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, 2001
--------------------------
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
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Codorus Valley Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
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(State of incorporation) (I.R.S. Employer ID No.)
105 Leader Heights Road, P.O. Box 2887 York, PA 17405
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(Address of principal executive offices) (Zip Code)
(717) 235-6871 or (717) 846-1970
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(Registrant's telephone number, including area code)
Not Applicable
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(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 10/23/01, 2,564,261
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
Consolidated Statements of Changes in
Stockholders' Equity........................... 4
Notes to Consolidated Financial Statements....... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 20
PART II - OTHER INFORMATION
Item 1. Legal proceedings.................................. 21
Item 2. Changes in securities and use of proceeds.......... 21
Item 3. Defaults upon senior securities.................... 21
Item 4. Submission of matters to a vote of security holders. 21
Item 5. Other information.................................. 21
Item 6. Exhibits and reports on Form 8-K................... 21
SIGNATURES................................................. 23
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) 2001 2000
--------- ---------
Assets
Cash and due from banks
Interest bearing deposits with banks $ 211 $ 283
Noninterest bearing deposits and cash 8,601 7,485
Federal funds sold 21,425 1,969
-------- --------
Cash and cash equivalents 30,237 9,737
Loans held for sale 3,561 0
Securities available-for-sale 41,118 40,572
Securities held-to-maturity (fair value $9,104
at 9/30/01 and $8,719 at 12/31/00) 9,359 9,360
Loans 220,573 217,926
Less-allowance for loan losses (1,932) (1,967)
-------- --------
Total net loans 218,641 215,959
Premises and equipment 8,902 8,998
Other assets 10,143 10,466
-------- --------
Total assets................................ $321,961 $295,092
======== ========
Liabilities
Deposits
Noninterest bearing demand $ 26,322 $ 26,670
NOW 24,884 26,313
Money market 59,902 51,434
Savings 14,362 15,169
Time CDs less than $100,000 115,800 108,826
Time CDs $100,000 and above 31,080 19,002
-------- --------
Total deposits 272,350 247,414
Long-term borrowings 18,787 19,034
Other liabilities 1,660 1,253
-------- --------
Total liabilities........................... 292,797 267,701
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 6,411 6,137
Shares: authorized - 10,000,000; issued -
2,564,261 at 9/30/01 (2,454,923 at 12/31/2000);
outstanding - 2,564,261 at 9/30/01 (2,440,423
at 12/31/2000)
Additional paid-in capital 13,930 12,447
Retained earnings 8,128 8,844
Accumulated other comprehensive income 695 126
Less: Treasury stock, 14,500 shares at 12/31/00 0 (163)
-------- --------
Total stockholders' equity................... 29,164 27,391
-------- --------
Total liabilities and stockholders' equity... $321,961 $295,092
======== ========
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) 2001 2000 2001 2000
---- ---- ---- ----
Interest income
Interest and fees from loans $4,769 $4,522 $14,248 $13,558
Interest from federal funds sold and interest
bearing deposits with banks 215 67 460 150
Interest and dividends from securities
Taxable interest income 618 672 1,792 2,049
Tax-exempt interest income 137 120 409 339
Dividend income 14 58 107 169
------ ------ ------- -------
Total interest income ............................. 5,753 5,439 17,016 16,265
Interest expense
NOW 49 61 165 182
Money market 408 437 1,329 1,160
Savings 53 95 184 286
Time CDs less than $100,000 1,562 1,677 4,703 4,674
Time CDs $100,000 and above 394 314 1,090 826
------ ------ ------- -------
Total interest expense on deposits 2,466 2,584 7,471 7,128
Interest expense on short-term borrowings and
federal funds purchased 0 40 7 464
Interest expense on long-term borrowings 291 170 871 510
------ ------ ------- -------
Total interest expense ........................... 2,757 2,794 8,349 8,102
------ ------ ------- -------
Net interest income ............................... 2,996 2,645 8,667 8,163
Provision for loan losses 30 50 143 119
------ ------ ------- -------
Net interest income after provision for loan losses 2,966 2,595 8,524 8,044
Noninterest income
Trust and investment services fees 159 156 507 493
Service charges on deposit accounts 191 164 529 497
Other income 287 184 695 616
Gain on sales of loans 1 0 69 0
Gains (losses), other 0 0 11 (3)
------ ------ ------- -------
Total noninterest income ............................. 638 504 1,811 1,603
Noninterest expense
Salaries and benefits 1,332 1,212 3,802 3,591
Occupancy of premises, net 208 148 606 462
Furniture and equipment 274 248 804 775
Postage, stationery and supplies 84 78 299 286
Professional and legal 89 57 180 165
Marketing and advertising 82 39 281 224
Foreclosed real estate, net 94 41 199 93
Other 460 378 1,313 1,265
------ ------ ------- -------
Total noninterest expense ......................... 2,623 2,201 7,484 6,861
------ ------ ------- -------
Income before income taxes ........................ 981 898 2,851 2,786
Provision for income taxes 265 251 777 784
------ ------ ------- -------
Net income ......................................... $ 716 $ 647 $ 2,074 2,002
====== ====== ======= =======
Net income per share
Basic ............................................ $ 0.28 $ 0.25 $ 0.81 $ 0.77
Diluted .......................................... $ 0.28 $ 0.25 $ 0.81 $ 0.77
See accompanying notes.
