 28
Balance-September 30, $1,978 $2,037
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans .11% .02%
Allowance for loan losses to total loans
at period-end .92% .99%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 60.1% 82.4%
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the market risk strategy as discussed
at "Item 7A: Quantitative and Qualitative Disclosures About Market Risk,"
pages 9 and 10 of Codorus Valley's annual Form 10K for the year ended
December 31, 1999. (SEC file number 000-15536, of Form 10-K.)
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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 or its subsidiaries are a
party or to which their property is subject, which, if determined adversely
to the Corporation or its subsidiaries, would be material in relation to
the Corporation's or its subsidiaries financial condition. There are no
proceedings pending other than ordinary routine litigation incident to the
business of the Corporation or its subsidiaries. In addition, no material
proceedings are pending or are known to be threatened or contemplated
against the Corporation or its subsidiaries 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 September 30, 2000.
(b) Reports on Form 8-K-
None.
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CODORUS VALLEY BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly authorized this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Codorus Valley Bancorp, Inc.
(Registrant)
November 10, 2000 /s/ Larry J. Miller
Date ---------------------
Larry J. Miller,
President & CEO
(principal executive officer)
November 10, 2000 /s/ Jann A. Weaver
Date ---------------------
Jann A. Weaver,
Treasurer & Assistant Secretary
(principal financial and accounting officer)
24