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 June 30, 1999
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.
2,403,075 shares of $2.50 (par value) common stock were outstanding
as of 7-27-99 .
CODORUS VALLEY BANCORP, INC.
10Q INDEX
Page
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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.............. 7
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.................................. 24
Item 6. Exhibits and reports on Form 8-K................... 24
SIGNATURES................................................. 25
EXHIBIT 27, Financial Data Schedule........................ 26
PART I - FINANCIAL INFORMATION: Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
June December
30, 31,
(dollars in thousands) 1999 1998
Assets --------- ---------
Cash and due from banks
Interest bearing deposits with banks $ 231 $ 203
Noninterest bearing deposits and cash 6,845 10,889
Federal funds sold 1,949 0
Securities available for sale 48,560 56,225
Loans 203,507 189,111
Less-allowance for loan losses (2,021) (1,865)
-------- --------
Total net loans 201,486 187,246
Premises and equipment 9,358 9,345
Interest receivable 1,505 1,588
Other assets 8,078 7,586
-------- --------
Total assets.................................$278,012 $273,082
======== ========
Liabilities
Deposits
Noninterest bearing demand $ 24,195 $ 25,047
NOW 24,256 26,936
Insured money fund and money market 42,079 36,577
Savings 21,441 20,655
Time CDs less than $100,000 113,372 113,688
Time CDs $100,000 and above 18,336 19,010
-------- --------
Total deposits 243,679 241,913
Federal funds purchased 0 1,234
Other short-term borrowings 3,800 0
Long-term borrowings 3,475 2,571
Interest payable 751 770
Other liabilities 400 536
-------- --------
Total liabilities............................ 252,105 247,024
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; 2,405,484 shares
issued and outstanding at 6/30/99; 2,303,987
at 12/31/98 6,020 5,760
Additional paid-in capital 11,980 10,279
Retained earnings 8,112 9,561
Accumulated other comprehensive income from
unrealized losses on securities, net of tax (162) 458
Less: Treasury stock, 2,343 common shares (43) 0
-------- --------
Total stockholders' equity................... 25,907 26,058
Total liabilities and stockholders' equity...$278,012 $273,082
======== ========
See accompanying notes. 1
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three months ended Six months ended
June 30, June 30,
(dollars in thousands, except per share data) 1999 1998 1999 1998
------ ------ ------ ------
Interest Income
Interest and fees from loans $4,290 $4,269 $8,419 $8,559
Interest from federal funds sold and interest
bearing deposits with banks 30 118 67 227
Interest and dividends from securities
Taxable interest income 583 598 1,208 1,124
Tax-exempt interest income 94 74 176 132
Dividend income 23 14 42 29
------ ------ ------ ------
Total interest income.............................. 5,020 5,073 9,912 10,071
Interest Expense
NOW 62 87 138 171
Insured money fund and money market 309 238 590 451
Savings 107 119 210 232
Time CDs less than $100,000 1,498 1,541 3,000 3,082
Time CDs $100,000 and above 236 280 479 575
------ ------ ------ ------
Total interest expense on deposits 2,212 2,265 4,417 4,511
Interest expense on short-term borrowings and
federal funds purchased 24 0 37 0
Interest expense on long-term borrowings 55 47 108 94
------ ------ ------ ------
Total interest expense............................ 2,291 2,312 4,562 4,605
------ ------ ------ ------
Net interest income................................ 2,729 2,761 5,350 5,466
Provision for Loan Losses 75 225 150 300
------ ------ ------ ------
Net interest income after provision for loan losses 2,654 2,536 5,200 5,166
Noninterest Income
Trust and investment services fees 137 151 261 284
Service charges on deposit accounts 146 123 273 231
Other income 208 82 409 149
Gain on sales of loans 2 104 2 104
Gain on sales of securities 6 0 43 122
------ ------ ------ ------
Total noninterest income 499 460 988 890
Noninterest Expense
Salaries and benefits 1,178 1,007 2,258 1,989
Occupancy of premises 199 195 407 402
Furniture and equipment 251 239 479 472
Postage, stationery and supplies 121 112 208 201
Professional and legal 68 57 141 105
Marketing and advertising 115 79 173 131
Acquired real estate, net 20 12 78 31
Other 372 358 775 771
------ ------ ------ ------
Total noninterest expense 2,324 2,059 4,519 4,102
Income before income taxes 829 937 1,669 1,954
Provision for Income Taxes 230 341 469 677
------ ------ ------ ------
Net income..........................................$ 599 $ 596 $1,200 $1,277
Net income per share ====== ====== ====== ======
Basic..............................................$0.25 $0.25 $0.50 $0.53
Diluted............................................$0.25 $0.25 $0.50 $0.53
See accompanying notes.