2
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine months ended
September 30,
2001 2000
---- ----
Cash flows from operating activities: (dollars in thousands)
Net Income $ 2,074 $ 2,002
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 717 672
Provision for loan losses 143 119
Provision for losses on foreclosed real estate 62 22
Gain on sales of foreclosed real estate (60) (39)
Gain on sales of loans (69) 0
(Gain) loss on sales of premises and equipment (11) 3
Decrease (increase) in interest receivable 22 (95)
Increase in other assets (405) (253)
Increase in interest payable 6 39
Increase (decrease) in other liabilities 175 (82)
Other, net (108) (158)
-------- --------
Net cash provided by operating activities .......... 2,546 2,230
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 2,313 0
Proceeds from maturities and calls of securities
available-for-sale 9,565 10,876
Purchase of securities available-for-sale (11,542) (9,435)
Net increase in loans (11,682) (7,449)
Proceeds from loan sales 4,366 358
Proceeds from sales of premises and equipment 11 36
Purchases of premises and equipment (621) (355)
Proceeds from sales of foreclosed real estate 1,728 363
-------- --------
Net cash used for investing activities .............. (5,862) (5,606)
Cash flows from financing activities:
Net increase in demand and savings deposits 5,884 6,169
Net increase in time deposits 19,052 1,643
Net decrease in short-term borrowings and
federal funds purchased 0 (6,157)
Payments on long-term borrowings (247) (229)
Dividends paid (893) (810)
Payment to repurchase common stock 0 (121)
Proceeds from issuance of common stock 24 0
Cash paid in lieu of fractional shares (4) (3)
-------- --------
Net cash provided by financing activities .......... 23,816 492
-------- --------
Net increase (decrease) in cash and cash equivalents 20,500 (2,884)
Cash and cash equivalents at beginning of year ..... 9,737 11,193
-------- --------
Cash and cash equivalents at September 30, ......... $ 30,237 $ 8,309
======== ========
Supplemental disclosures:
Interest paid on deposits and borrowed funds $ 8,345 $ 8,114
Income taxes paid $ 805 $ 772
See accompanying notes.
3
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unaudited
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
----- ------- -------- ------------- ----- -----
(dollars in thousands)
For the nine months ended September 30, 2001
Balance, December 31, 2000 .................. $6,137 $12,447 $ 8,844 $ 126 $ (163) $27,391
Comprehensive income:
Net income 2,074 2,074
Unrealized gains on securities,
available for sale 569 569
-------
Total comprehensive income 2,643
Cash dividends ($.35 per share) (893) (893)
5% stock dividend
(121,738 shares at fair value) 268 1,464 (1,899) 163 (4)
Issuance of common stock 6 19 2 27
------ ------- ------- ----- ------- -------
Balance, September 30, 2001 ................. $6,411 $13,930 $ 8,128 $ 695 $ 0 $29,164
====== ======= ======= ===== ======= =======
For the nine months ended September 30, 2000
Balance, December 31, 1999 $6,019 $11,978 $ 9,050 $(523) $(1,152) $25,372
Comprehensive income:
Net income 2,002 2,002
Unrealized gains on securities,
available for sale 287 287
-------
Total comprehensive income 2,289
Cash dividends ($.32 per share) (810) (810)
5% stock dividend
(116,640 shares at fair value) 118 469 (1,810) 1,220 (3)
Purchase of treasury stock
(9,400 shares) (121) (121)
------ ------- ------- ----- ------- -------
Balance, September 30, 2000 ................. $6,137 $12,447 $ 8,432 $(236) $ (53) $26,727
====== ======= ======= ===== ======= =======
4
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1-General
The interim financial statements are unaudited. However, they reflect all
adjustments that 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 2000 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.
The results of operations for the nine-month period ended September 30, 2001 are
not necessarily indicative of the results to be expected for the full year.
Note 2-Summary of Significant Accounting Policies
Per Share Computations - All per share computations include the retroactive
effect of stock dividends declared, including the 5% stock dividend declared
April 10, 2001. The weighted average number of shares of common stock
outstanding, used for both basic and diluted calculations, was 2,562,693 for the
nine-month period ended September 30, 2001 and 2,578,186 for the same period in
2000.
