FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405
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(Address of principal executive offices) (Zip code)
(717) 747-1519
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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 changed since the last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
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. On April 29, 2002, 2,692,474
shares of common stock, par value $2.50, were outstanding, which includes
retroactive effect of a 5 percent stock dividend declared April 9, 2002.
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Codorus Valley Bancorp, Inc.
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION Page #
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Item 1. Financial statements:
Consolidated statements of financial condition 3
Consolidated statements of income 4
Consolidated statements of cash flows 5
Consolidated statements of changes in stockholders' equity 6
Notes to consolidated financial statements 7
Item 2. Management's discussion and analysis of financial condition and
results of operations 10
Item 3. Quantitative and qualitative disclosures about market risk 17
PART II - OTHER INFORMATION
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Item 1. Legal proceedings 17
Item 2. Changes in securities and use of proceeds 17
Item 3. Defaults upon senior securities 17
Item 4. Submission of matters to a vote of security holders 18
Item 5. Other information 18
Item 6. Exhibits and reports on Form 8-K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Codorus Valley Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
March 31, December 31,
(dollars in thousands) 2002 2001
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ASSETS
Interest bearing deposits with banks $ 210 $ 388
Cash and due from banks 7,018 9,722
Federal funds sold 31,771 14,925
- --------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 38,999 25,035
Securities, available for sale 45,510 38,362
Securities, held to maturity (fair value $9,084 for 2002 and $9,216 for 2001) 9,358 9,358
Loans, held for sale 1,345 12,349
Loans (net of deferred fees of $717 in 2002 and $691 in 2001) 227,923 225,785
Less-allowance for loan losses (1,909) (1,898)
- --------------------------------------------------------------------------------------------------------
Net loans 226,014 223,887
Premises and equipment 9,312 9,449
Other assets 12,274 12,015
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Total assets $ 342,812 $ 330,455
========================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 30,773 $ 26,093
Interest-bearing 258,232 250,852
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Total deposits 289,005 276,945
Long-term debt 19,488 19,573
Other liabilities 4,586 4,569
- --------------------------------------------------------------------------------------------------------
Total liabilities 313,079 301,087
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; 2,692,474 shares issued
on 3/31/02 and 2,564,261 on 12/31/01 6,732 6,411
Additional paid-in capital 15,497 14,004
Retained earnings 7,192 8,526
Accumulated other comprehensive income 312 427
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 29,733 29,368
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 342,812 $ 330,455
========================================================================================================
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
Unaudited
Three months ended March 31,
(dollars in thousands, except per share data) 2002 2001
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INTEREST INCOME
Loans, including fees $4,406 $4,694
Investment securities:
Taxable 493 585
Tax-exempt 131 135
Dividends 13 56
Other 115 83
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Total interest income 5,158 5,553
INTEREST EXPENSE
Deposits 2,100 2,532
Federal funds purchased and other short-term borrowings 0 7
Long-term debt 316 289
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Total interest expense 2,416 2,828
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Net interest income 2,742 2,725
PROVISION FOR LOAN LOSSES 20 30
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Net interest income after provision for loan losses 2,722 2,695
NONINTEREST INCOME
Trust and investment services fees 207 180
Service charges on deposit accounts 175 161
Income from bank owned life insurance 75 64
Other income 152 126
Gain on sale of securities 72 0
Gain on sale of mortgages 242 67
- ----------------------------------------------------------------------------------------
Total noninterest income 923 598
NONINTEREST EXPENSE
Salaries and benefits 1,438 1,247
Occupancy of premises, net 213 193
Furniture and equipment 273 255
Postage, stationery and supplies 92 112
Professional and legal 65 41
Marketing and advertising 97 87
Foreclosed real estate, net 35 96
Other 474 394
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Total noninterest expense 2,687 2,425
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Income before income taxes 958 868
PROVISION FOR INCOME TAXES 171 236
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Net income $ 787 $ 632
========================================================================================
Net income per share, basic and diluted $ 0.29 $ 0.24
========================================================================================