2
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six months ended
June 30,
1999 1998
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $1,200 $ 1,277
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 413 416
Provision for loan losses 150 300
Provision for losses on assets acquired in foreclosure 15 22
Net loss on sales of assets acquired in foreclosure 4 1
Gain on sales of loans (2) (104)
Gain on sales of securities (43) (122)
Decrease (increase) in interest receivable 83 (22)
(Increase) decrease in other assets (432) 128
Decrease in interest payable (19) (27)
Decrease in other liabilities (23) (441)
Other, net 1 (82)
------- -------
Net cash provided by operating activities.............1,347 1,346
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 6,055 6,584
Proceeds from maturities and calls of securities
available for sale 10,319 6,996
Purchase of securities available for sale (9,689) (22,368)
Net (increase)decrease in loans made to customers (14,838) (51)
Proceeds from loan sales 306 3,384
Purchases of premises and equipment (426) (197)
Proceeds from sale of assets acquired in foreclosure 354 286
------- -------
Net cash used in investing activities................ (7,919) (5,366)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 2,756 7,894
Net decrease in time deposits (990) (3,531)
Net increase in short-term borrowings and
federal funds purchased 2,566 0
Net increase (decrease) in long-term borrowings 904 (114)
Dividends paid (483) (439)
Payment to repurchase common stock (243) 0
Cash paid in lieu of fractional shares (5) (6)
------- -------
Net cash provided by financing activities............ 4,505 3,804
------- -------
Net decrease in cash and cash equivalents............ (2,067) (216)
Cash and cash equivalents at beginning of year....... 11,092 13,194
------- -------
Cash and cash equivalents at June 30,................$ 9,025 $12,978
======= =======
Supplemental Disclosures:
Interest payments $4,436 $4,538
Income tax payments $592 $662
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 1998 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 134,009 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan; 75,711 shares for the 1996 Stock Incentive Plan; 105,000
shares for the 1998 Independent Directors' Stock Option Plan; and those
shares reserved for the Shareholders' Rights Plan.
The results of operations for the six month period ended June 30,
1999 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, including the 5 percent stock
dividend paid June 11, 1999. The weighted average number of shares of
common stock outstanding used was approximately 2,404,182 for the six
month period ended June 30, 1999 and 2,407,827 for the same period
in 1998.
Reclassifications - Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the 1999 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
4
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 2 - Summary of Significant Accounting Policies, continued
unrealized gains or losses on available for sale securities, to be
included in other comprehensive income. Total comprehensive income was
$194,000 for the quarter ended June 30, 1999, compared to $546,000 for
the same period of 1998. Year to date total comprehensive income was
$580,000 for 1999, compared to $1,112,000 for 1998.
Note 3-Current Accounting Developments
In December 1998, the Financial Accounting Standards Board (FASB) issued
an Invitation to Comment Document entitled "Methods of Accounting for
Business Combinations: Recommendations of the G4+1 for Achieving
Convergence." Subsequently, in April 1999, the FASB tentatively agreed
to eliminate the pooling-of-interests method of accounting for business
combinations. In reaching its conclusion, the Board commented that the
use of two methods, purchase and pooling-of-interests, makes it
difficult for users to compare the financial statements of companies
engaged in business combinations, and that the pooling method is
inconsistent with the general concept of fair value associated with
acquisitions. Accordingly, the Board concluded that there should be a
single method of accounting for all business combinations, and that
method is the purchase method. As a general rule, the purchase method
establishes a new accounting basis for the assets and liabilities
acquired based on fair value and recognizes goodwill (positive or
negative). Goodwill, the difference between the purchase price and total
value of the assets and liabilities obtained, is an intangible asset
that must be amortized over future periods. Regarding transition, the
Board tentatively concluded that all business combinations reported
before final issuance of a new standard, as well as all combinations in
process at the time the new standard is issued should be accounted for
under APB 16 as a pooling, if the pooling criteria within that standard
are met. The FASB expects to issue an Exposure Draft during 1999, but
has not yet indicated when it expects to issue the final standard.
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.
June 30, December 31,
(dollars in thousands) 1999 1998
------ ------
Impaired loans $2,310 $1,706
Amount of impaired loans that
have a related allowance $2,310 $1,706
Amount of impaired loans with
no related allowance $0 $0
Allowance for impaired loans $528 $456
For the six month period ended
June 30,
1999 1998
------ ------
Average investment in impaired loans $2,045 $2,650
Interest income recognized on
impaired loans (all cash-basis) $30 $46
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the six month period
ended June 30, were as follows:
(dollars in thousands) 1999 1998
------ ------
Balance-January 1, $1,865 $2,098
Provision charged to operating expense 150 300
Loans charged off (4) (488)
Recoveries 10 12
------ ------
Balance-June 30, $2,021 $1,922
====== ======
6
CODORUS VALLEY BANCORP, INC.