Reclassifications - Certain reclassifications have been made to the 2000
consolidated financial statements to conform to the 2001 presentation.
Note 3-Contingencies
During the second quarter of 2001, PeoplesBank's management became aware of a
potential loss stemming from its merchant credit card business. Some individuals
who transacted business with a former PeoplesBank merchant customer are seeking
refunds claiming that service was not rendered. The merchant has insufficient
funds to cover reimbursement requests, and PeoplesBank has terminated the
merchant's credit card account relationship. To date, losses of $38,000 are
included in 2001 other expenses which represents refunds requested to date in
excess of funds available in the merchant's account. An estimate of additional
potential loss associated with this merchant credit card account cannot be
determined at this time. Management has engaged legal counsel to determine the
extent of its liability and to assist it with developing and pursuing legal
remedies.
5
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Current Accounting Developments
In July of 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations", and Statement No. 142, "Goodwill and Other
Intangible Assets".
Statement No. 141 requires that all business combinations be accounted for using
the purchase method of accounting; use of the pooling-of-interests method is
prohibited. In addition, this Statement requires that the negative goodwill that
exists after the basis of certain acquired assets is reduced to zero be
recognized as an extraordinary gain. The provisions of this Statement apply to
all business combinations initiated after June 30, 2001.
Statement No. 142 prescribes that goodwill associated with a business
combination and intangible assets with an indefinite useful life should not be
amortized but should be tested for impairment at least annually. The Statement
requires that intangibles that are separable from goodwill and that have a
determinable useful life be amortized over the determinable useful life. The
provisions of this Statement become effective in January, 2002. Upon adoption of
this Statement, goodwill and other intangible assets arising from acquisitions
completed before July 1, 2001 will be accounted for in accordance with the
provisions of this Statement. This transition provision could require a
reclassification of a previously separately recognized intangible to goodwill
and vice versa if the intangibles in question do not meet the new criteria for
classification as a separately recognizable intangible.
In June of 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations", which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement is effective for the Corporation on January 1, 2003.
In August of 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment of or Disposal of Long-Lived Assets". This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business". This Statement also
amends ARB No. 51, "Consolidated Financial Statements". The provisions of
Statement No. 144 are effective for the Corporation on January 1, 2002.
Adoption of these Statements is not expected to have a significant impact on the
Corporation's financial condition or results of operations.
6
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 of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Corporation and its subsidiaries.
When words such as "believes," "expects," "anticipates" or similar expressions
occur in this Form 10-Q, management is making forward-looking statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that management incorporates by reference,
could affect the future financial results of the Corporation and its
subsidiaries, both individually and collectively, and could cause those results
to differ materially from those expressed in the forward-looking statements
contained or incorporated by reference in this Form 10-Q. These factors include
the following:
- - 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.
7
Codorus Valley Bancorp, Inc.
Three months ended September 30, 2001 compared to three months ended September
30, 2000
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the current three-month period was $716,000 or $.28 per diluted
share, compared to $647,000 or $0.25 per diluted share, for the third quarter of
2000. The $69,000 or 11 percent increase in current period net income was caused
by increases in net interest income and noninterest income, which more than
offset an increase in noninterest expense. Net interest income increased
$351,000 or 13 percent due to a larger volume of earning assets. Noninterest
income increased $134,000 or 27 percent due to increases in fee income from the
bank's insurance and real estate settlement subsidiaries, and service charges
from a larger volume of deposits. Noninterest expense increased $422,000 or 19
percent due to franchise expansion, addition of a mortgage banking operation,
increases in foreclosed real estate carrying costs, and losses associated with a
merchant credit card account. 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 ending September 30,
2001, was $2,996,000, an increase of $351,000 or 13 percent above the same
period in 2000. The net yield (tax equivalent) on total interest earning assets
was 4.15 percent for the current period compared to 4.14 percent for the third
quarter of 2000. The increase in net interest income was due primarily to an
increase in the volume of earning assets, principally commercial loans and
overnight investments. Total interest earning assets averaged $293 million to
yield 7.67 percent for the current period compared to $257 million and 8.24
percent, respectively, for the same period in 2000. Total interest bearing
liabilities averaged $263 million at an average rate of 4.16 percent for the
current period compared to $235 million and 4.72 percent, respectively, for the
same period in 2000. Funding was provided primarily by growth in money market
and time deposits.
Throughout the third quarter of 2001, market interest rates continued their
sharp descent, a result of Federal Reserve Board action that began in January of
this year to stimulate a sluggish national economy. Many economists believe that
the terrorist attacks on the World Trade Center and the Pentagon on September
11, 2001, and the international war on terrorism that resulted, will push the
national economy into a recession. More information about market interest rates
is provided under the market interest rates subheading in the year-to-date
section of this report.