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
Three months ended March 31,
(dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 787 $ 632
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 243 230
Provision for loan losses 20 30
Amortization of investment in real estate partnership 196 0
Increase in cash surrender value of life insurance investment (75) (64)
Originations of held-for-sale mortgages (12,138) 0
Proceeds from sales of held-for-sale mortgages 23,384 3,761
Gain on sales of held-for-sale mortgages (242) (67)
Gain on sales of securities (72) 0
Increase in accrued interest receivable and other assets (329) (194)
Increase in accrued interest payable and other liabilities 75 175
Other, net 37 9
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,886 4,512
CASH FLOWS FROM INVESTING ACTIVITIES
Securities, available for sale:
Purchases (15,201) (3,624)
Maturities and calls 6,806 2,641
Sales 1,090 0
Net increase in loans made to customers (2,139) (1,896)
Purchases of premises and equipment (146) (208)
Proceeds from sales of foreclosed real estate 0 14
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,590) (3,073)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 11,353 468
Net increase in time deposits 707 7,914
Repayment of long-term debt (85) (80)
Dividends paid (307) (293)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,668 8,009
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Net increase in cash and cash equivalents 13,964 9,448
Cash and cash equivalents at beginning of year 25,035 9,737
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 38,999 $ 19,185
=====================================================================================================
SUPPLEMENTAL DISCLOSURES
Interest paid on deposits and borrowed funds $ 2,401 $ 2,773
Income taxes paid $ 0 $ 100
See accompanying notes.
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Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
(dollars in thousands) Stock Capital Earnings Income (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, 2002
Balance, December 31, 2001 $6,411 $14,004 $8,526 $427 $0 $29,368
Comprehensive income:
Net income 787 787
Other comprehensive income, net of tax:
Unrealized losses on securities, net (115) (115)
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Total comprehensive income 672
Cash dividends ($.114 per share, adjusted) (307) (307)
5% stock dividend - 128,313 shares at fair value 321 1,493 (1,814) 0
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $6,732 $15,497 $7,192 $312 $0 $29,733
=================================================================================================================================
For the three months ended March 31, 2001
Balance, December 31, 2000 $6,137 $12,447 $8,844 $126 $(163) $27,391
Comprehensive income:
Net income 632 632
Other comprehensive income, net of tax:
Unrealized gains on securities, net 404 404
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Total comprehensive income 1,036
Cash dividends ($.109 per share, adjusted) (293) (293)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $6,137 $12,447 $9,183 $530 $(163) $28,134
=================================================================================================================================
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
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 the notes to the audited
financial statements contained in the 2001 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 three-month period ended March 31, 2002 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Stock dividend and per share computations
The balance sheet and all per share computations include the retroactive effect
of stock dividends declared, including the 5 percent stock dividend declared
April 9, 2002. The weighted average number of shares of common stock outstanding
used for basic and diluted calculations were 2,692,474 and 2,699,292,
respectively, for the three-month period ended March 31, 2002. Comparatively,
shares for basic and diluted calculations were 2,675,341 and 2,676,406,
respectively, for the three-month period ended March 31, 2001.
Comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The components of other comprehensive income and related
tax effects are presented in the following table:
Three months ended
March 31,
(dollars in thousands) 2002 2001
- --------------------------------------------------------------------------
Unrealized holding gains(losses)
arising during the period $(102) $ 612
Reclassification adjustment for gains
included in net income (72) -
- --------------------------------------------------------------------------
Net unrealized gains(losses) (174) 612
Tax effect 59 (208)
- --------------------------------------------------------------------------
Net of tax effect $(115) $ 404
Reclassifications
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation format. These reclassifications had no impact
on the Corporation's net income.
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Recently issued FASB Statements
In June of 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations", which addresses the
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 will become effective for Codorus Valley on January 1, 2003 and
is not expected to have a significant impact on the financial condition or
results of operations.