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Below is 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 (CVLY or Corporation), and its wholly-owned
subsidiary, PEOPLESBANK, A Codorus Valley Company (PEOPLESBANK). CVLY'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 CVLY 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 are incorporated by reference, could affect the future
financial results of CVLY 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.
CVLY 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 CVLY files periodically with the
Securities and Exchange Commission.
Three months ended June 30, 1999
compared to three months ended June 30, 1998
INCOME STATEMENT ANALYSIS
Overview
Net income for the current three month period was $599,000, or $.25 per
share compared to $596,000 or $.25 per share, for the same period in 1998.
An increase in noninterest income and lower provisions for loan losses and
taxes
7
CODORUS VALLEY BANCORP, INC.
for the current quarter were largely offset by an increase in noninterest
expense. The current quarter included $2,000 in gains from the periodic
sale of loans compared to $104,000 for the second quarter in 1998. 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 $2,729,000
representing a $32,000 or 1.2 percent decrease from the second quarter of
1998. Generally, the decline in net interest income was attributable to
lower yields on loans and investments due to competitive pressures, and
declining market interest rates during 1998 and early 1999.
Total earning assets averaged $250 million with a weighted average tax
equivalent yield of 7.78 percent for the second quarter of 1999 compared to
$236 million and 8.29 percent, respectively, for the second quarter of
1998. Growth in the average volume of interest earning assets occurred
primarily in the commercial loan portfolio.
In June 1999, CVLY and PEOPLESBANK began to execute a $10 million leverage
growth strategy which involves investment in long term trust preferred
securities funded by borrowings from third parties. The purpose of the
leverage strategy is to generate additional net interest income to help
offset financial opportunity costs associated with the long term investment
in the Codorus Valley Corporate Center facility. The leverage strategy is
expected to be completed in the third quarter of 1999.
Total deposits averaged $243 million with a weighted average rate of 3.64
percent for the second quarter of 1999 compared to $226 million and 4.01
percent, respectively, for the second quarter of 1998. Relatively low cost
demand and interest bearing demand core deposits increased from last year
while CDs remained stable.
Provision for loan losses
A $75,000 provision expense for possible loan losses was recorded for the
current period to support growth in the commercial loan portfolio.
Comparatively, a $225,000 provision was recorded for the second quarter of
1998 to support a higher level of net loan charge-offs.
Noninterest income
Total noninterest income for the current three month period was $499,000,
an increase of $39,000 or 8.5 percent above the same period in 1998. The
overall increase was due primarily to a 154 percent increase in the other
income
8
CODORUS VALLEY BANCORP, INC.
category which reflects increases in the cash surrender value of bank owned
life insurance (boli), ATM fees and rental income. Service charge fees on
deposit accounts also increased approximately 19 percent above the second
quarter of 1998 due to a larger deposit base. During the current period,
PEOPLESBANK recorded $2,000 in gains from the periodic sale of loans
compared to $104,000 for the second quarter of 1998.
Commercial equipment leasing
In May 1999, PEOPLESBANK entered into a third party commercial leasing
arrangement in order to provide the Bank with an additional source of
income, and expand its menu of commercial services. Under the arrangement,
PEOPLESBANK will fund leases that meet its credit risk standards with
assignment of the lease and a security interest in the leased equipment as
collateral. Third party responsibilities include entering into the lease
agreement with the lessee, equipment purchase and disposition, marketing
and administrative support, and providing PEOPLESBANK with commercial
leasing expertise. Start-up costs were approximately $10,000 and ongoing
expenses associated with the commercial leasing arrangement are expected to
be insignificant.
Noninterest expense
Total noninterest expense for the current three month period was $2,324,000
or 12.9 percent above the second quarter of 1998. The increase in
noninterest expense primarily reflects increases within the salaries and
benefits, and marketing expense categories as described in the year-to-date
section of this report.
Capital investment in technology
In late April 1999, PEOPLESBANK completed the installation of an item
processing system with check imaging capability. This mission critical
system replaced an aged, fully depreciated, item processing system that was
not Y2K compliant. The new system, which is more efficient and has more
processing capacity, cost approximately $650,000 ($300,000 for item
processing and $350,000 for check imaging) and was funded internally.
Annual depreciation expense on the new system will approximate $110,000
based on an expected useful life of five to seven years. Following
installation and testing, the system was introduced to PEOPLESBANK clients
effective July 1, 1999.