PROVISION FOR LOAN LOSSES
A $30,000 provision expense for loan losses was recorded for the current
three-month period, compared to $50,000 for the same period in 2000. The expense
for each period was responsive to loan growth and the condition of the loan
portfolio in that period.
8
Codorus Valley Bancorp, Inc.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $638,000, an
increase of $134,000 or 27 percent above the third quarter in 2000. The increase
in noninterest income was due primarily to increases in fee income from the
bank's insurance and real estate settlement subsidiaries and service charges
from a larger volume of deposits.
NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $2,623,000, an
increase of $422,000 or 19 percent above the third quarter of 2000. The increase
in noninterest expense was caused primarily by operating expenses attributable
to franchise expansion and the addition of a mortgage banking operation. The
$53,000 or 129 percent increase in foreclosed real estate expense was due
primarily to increased carrying costs associated with assets taken in
satisfaction of debt. Other operating expense increased $82,000 or 22 percent
due in part to $38,000 in losses attributable to a former merchant credit card
account, as described in Note 3-Contingencies, and normal business growth.
FRANCHISE EXPANSION
In September, PeoplesBank opened its tenth financial center. The new financial
center is located in downtown York, Pennsylvania. Details about the new office
are provided under this subheading in the year-to-date section of this report.
INCOME TAXES
The provision for federal income tax was $265,000 for the current three-month
period, compared to $251,000 for the third quarter of 2000. The effective tax
rate was approximately 27% for the current quarter compared to 28% for the same
quarter in 2000. The increase in tax expense was due to an increase in taxable
income, which more than offset the reduction in the effective tax rate.
9
Codorus Valley Bancorp, Inc.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the current nine-month period was $2,074,000 or $.81 per diluted
share, compared to $2,002,000 or $0.77 per diluted share, for the same period in
2000. To date, earnings reflect an increase in net interest income due to a
greater volume of earning assets and an increase in noninterest income, which
more than offset the increase in noninterest expense. The increase in
noninterest expense was caused primarily by operating expenses attributable to
expansion and normal business growth. For the nine-month period (annualized) of
2001, the return on average assets was approximately 0.90 percent compared to
.93 percent for 2000. For the same periods, the return on average equity was
approximately 9.8 percent for 2001 compared to 10.3 percent for 2000.
On September 30, 2001, total assets were $322 million, an increase of $27
million or 9 percent above December 31, 2000. The increase in total assets
occurred primarily in fed funds sold, i.e., overnight investments, reflecting a
build-up of liquidity from deposit growth as customers sought safe haven from
widespread price declines in securities markets. Proceeds from a $3.4 million
mortgage loan sale also contributed to the increase in fed funds sold. A $6
million or 3 percent increase in loans, principally commercial loans, also
contributed to asset growth. Book value per share was $11.37 on September 30,
2001, compared to $10.69 on December 31, 2000, as adjusted for the 5 percent
stock dividend paid June 7, 2001. As of September 30, 2001, 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.
Details about financial center additions can be found under the subheading
"Franchise expansion" within this report. Details about the creation of a
mortgage banking operation can be found under the subheading "Mortgage banking
operation" within this report. 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 under the subheading "Capital investment in technology"
within this report.
An explanation of the factors and trends that caused changes between the two
periods, by earnings category, is provided below.
10
Codorus Valley Bancorp, Inc.
NET INTEREST INCOME
Net interest income for the current nine-month period was $8,667,000, an
increase of $504,000 or 6 percent above the same period in 2000. The net yield
(tax equivalent) on total interest earning assets was 4.22 percent for the
current period compared to 4.25 percent for the first nine months of 2000. The
increase in net interest income was due primarily to an increase in average
earning assets, principally commercial loans and overnight investments. Total
interest earning assets averaged $280 million to yield 8 percent for the current
period compared to $260 million and 8.15 percent, respectively, for the same
period in 2000. Total interest bearing liabilities averaged $254 million at an
average rate of 4.4 percent for the current nine-month period compared to $236
million and 4.58 percent, respectively, for the same period in 2000. Funding was
provided primarily by growth in money market and time deposits.
As a strategy to stimulate a sluggish national economy, exacerbated by terrorist
attacks on the World Trade Center and the Pentagon on September 11, 2001, the
Federal Reserve Board (Fed) aggressively reduced the fed funds rate. For the
period January 3 through September 17, 2001, the Fed reduced its benchmark fed
funds rate by 350 basis points. During that time the prime rate moved in lock
step. On September 30, 2001, the fed funds rate was 3 percent and the prime rate
was 6 percent. Both rates, used by bankers to price their products, were at
their lowest level in seven years. As yields on loans and investments tied to or
influenced by these rates declined, PeoplesBank lowered deposit rates to
mitigate the impact on its net interest margin.