NOTE 3--DEPOSITS
The composition of deposits on March 31, 2002 and December 31, 2001, was as
follows:
March 31, December 31,
(dollars in thousands) 2002 2001
- ----------------------------------------------------------------------
Noninterest bearing demand $ 30,773 $ 26,093
NOW 31,662 29,301
Money market 66,266 62,148
Savings 13,911 13,719
Time CDs less than $100,000 116,970 117,724
Time CDs $100,000 or more 29,423 27,960
- ----------------------------------------------------------------------
Total deposits $289,005 $276,945
NOTE 4--REGULATORY MATTERS
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a material
effect on Codorus Valley's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Codorus
Valley and PeoplesBank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgements by the
regulators.
Quantitative measures established by regulators to ensure capital adequacy
require Codorus Valley and PeoplesBank to maintain minimum ratios, as set forth
below, to total and Tier I capital as a percentage of risk-weighted assets, and
of Tier I capital to average assets (leverage ratio). Management believes that
Codorus Valley and PeoplesBank were well capitalized on March 31, 2002, based on
FDIC capital guidelines.
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NOTE 4-REGULATORY MATTERS
===========================================================================================================================
CODORUS VALLEY BANCORP, INC.
ADEQUATELY WELL CAPITALIZED
ACTUAL CAPITALIZED MINIMUM MINIMUM
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(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 2002
Capital ratios:
Tier 1 risk based $29,413 11.26% >= $10,446 >= 4.0% >= $15,669 >= 6.0%
Total risk based 31,322 11.99 >= 20,891 >= 8.0 >= 26,114 >= 10.0
Leverage 29,413 8.84 >= 13,308 >= 4.0 >= 16,635 >= 5.0
- ---------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001
Capital ratios:
Tier 1 risk based $28,932 10.88% >= $10,637 >= 4.0% >= $15,956 >= 6.0%
Total risk based 30,829 11.59 >= 21,275 >= 8.0 >= 26,593 >= 10.0
Leverage 28,932 9.27 >= 12,482 >= 4.0 >= 15,603 >= 5.0
===========================================================================================================================
===========================================================================================================================
PEOPLESBANK
ADEQUATELY WELL CAPITALIZED
ACTUAL CAPITALIZED MINIMUM MINIMUM
--------------------------------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 2002
Capital ratios:
Tier 1 risk based $24,381 9.58% >= $10,179 >= 4.0% >= $15,270 >= 6.0%
Total risk based 26,290 10.33 >= 20,360 >= 8.0 >= 25,450 >= 10.0
Leverage 24,381 7.48 >= 13,039 >= 4.0 >= 16,298 >= 5.0
- ---------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001
Capital ratios:
Tier 1 risk based $23,919 9.23% >= $10,369 >= 4.0% >= $15,554 >= 6.0%
Total risk based 25,816 9.96 >= 20,738 >= 8.0 >= 25,923 >= 10.0
Leverage 23,919 7.86 >= 12,207 >= 4.0 >= 15,259 >= 5.0
NOTE 5--CONTINGENT LIABILITIES
During second quarter 2001, the management of PeoplesBank 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 did not have
sufficient funds to cover reimbursement requests, and PeoplesBank terminated the
merchant's credit card account relationship. Losses of approximately $4,600 were
included in other expense for the first three months of 2002 and $41,000 for the
year 2001, which represent refunds in excess of funds available in the
merchant's account. Management cannot estimate the additional potential loss
associated with this merchant credit card account 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.
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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 the accompanying
consolidated financial statements for Codorus Valley Bancorp, Inc. (Codorus
Valley or Corporation), a bank holding company, and its wholly owned subsidiary,
PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided below. Codorus
Valley's consolidated financial condition and results of operations consist
almost entirely of PeoplesBank's financial condition and results of operations.
Current performance does not guarantee and may not be indicative of similar
performance in the future.
FORWARD-LOOKING STATEMENTS:
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements may be subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Corporation and its
subsidiaries. When words such as "believes," "expects," "anticipates" or similar
expressions occur in the Form 10-Q, management is making forward-looking
statements.