9
CODORUS VALLEY BANCORP, INC.
Income taxes
The provision for federal income taxes was $230,000 for the current three
month period, compared to $341,000 for the same period in 1998. The
decrease in the tax provision for 1999 was the result of a lower level of
income before income taxes and a higher level of tax-exempt income.
Six months ended June 30, 1999
compared to six months ended June 30, 1998
INCOME STATEMENT ANALYSIS
Overview
Net income for the current six month period was $1,200,000 or $.50 per share,
compared to $1,277,000 or $0.53 per share, for the same period in 1998.
All per share amounts were adjusted for stock dividends. Net income for the
current period was less than 1998 due primarily to a reduction in net
interest income attributable to competitive pressures, and higher staffing
costs. Additionally, 1998 was positively impacted by capital gains from the
periodic sale of assets. For the six month period (annualized) of 1999, the
return on average assets was approximately 0.88 percent compared to 1 percent
for 1998. For the same periods, the return on average equity was
approximately 9.2 percent for 1999 compared to 10.2 percent for 1998.
On June 30, 1999, total assets were approximately $278 million, an increase
of $18.5 million or 7 percent above June 30, 1998. Book value per share, as
adjusted, was $10.77 on June 30, 1999, compared to $10.42 on June 30, 1998.
As of June 30, 1999, management believes that CVLY's capital 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 six month period was $5,350,000, a
decrease of $116,000 or approximately 2 percent less than the same period in
1998. Generally, the decline in net interest income was attributable to
lower yields on interest earning assets which reflected declining market
interest rates throughout 1998 and early 1999, and competitive price
pressures. The yield on the commercial loan portfolio declined in part from
an unusually large level of early loan payoffs of approximately $8.5 million
10
CODORUS VALLEY BANCORP, INC.
from business clients who sold their businesses or other assets during the
prior period. An additional factor which contributed to the decline in net
interest income was a $5 million investment in bank owned life insurance
(boli) during the third quarter of 1998. Tax exempt income generated from the
boli investment is recorded as noninterest income.
Total interest earning assets averaged $247 million with a weighted average
tax equivalent yield of 7.89 percent for the first six months of 1999
compared to $235 million and 8.43 percent, respectively, for the first six
months of 1998. Growth in the average volume of interest earning assets
occurred primarily in the commercial loan and investment securities
portfolios.
Total deposits averaged $241 million with a weighted average rate of 3.70
percent for the first six months of 1999 compared to $225 million and 4.05
percent, respectively, for the same period of 1998. The average balances of
demand and interest bearing demand deposits increased 23 percent above 1998,
while savings deposits increased 2 percent and CD deposits were stable. Due
to the growth in relatively low cost core deposits and the need to manage net
interest income compression, PEOPLESBANK has not priced CDs aggressively.
Provision for loan losses
A $150,000 provision expense for possible loan losses was recorded for the
current period to support growth in the commercial loan portfolio.
Comparatively, a $300,000 provision was recorded for the same period of 1998
to support a higher level of net loan charge-offs.
Noninterest income
Total noninterest income for the current six month period was $988,000, an
increase of $98,000 or 11 percent above the same period in 1998. The overall
increase was due primarily to a 174 percent increase in the other income
category which reflects increases in the cash surrender value of bank owned
life insurance (boli), ATM fees and rental income. Service charge fees on
deposit accounts also increased 18 percent above the first six months of 1998
due to a larger deposit base. During the current period, PEOPLESBANK recorded
$45,000 in capital gains from the periodic sale of assets compared to
$226,000 for the same period in 1998.
For 1999, noninterest income is expected to exceed the 1998 level, with the
possible exception of capital gains from asset sales. Boli investment income
and rental income from leasing space in CVLY and PEOPLESBANK facilities is
projected to make a larger contribution to noninterest income. Additionally,
fee income is expected to be generated from the PEOPLESBANK subsidiary, SYC
Settlement Services, Inc. described in the following section.
11
CODORUS VALLEY BANCORP, INC.
Sales of insurance and related investment products
In January 1999, PEOPLESBANK subsidiary, SYC Settlement Services, Inc. began
operations. This subsidiary was created, and operates at minimal cost. SYC
Settlement Services generates fee income for PEOPLESBANK by providing real
estate title insurance and settlement services. PEOPLESBANK is currently
evaluating its options regarding the sale of other insurance and related
investment products.