PROVISION FOR LOAN LOSSES
A $143,000 provision expense for loan losses was recorded for the current
nine-month period, compared to $119,000 for the same period in 2000. The level
of expense was responsive to loan growth and a national and local economic
slowdown.
NONINTEREST INCOME
Total noninterest income for the current nine-month period was $1,811,000, an
increase of $208,000 or 13 percent above the same period in 2000. Current period
noninterest income included $80,000 in gains from the periodic sale of assets.
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
increased $125,000 or 8 percent from the same period of 2000. All components of
noninterest income were up due primarily to normal business growth.
11
Codorus Valley Bancorp, Inc.
NONINTEREST EXPENSE
Total noninterest expense for the current nine-month period was $7,484,000, an
increase of $623,000 or 9 percent above the same period in 2000. The increase in
noninterest expense was caused primarily by increases in salaries and benefits,
occupancy, marketing and foreclosed real estate expenses. The $211,000 or 6
percent increase in salary and benefit expense reflects staff additions
associated with franchise expansion (see below), the addition of a mortgage
banking operation (see below) and merit raises. The $144,000 or 31 percent
increase in occupancy expense was also caused by franchise expansion and
increased energy costs. The $57,000 or 25 percent increase in marketing expense
reflected promotion expenses associated with branch office expansion. The
$106,000 or 114 percent increase in foreclosed real estate expense was due
primarily to increased carrying costs associated with assets taken in
satisfaction of debt.
Noninterest expense is expected to increase in the period ahead due to normal
business growth, franchise expansion, mortgage banking operations, and
technology investments. A contingency loss disclosed in Note 3 could increase
noninterest expense in future periods.
FRANCHISE EXPANSION
Management plans to establish a financial center in the new Susquehanna Commerce
Center at 221 W. Philadelphia Street, downtown York, Pennsylvania, when
construction is complete during the third quarter of 2002. A long-term lease
agreement for approximately 2,498 square feet of space in the Commerce Center is
presently being negotiated.
In September, PeoplesBank opened its tenth financial center which is located at
118 E. Market Street in downtown York, Pennsylvania. Rental expense is
insignificant, and investment in furniture and equipment was approximately
$128,000.
In February, PeoplesBank opened its ninth financial center. This new full
service office is located in South Hanover, York County, Pennsylvania. The 1,850
square foot facility, leased under a long-term contract, is attached to a
convenience store/gas operation, for customer convenience. The annual lease
expense is approximately $106,000. Investment in fixed assets, including
equipment, furniture and leasehold improvements totaled $190,000. Annual
depreciation expense is approximately $32,000.
MORTGAGE BANKING OPERATION
During the second quarter, PeoplesBank created a mortgage banking operation to
significantly strengthen its residential mortgage lending business and market
presence. The initial staff is comprised of a five-person team of experienced
mortgage bankers, who will operate from an existing PeoplesBank facility. The
mission of the mortgage banking operation is to generate income through the
origination and sale of conventional, non-conventional, FHA and VA residential
mortgage loans. The mortgage banking operation is not expected to have a
material impact on net income for 2001 operations.
12
Codorus Valley Bancorp, Inc.
CAPITAL INVESTMENT IN TECHNOLOGY
In June, PeoplesBank's board of directors approved the purchase of hardware and
software to automate the teller function. Plans call for this project to be
completed in phases. Initially, the bank purchased "thin client" hardware to
establish an infrastructure. The cost of this initial phase was approximately
$95,000, depreciable over a three-year useful life. The infrastructure was
completed in late September of this year. The bank will purchase and install
teller automation software next year. Preliminary teller automation software
cost estimates range from $50,000 to $75,000, which will also be depreciated
over a three-year useful life.
In April, PeoplesBank installed software that interfaces its imaging and
internet banking systems. This enables clients who use the Bank's popular
internet banking system to access images of their checks online. In the near
future this service will be enhanced to also permit access to bank statements.
The cost of this project was approximately $55,000, excluding marketing and
maintenance expenses, and is being depreciated over a three-year useful life.
INCOME TAXES
The provision for federal income taxes was $777,000 for the current nine-month
period, compared to $784,000 for the same period in 2000. The decrease in
federal taxes was due primarily to an increase in tax exempt income as a
percentage of total income.
BALANCE SHEET REVIEW
INVESTMENTS & LOANS
On September 30, 2001, overnight investments in federal funds sold reflected a
large increase from year-end 2000. The increase was primarily attributable to
deposit growth, as customers sought safe haven from widespread price declines in
securities markets. The proceeds from a $3.4 million mortgage loan sale, and the
accumulation of funds for future investment also contributed to the increase in
this category.
On September 30, 2001, total loans reflected a 3 percent increase from December
31, 2000, primarily in the commercial loan portfolio. Loan growth to date, was
partially offset by a loan sale in early March. At that time, PeoplesBank sold
$3.4 million residential mortgage loans to the Federal National Mortgage
Association. The loans were sold without recourse and servicing rights were
retained. The loan portfolio yielded 7.26 percent and was comprised primarily of
fixed rate instruments. PeoplesBank realized a $67,000 gain from the loan sale.
13
Codorus Valley Bancorp, Inc.
DEPOSITS
Total deposits increased $25 million or 10 percent since year-end 2000. Most of
the increase occurred in time and money market deposits. Management believes
that bank deposits provided a safe haven to customers seeking protection from
widespread price declines in securities markets.
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 federal funds purchased. PeoplesBank also
uses available credit, both short-term and long-term, through the Federal Home
Loan Bank of Pittsburgh (FHLBP). Borrowing rates are established daily based on
prevailing market conditions. PeoplesBank's maximum borrowing capacity, as
established quarterly by the FHLBP, was approximately $52 million, on June 30,
2001, the most recent available date. On September 30, 2001, PeoplesBank owed
approximately $17 million to the FHLBP under long-term borrowing agreements.
STOCKHOLDERS' EQUITY
Stockholders' equity, or capital, as a source of funds, enables Codorus Valley
to maintain asset growth and absorb losses. Total stockholders' equity was
approximately $29 million on September 30, 2001, an increase of $1.8 million or
6.5 percent above December 31, 2000. The increase was caused primarily by
profitable operations and an increase in unrealized holding gains on
available-for-sale investment securities caused by declining market interest
rates. Book value per share, as adjusted, was $11.37 on September 30, 2001,
compared to $10.69 on December 31, 2000.
The level of capital for Codorus Valley and PeoplesBank exceeded regulatory
requirements 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, 2001, and December 31, 2000.
Capital Ratios
Codorus Valley
Consolidated PeoplesBank
9/30/01 12/31/00 9/30/01 12/31/00
------- -------- ------- --------
Tier I risk-based capital 11.3 11.3 9.5 9.5
Total risk-based capital 12.0 12.1 10.3 10.3
Tier I leverage 8.9 9.4 7.5 7.9
14
Codorus Valley Bancorp, Inc.
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 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 9, 2001, the board of directors declared a quarterly cash dividend of
$.12 per share, payable on or before November 13, 2001, to shareholders of
record October 23, 2001. This follows a $.12 per share cash dividend paid in
August, May and February, 2001. Additionally, a 5 percent stock dividend was
paid on June 7, 2001.
The weighted average number of shares of common stock outstanding, adjusted for
the stock dividend paid in June 2001, was 2,562,693 shares for the nine-month
month period ended September 30, 2001, and 2,578,186 for the same period of
2000.
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, 2001, compared to December 31, 2000.
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, 2001, the impaired loan portfolio was
$851,000, a decrease of $1,155,000 or 58 percent below December 31, 2000. The
decrease was caused primarily by a $474,000 commercial loan that was
reclassified to performing status, and loan payments from collateral
liquidations. On September 30, 2001, the impaired loan portfolio was comprised
of fifteen unrelated accounts, primarily commercial loan relationships, ranging
in size from $2,600 to $292,000. These loan relationships vary by industry and
are generally collateralized with real estate assets. A loss allowance is
evaluated, at least quarterly, by management and the board of directors. 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.
Foreclosed real estate, net of allowance, totaled $1,708,000 on September 30,
2001, a decrease of $682,000 or 29 percent below December 31, 2000. The decrease
was caused primarily by asset liquidations. On September 30, 2001, the portfolio
consisted primarily of real estate assets from five former loan relationships.
The largest property has a carrying value of
15
Codorus Valley Bancorp, Inc.
approximately $1,006,000, which represents 59 percent of the portfolio. This
property is presently under contract of sale and management believes that the
net realizable value will be sufficient to cover its carrying value. A loss
allowance, which is evaluated at least quarterly, has been established for
assets whose estimated market value, less selling expenses, are below their book
value. On September 30, 2001, the allowance was $30,000. For the first nine
months of 2001 a $62,000 loss provision was recorded to reflect losses
associated with declines in fair value. Comparatively, a $22,000 loss provision
was recorded for the same period in 2000. Efforts to liquidate are proceeding as
quickly as potential buyers can be located and legal constraints permit.
On September 30, 2001, the volume of loans past due 90 days or more and still
accruing interest was $874,000, compared to $346,000 on December 31, 2000.
Generally, loans in the past due category are adequately collateralized and in
the process of collection.