Noninterest expense
Total noninterest expense for the current six month period was $4,519,000,
an increase of $417,000 or approximately 10 percent above the same period in
1998. The increase in noninterest expense primarily reflects increases in
salaries and benefits, professional and legal, marketing and advertising, and
acquired real estate expenses. Salaries and benefits expense increased
$269,000 or 13.5 percent above 1998 due primarily to merit raises, higher
replacement and recruiting expenses, and increases in the cost of health and
retirement benefit plans. Additionally, the prior period included a one-time
$58,000 expense reduction associated with termination of PEOPLESBANK's
defined benefits retirement plan. Professional and legal expense increased
$36,000 or approximately 34 percent due primarily to consulting fees
associated with a third party investment management arrangement for selected
accounts within the trust and investment services division, and technology
planning. Marketing and advertising expense increased $42,000 or
approximately 32 percent due to a larger marketing budget. Acquired real
estate expense increased $47,000 or 152 percent due to greater carrying costs
and deterioration in the market value of selected properties. Noninterest
expense is expected to increase in 1999 due to planned strategic initiatives,
including capital investment in technology, Y2K compliance and normal
business growth.
Capital investment in technology
In accordance with CVLY's strategic technology plan, PEOPLESBANK has several
technology projects underway that are briefly described below and in the
capital investment section for the current quarter.
In order to improve staff productivity through technology, PEOPLESBANK is
implementing a local area network (LAN). A LAN infrastructure will enable
selected employees to access e-mail, the Internet, and the latest desk-top
application systems. It also permits centralized file sharing, storage and
backup. The initial capital investment, exclusive of user training expense,
is expected to approximate $100,000 and will be depreciated over a three year
expected useful life. Implementation of the LAN is expected to be completed
in August 1999, with user training to follow.
12
CODORUS VALLEY BANCORP, INC.
In order to improve client convenience through technology, PEOPLESBANK is
implementing an Internet banking system with online bill payment and other
useful features. The capital investment, exclusive of marketing and
maintenance expenses, is expected to approximate $50,000 and will be
depreciated over a three year expected useful life. Internet banking will be
available to PEOPLESBANK clients in the fourth quarter of 1999.
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. This comprehensive retail training program
is expected to take approximately 30 months to complete at an estimated cost
of $175,000. Through June 30, 1999, PEOPLESBANK expended approximately
$127,000 toward this program ($32,000 in 1999 and $95,000 for the full year
1998).
Year 2000 compliance
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact of the Year 2000 issue (Y2K) on CVLY
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
The Year 2000 issue poses significant risks for all businesses, households
and governments. The risk is that on January 1, 2000, date sensitive systems
using two digits to represent the year may not be able to distinguish between
the Year 2000 and the Year 1900. The date problem could result in system
failures or miscalculations causing disruptions in normal business and
governmental operations. The problem has broad implications far beyond
familiar computer systems and could adversely impact security systems,
telephone systems, climate control systems, elevators, automobiles and other
date sensitive systems. Unfortunately, there is no universal solution for
this problem and resolution of the Year 2000 issue may be both labor
intensive and costly for some companies.
PEOPLESBANK is subject to the regulation and oversight of various banking
regulators, whose oversight includes the provision of specific timetables,
programs and guidance regarding Y2K issues. Regulatory examination of
PEOPLESBANK'S Y2K programs are conducted periodically, and reports from
management are submitted quarterly to CVLY's Board of Directors.
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CODORUS VALLEY BANCORP, INC.
Corporation's State of Year 2000 Readiness
Resolving the Year 2000 issue is one of CVLY's highest priorities. In 1997,
a project team was formed to address the Y2K issue. Based on an internal
assessment of CVLY's systems and software, the project team determined that
some existing systems and software must be remediated or replaced prior to
the millennium. Management presently believes that as a result of
modifications to existing software and hardware and conversions to new
software, the Y2K issue can be mitigated.
CVLY has initiated communications with its major vendors to determine the
extent to which these third parties will be Y2K compliant. To date, responses
have been positive; however, there is no guarantee that the systems and
software of other companies on which CVLY relies will be Y2K compliant. As a
precaution CVLY has developed a business resumption contingency plan, as
needed, for mission critical systems.
Further, PEOPLESBANK has communicated with its large commercial borrowers.
These borrowers may pose a credit risk to PEOPLESBANK if they are not Y2K
compliant, and their businesses are disrupted. Responses from large
commercial borrowers have been evaluated, and PEOPLESBANK will take
appropriate action based upon their level of readiness for Year 2000.
PEOPLESBANK has also incorporated a Y2K readiness review in its underwriting
process for business loans.