On September 30, 2001, management was monitoring loans of approximately $7.6
million for which the ability of the borrower to comply with present repayment
terms was uncertain. These loans were not included in the Table 1 disclosure.
They are monitored closely, and management presently believes that the allowance
for loan losses is adequate to cover anticipated losses that may be attributable
to these loans. Comparatively, management was monitoring loans of approximately
$9 million on December 31, 2000.
ALLOWANCE FOR LOAN LOSSES
Table 2, Analysis of Allowance for Loan Losses depicts a $1,932,000 allowance on
September 30, 2001, which was 0.86 percent of total loans. 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, 2001.
LIQUIDITY
Since year-end, liquidity has increased for PeoplesBank, as evidenced by an
increase in the volume of fed funds sold (overnight investments) and a decrease
in its loan-to-deposit ratio. The loan-to-deposit ratio was approximately 82
percent on September 30, 2001, compared to 88 percent on December 31, 2000.
Funds from deposit growth and a $3.4 million loan sale have accumulated faster
than management can safely and profitably deploy them. Increased liquidity is an
industry challenge as the investing public seeks safe haven from depressed
securities markets.
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 manages interest rate risk. A
16
Codorus Valley Bancorp, Inc.
detailed discussion of market risk is provided in the SEC Form 10-K for the
period ended December 31, 2000.
Since year-end 2000, the corporation's balance sheet has become asset sensitive
in response to declining market interest rates, a direct result of aggressive
interest rate cuts by the Fed. As the Fed cut rates to shore up a weak U.S.
economy, liquidity increased in banks, as deposit customers sought safe haven
from depressed capital markets, loan customers refinanced, and bond issuers
called bonds. Asset sensitivity means that loan and investment assets will
reprice to a greater and faster degree than the deposits and debt that fund
them. Therefore, if market interest rates continue to decline, earnings will
decline. Conversely, if market interest rates increase, earnings will increase.
The table below summarizes the results of a financial simulation to measure
interest rate risk for the corporation on September 30, 2001, compared to
December 31, 2000.
at 9/30/01 at 12/31/00
Change in Change in
Change in interest Forecasted Net Income Net Income
rates (basis points) interest rate ------------- ------------
over 12 months scenario $000's % $000's %
-------------- -------- ------ - ------ -
+200 High 171 6.4 (48) (1.7)
0 Flat (baseline) 0 0 0 0
-200 Low (341) (12.8) (21) (0.8)
On September 30, 2001, the hypothetical 200 basis point reduction in market
interest rates (low rate scenario) portrays a 12.8% decline in net income, which
slightly exceeds management's 10% policy guideline. Management is not overly
concerned with exceeding its policy guideline at this time because market
interest rates are nearing 40-year lows, which have caused excess liquidity and
increased asset sensitivity throughout the financial services industry.
Moreover, management believes that the corporation's balance sheet is positioned
to benefit from an economic recovery and rising market interest rates.
Management will continue to monitor interest rate risk and take corrective
action if warranted.
OTHER RISKS
Terrorist attacks on the World Trade Center and the Pentagon on September 11,
2001, which destroyed life and property, created a shock to the U.S. economy and
psyche. This tragic event, and the international war on terrorism that it
spawned, could have a material adverse impact on both national and local
economies in the foreseeable future. More grand acts of terrorism on U.S. soil
could further erode consumer and business confidence and disrupt commerce,
resulting in a prolonged economic recession. A prolonged economic recession
could have a material adverse effect on the liquidity, capital resources, or
results of operations of the corporation.
Periodically, federal and state legislation is proposed that could result in
additional regulation of, or restrictions on, the business of Codorus Valley and
its subsidiaries. Other than as discussed below, it cannot be predicted whether
such legislation will be adopted or, if adopted, how the legislation would
affect the business of Codorus Valley and its subsidiaries.
17
Codorus Valley Bancorp, Inc.
In November 1999, the Gramm-Leach-Bliley Act of 1999, which is also known as the
Financial Services Modernization Act, became law. The law repeals Depression-era
banking laws and permits banks, insurance companies and securities firms to
engage in each other's businesses after complying with certain conditions and
regulations. The law 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, the Corporation has no plans to pursue these
additional possibilities. Management does not believe that the Financial
Services Modernization Act will have a material effect on Codorus Valley's
operations. However, the law 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.
The Financial Services Modernization Act also modifies current law related to
financial privacy and community reinvestment. The new privacy provisions
generally prohibit financial institutions, including Codorus Valley and
PeoplesBank, from disclosing nonpublic personal financial information to
nonaffiliated third parties unless customers have the opportunity to "opt out"
of the disclosure.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which, if they were implemented,
would have a material adverse effect on 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.