Costs of Year 2000 Readiness
As of June 30, 1999, management's best estimate of the total expense of Y2K
readiness is $45,000. Of this estimate, $12,000 will be expended in 1999, and
$33,000 was incurred in 1998. Y2K expenditures were incurred principally for
external technicians for system test plans and testing. In addition,
PEOPLESBANK replaced an aged item-processing system in April 1999 which was
not Y2K compliant. On a comparable cost basis, this system cost approximately
$300,000 (exclusive of the cost of a check imaging capability unique to the
new system) which produces an annual after-tax depreciation expense of
$28,000 based on a seven-year expected useful life. Implementation of this
mission critical system was accelerated from its original fourth quarter 1999
target date.
The cost of the Y2K project and the date on which CVLY plans to become Y2K
compliant is based on management's best estimates, which assume the continued
availability of certain resources, third party modification plans and other
factors. However, there is no guarantee that these estimates will be achieved
and actual results could differ materially from management's plan.
14
CODORUS VALLEY BANCORP, INC.
Risks of Year 2000
At present, management believes its progress in remedying CVLY's systems,
programs and applications and installing Y2K compliant upgrades is on target.
The Y2K problem creates risk for CVLY from unforeseen problems in its own
computer systems and from third party vendors who provide the majority of
mainframe and pc-based computer applications. Failure of third party systems
relative to the Y2K issue could have a material impact on CVLY's ability to
conduct business. CVLY is also exposed to credit risk if large commercial
borrowers are not Y2K compliant and their businesses are disrupted.
Contingency Plans for Year 2000
Mission critical systems have been remediated and tested for Year 2000
compliance. Mission critical systems were successfully tested and operated
correctly within the test environment. CVLY will continue to monitor and test
mission critical systems and has developed a business resumption contingency
plan.
In accordance with regulatory mandate, CVLY was substantially Year 2000
compliant by year end 1998. However, uncertainties remain about whether or
not CVLY's third party vendors and large commercial borrowers will be Year
2000 compliant. Accordingly, the financial impact of the Year 2000 issue on
CVLY's assets, earnings and liquidity cannot be determined at this time.
Income taxes
The provision for federal income taxes was $469,000 for the current six month
period, compared to $677,000 for the same period in 1998. The decrease in the
tax provision for 1999 was the result of a lower level of income before
income taxes and a higher level of tax-exempt income.
15
CODORUS VALLEY BANCORP, INC.
BALANCE SHEET REVIEW
Investment securities
At June 30, 1999, the available-for-sale investment securities portfolio was
$48.6 million compared to $56.2 million at December 31, 1999. The decline in
the portfolio was caused primarily by securities sales which totalled
approximately $6 million during the first six months of operations.
Securities sales generated pretax capital gains totalling $43,000. Sale
proceeds were reinvested in the commercial loan portfolio.
In July 1999, PEOPLESBANK invested $5 million in trust preferred stock (trust
preferreds) issued by money center commercial banks. These instruments, which
are substantially junior subordinated debt, pay interest semi-annually,
mature in the 2026-2027 timeframe, and yield approximately 7.8 percent.
Loans
At June 30, 1999, total loans were $203.5 million representing a $14.4
million or 7.6 percent increase from year end 1998. The increase was due
primarily to growth in the fixed rate commercial loan category. To date,
strong commercial loan growth has more than compensated for the portfolio
runoff that occurred during 1998. Runoff in the prior year was attributable
to competitive price pressures and approximately $8.5 million in early loan
payoffs associated with clients selling businesses and assets. In spite of
competitive pressures, PEOPLESBANK is committed to maintaining high credit
underwriting standards.
Deposits
At June 30, 1999, total deposits were $243.7 million representing a $1.8
million or 0.7 percent increase from year end 1998. Competitive pressures,
particularly the stock and mutual funds markets, have constrained deposit
growth for PEOPLESBANK and the commercial banking industry.
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 $62 million, at March 31, 1999, the most recent
16
CODORUS VALLEY BANCORP, INC.
available date. At June 30, 1999, PeoplesBank had approximately $3.5 million
outstanding with the FHLBP in the form of long-term fixed rate debt.
In July 1999, PEOPLESBANK borrowed $5 million for 15 years from the FHLBP to
help fund its operations. Under the loan arrangement with the FHLBP, the rate
is fixed at 6.43 percent 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 index plus 16 basis points.
Stockholders' Equity
Stockholders' equity, or capital, is a source of funds which enables CVLY to
maintain asset growth and to absorb losses. Total stockholders' equity was
$25.9 million at June 30, 1999, compared to $26.1 million at December 31,
1998. The decrease in equity capital was caused primarily by unrealized
holding losses on available-for-sale investment securities caused by
declining market interest rates. Book value per share, as adjusted, was
$10.77 on June 30, 1999, compared to $10.82 on December 31, 1998.
The level of capital for CVLY 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 Leverage ratio, 5 percent. At the state level,
the Pennsylvania Department of Banking uses a Leverage ratio guideline of 6
percent. CVLY's and PEOPLESBANK'S capital amounts and classification are also
subject to qualitative judgements by regulators. The table below depicts
capital ratios for CVLY and PEOPLESBANK on June 30, 1999, and December 31,
1998.
Ratios CVLY PEOPLESBANK
6/30/99 12/31/98 6/30/99 12/31/98
Tier I risk-based capital 11.8 12.4 9.7 10.1
Total risk-based capital 12.8 13.3 10.7 11.1
Leverage 9.4 9.6 7.7 7.8
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.
17
CODORUS VALLEY BANCORP, INC.
On July 13, 1999, the Board declared a regular quarterly cash dividend of
$.11 cents per share, payable August 10, 1999, to shareholders of record July
27, 1999. This follows a $.105 cents per share cash dividend paid in May 1999
and in February 1999. In June 1999, a 5 percent stock dividend was paid which
resulted in the issuance of 103,840 shares of common stock.
In February 1999, CVLY 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 CVLY's 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 June 30,
1999, CVLY purchased 13,221 shares of its common stock for approximately
$244,000. Of this total, 10,878 shares were reissued to partially satisfy the
5 percent stock dividend paid in June 1999. The remaining 2,343 shares were
held in treasury as of June 30, 1999.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends, was approximately 2,404,182 shares for the six month
period ended June 30, 1999, and 2,407,827 shares for the same period in 1998.
RISK MANAGEMENT
Nonperforming assets
A summary of nonperforming assets and past due loans, and related ratios, is
provided in Table 1 included in this report. An explanation of changes within
each classification for June 30, 1999, compared to December 31, 1998, is
provided below.
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, CVLY uses the cash basis method to recognize
interest income on loans that are impaired. On June 30, 1999, the impaired
loan portfolio was $2,310,000, reflecting a $604,000 or 35 percent increase
since year end 1998. The increase was caused by the addition of one
commercial account, adequately collaterized by real estate assets, which
totalled $759,000. At June 30, 1999, the impaired loan portfolio was
comprised of twenty unrelated accounts, primarily commercial loan
relationships, ranging in size from $16,000 to $759,000. 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.
18
CODORUS VALLEY BANCORP, INC.
Assets acquired in foreclosure, net of allowance, were $1,696,000 on June 30,
1999, reflecting a decrease of $175,000 or 9 percent below year end 1998. The
decrease was caused by the liquidation of several real estate assets. As of
June 30, 1999, the assets acquired portfolio was comprised of real estate
assets from six former commercial loan relationships. The largest property
has a carrying value of $986,000 which makes up 58 percent of the assets
acquired 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. At June 30, 1999, the
allowance for assets acquired was $69,000. For the first six months of 1999,
a $15,000 loss provision was recorded to reflect a decline in fair value.
Comparatively, a $22,000 loss provision was deemed necessary for the same
period in 1998. Efforts to liquidate assets acquired are proceeding as
quickly as potential buyers can be located and legal constraints permit.
At June 30, 1999, and December 31, 1998, the level of loans past due 90 days
or more and still accruing interest was deemed insignificant. Generally,
loans in the past due category are well collateralized and in the process of
collection.
At June 30, 1999, there were no potential problem loans, as defined by the
Securities and Exchange Commission, identified by management. However,
management was monitoring loans of approximately $5.7 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, 1998.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses depicts a $2,021,000 allowance
at June 30, 1999, which was 1 percent of total loans. The current period
allowance increased from the prior year primarily as a result of commercial
loan growth. The provision expense for the current six month period was
$150,000, compared to $300,000 for the same period in 1998. In June of the
prior year management charged off $456,000 attributable to a single
commercial borrower whose account was deemed partially uncollectible.
Based on a recent evaluation of potential loan losses, management believes
that the allowance is adequate to support any reasonably foreseeable level of
losses that may arise. Ultimately, however, the adequacy of the allowance is
largely dependent upon future economic factors beyond CVLY's control.
19
CODORUS VALLEY BANCORP,INC.
Liquidity
Liquidity is deemed adequate and the principal funding sources include:
deposit growth, maturing investment securities, the ability to borrow from
the Federal Home Loan Bank of Pittsburgh, and asset sales.
The loan-to-deposit ratio was approximately 84 percent on June 30, 1999,
compared to 78 percent on December 31, 1998. The ratio for both periods was
within current policy guidelines.