18
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
September 30, December 31,
(dollars in thousands) 2001 2000
---- ----
Impaired loans (1) $ 851 $2,006
Foreclosed real estate, net of reserve 1,708 2,390
------ ------
Total nonperforming assets $2,559 $4,396
====== ======
Accruing loans that are contractually past
due 90 days or more as to principal or
interest $874 $346
Ratios:
Impaired loans as a % of
total period-end loans .38% .92%
Nonperforming assets as a % of total
period-end loans and foreclosed real
estate, net of reserve 1.13% 2.00%
Nonperforming assets as a % of
total period-end stockholders' equity 8.77% 16.05%
Allowance for loan losses as a
multiple of impaired loans 2.3x 1.0x
(1) Comprised solely of nonaccrual loans.
19
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 2001 2000
---- ----
Balance-January 1, $1,967 $2,023
Provision charged to operating expense 143 119
Loans charged off:
Commercial 121 160
Real estate-mortgage 0 15
Consumer 70 29
------ ------
Total loans charged off 191 204
Recoveries:
Commercial 7 25
Real estate-mortgage 0 0
Consumer 6 15
------ ------
Total recoveries 13 40
------ ------
Net charge-offs (recoveries) 178 164
------ ------
Balance-September 30, $1,932 $1,978
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans .11% .11%
Allowance for loan losses to total loans
at period-end .86% .92%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 112.0% 60.1%
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the section entitled "Market risk management" within Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations.
20
CODORUS VALLEY BANCORP, INC.
PART II - OTHER INFORMATION:
Item 1. Legal proceedings
In the opinion of management, 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 upon senior securities
Nothing to report.
Item 4. Submission of matters to a vote of security holders
Nothing to report.
Item 5. Other information
Nothing to report.
Item 6. (a) Exhibits
Exhibit Description
3(i) Articles of Incorporation(Incorporated by reference to Exhibit 3(i) to
Form 8-K filed with the Commission on March 29, 2001.)
3(ii) By-laws(Incorporated by reference to Exhibit 3(ii) to Form 8-K filed
with the Commission on March 29, 2001.)
4 Rights Agreement dated as of November 4, 1995 (Incorporated by
reference to Exhibit 4 to Form 8-K filed with the Commission on March
29, 2001.)
10.1 1996 Stock Incentive Plan (Incorporated by reference to Exhibit
99 of Registration Statement No. 333-9277 on Form S-8, filed with
the Commission on July 31, 1996.)
10.2 Amendment to the Employment Agreement by and among PeoplesBank, A
Codorus Valley Company, Codorus Valley Bancorp, Inc. and Larry J.
Miller dated October 1, 1997,including Executive Employment
Agreement dated January 1,1993 between Codorus Valley Bancorp,
Inc., Peoples Bank of Glen Rock and Larry J. Miller.(Incorporated
by reference to Exhibit 10.1 to Form 8-K, dated and filed with
the Commission on March 13, 1998.)
21
Codorus Valley Bancorp, Inc.
Item 6. (a) Exhibits, continued
Exhibit Description
10.3 Change of Control Agreement between PeoplesBank, A Codorus Valley
Company, Codorus Valley Bancorp, Inc. and Jann A. Weaver, dated
October 1, 1997.(Incorporated by reference to Exhibit 10.2 to
Form 8-K, dated and filed with the Commission March 13, 1998.)
10.4 Change of Control Agreement between PeoplesBank, A Codorus Valley
Company, Codorus Valley Bancorp, Inc. and Harry R. Swift, dated
October 1, 1997.(Incorporated by reference to Exhibit 10.4 to Form
8-K, dated and filed with the Commission March 13, 1998.)
10.5 1998 Independent Directors Stock Option Plan (Incorporated by
reference to Exhibit 4.3 of Registration Statement No. 333-61851
on Form S-8,filed with the Commission on August 19, 1998.)
10.6 2000 Stock Incentive Plan (Incorporated by reference to Exhibit
4.3 of Registration Statement No. 333-40532 on Form S-8, filed
with the Commission on August 19, 1998.)
10.7 Employee Stock Bonus Plan (Incorporated by reference to Exhibit 99.1
of Registration Statement No. 333-68410 on Form S-8, filed with the
Commission on August 27, 2001.)
11 Statement re: Computation of Earnings Per Share can be
referenced in Note 2 of the Consolidated Financial Statements in
this report.
Item 6. (b) Reports on Form 8-K
None.
22
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 9, 2001
Date /s/ Larry J. Miller
---------------------
Larry J. Miller,
President & CEO
(principal executive officer)
November 9, 2001
Date /s/ Jann A. Weaver
---------------------
Jann A. Weaver,
Treasurer & Assistant Secretary
(principal financial and accounting officer)
23