Market risk management
In the normal course of conducting business, CVLY 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. Interest rate risk is managed by an Asset-Liability
Management Committee comprised of members of senior management and an outside
director. 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, 1998.
Other risks
Periodically, various types of federal and state legislation are proposed
that could result in additional regulation of, or restrictions on, the
business of CVLY and its subsidiaries. It cannot be predicted whether such
legislation will be adopted or, if adopted, how such legislation would affect
the business of CVLY and its subsidiaries.
Further, the business of CVLY is also affected by the state of the financial
services industry in general. As a result of legal and industry changes,
management predicts that the industry will continue to experience an increase
in consolidations and mergers as the financial services industry strives to
increase profits and market share. Management also expects increased
diversification of financial products and services offered by the Corporation
or subsidiary thereof, and its competitors. Management believes that such
consolidations and mergers, and diversification of products and services may
enhance its competitive position as a community bank.
Congress is currently considering legislation to modernize the financial
services industry. This proposed legislation will likely deregulate many
activities engaged in currently, or prospectively, by CVLY and PEOPLESBANK.
It is also likely to present many opportunities and challenges to CVLY and
PEOPLESBANK. However, the exact effects of this legislation cannot be
determined at this time.
20
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
June 30, December 31,
(dollars in thousands) 1999 1998
------ ------
Impaired loans (1) $2,310 $1,706
Assets acquired in foreclosure (2) 1,696 1,871
------ ------
Total nonperforming assets $4,006 $3,577
====== ======
Loans past due 90 days or more
and still accruing interest $71 $13
Ratios:
Impaired loans as a % of
total period-end loans 1.14% .90%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 1.95% 1.87%
Nonperforming assets as a % of
total period-end stockholders'
equity 15.46% 13.73%
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 $274 $312
Interest revenue recognized 30 73
---- ----
Interest not recognized in operations $244 $239
==== ====
(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.
21
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 1999 1998
------ ------
Balance-January 1, $1,865 $2,098
Provision charged to operating expense 150 300
Loans charged off:
Commercial 2 474
Real estate-mortgage 0 0
Consumer 2 14
------ ------
Total loans charged off 4 488
Recoveries:
Commercial 6 7
Real estate-mortgage 0 0
Consumer 4 5
------ ------
Total recoveries 10 12
------ ------
Net (recoveries)chargeoffs (6) 476
Balance-June 30, $2,021 $1,922
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans .00% 1.01%
Allowance for loan losses to total loans
at period-end .99% 1.03%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 84.9% 56.0%
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, 1998. (SEC file number 000-
15536, "Item 7A: Quantitative and Qualitative Disclosures About Market
Risk," pages 9 and 10 of Form 10-K.)
22
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 the Bank are a party or to which its
property is subject, which, if determined adversely to the Corporation and
the Bank, would be material in relation to the Corporation's and the Bank's
financial condition. There are no proceedings pending other than ordinary
routine litigation incident to the business of the Corporation and the Bank.
In addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and the Bank 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 -
(a) An annual meeting of shareholders was held on May 18, 1999, at
9:00am, Codorus Valley Corporate Center, 105 Leader Heights Road,
York, Pennsylvania.
(b), (c) Two matters were voted upon at the May 18, 1999, meeting as
follows:
(1) Three directors were re-elected:
Votes Votes
Term cast Against or
Re-elected Expires For Withheld*
---------- ------- ----- ---------
Class C:
D. Reed Anderson, Esq. 2002 1,894,196 13,343
MacGregor S. Jones 2002 1,901,738 5,801
Larry J. Miller 2002 1,903,119 4,420
*includes broker nonvotes.
Directors whose term continued after the meeting:
-------------------------------------------------
Term Expires
Class A: ------------
Rodney L. Krebs 2000
Dallas L. Smith 2000
George A. Trout, D.D.S. 2000
Class B:
M. Carol Druck 2001
Barry A. Keller 2001
Donald H. Warner 2001
23
Codorus Valley Bancorp, Inc.
PART II - OTHER INFORMATION, continued
Item 4. Results of votes of security holders, continued -
2 (2) The shareholders ratified the selection of Ernst & Young LLP,
as
the independent auditors for the Codorus Valley Bancorp, Inc. for the
year ending December 31, 1999. Votes were cast as follows:
1,825,976 for, 75,224 against, and 6,339 abstentions or broker
nonvotes.
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: (see also Item 6(b))
Exhibit No. Description
27 Financial Data Schedule as of June 30, 1999.
(b) Reports on Form 8-K- none.
24
CODORUS VALLEY BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Codorus Valley Bancorp, Inc.
(Registrant)
August 5, 1999 /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
August 5, 1999 /s/ Jann A. Weaver
Date Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
25