Readers should note that many factors, some of which are discussed elsewhere in
the 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 the Form 10-Q. 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 analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that Codorus Valley files periodically with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES:
Disclosure of Codorus Valley's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2001 Annual Report to
Stockholders filed as Exhibit 13 to Form 10-K for the period ended December 31,
2001. Some of these policies are particularly sensitive requiring significant
judgements, estimates and assumptions to be made by management. Additional
information is contained in management's Discussion and Analysis for the most
sensitive of these issues, including the provision and allowance for loan
losses, which are located on pages 11 and 15 of this report.
Significant estimates are made by management in determining the allowance for
loan losses. Consideration is given to a variety of factors in establishing this
estimate. In estimating the allowance for loan losses, management considers
current economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, financial and managerial strengths
of borrowers,
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adequacy of collateral, if collateral dependent, or present value of future cash
flows and other relevant factors.
THREE MONTHS ENDED MARCH 31, 2002
COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
INCOME STATEMENT ANALYSIS
OVERVIEW
Net income for the current three-month period was $787,000 or $.29 per diluted
share, compared to $632,000 or $.24 per diluted share, for the first quarter of
2001. The $155,000 or 25 percent increase in current period net income was
caused primarily by an increase in noninterest income, including gains from the
sale of held-for-sale mortgages and available-for-sale securities, and a
decrease in federal income tax, which more than offset an increase in
noninterest expense. The decrease in federal income tax was due to tax credits,
which PeoplesBank will receive from its investment in a real estate partnership
with an affiliate of the YMCA of York, Pennsylvania. The partnership's purpose
is to provide affordable housing to qualified families and, to a lesser degree,
space for commercial purposes in downtown York as part of a revitalization
initiative. The increase in noninterest expense was caused primarily by
increased operating expenses attributable to the addition of two full service
banking offices, a centralized call center and a mortgage banking operation in
the prior year. 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 ended March 31, 2002, was
$2,742,000, an increase of $17,000 or 0.6 percent above the same period in 2001.
Net interest income increased due to an increase in the volume of earning
assets, and a decrease in funding costs. Earning assets averaged $305 million
and yielded 6.52 percent (tax equivalent) for 2002 compared to $268 million and
8.30 percent, respectively, for 2001. Interest bearing liabilities averaged $273
million at an average rate of 3.55 percent for 2002 compared to $245 million and
4.69 percent, respectively, for 2001. Declining market interest rates, which
prevailed throughout 2001 and early 2002, lowered yields on earning assets and
rates paid on the liabilities that funded them.
PROVISION FOR LOAN LOSSES
A $20,000 provision expense for loan losses was recorded in the current
three-month period, compared to $30,000 for the same period in 2001. The expense
for each period was responsive to loan growth and the condition of the loan
portfolio.
NONINTEREST INCOME
Total noninterest income for the current three-month period was $923,000, an
increase of $325,000 or 54 percent above the first quarter of 2001. Current
period noninterest income included a $175,000 increase in gains from the sale of
held-for-sale residential mortgages. As market saturation and rising market
interest rates bring an end to the mortgage "refi boom," it is unlikely that the
current level of gains from sales of mortgages will be sustainable in the period
ahead. The current period also reflected $72,000 in gains from the sale of
available-for-sale securities. Comparatively, no securities were sold during the
same period of 2001. Other income increased 21 percent due primarily to
increased fee
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income from activities of PeoplesBank subsidiaries, SYC Insurance, Inc. and SYC
Settlement Services, Inc.
NONINTEREST EXPENSE
Total noninterest expense for the current three-month period was $2,687,000, an
increase of $262,000 or 11 percent above the first quarter of 2001. The increase
was caused primarily by increases in salaries and benefits, occupancy, and
furniture and equipment expenses, which were caused by the addition of two
financial centers, a mortgage banking operation and a centralized call center in
the prior year. Foreclosed real estate expense decreased due to a decrease in
foreclosed real estate assets. Other expense increased due in part to a $35,000
loss on a fraudulent check, and normal business growth.
FRANCHISE EXPANSION
Management plans to establish a financial center in the new Susquehanna Commerce
Center at 221 West Philadelphia Street in downtown York, Pennsylvania when
construction is complete during the fourth quarter of 2002. A long-term lease
agreement for approximately 2,269 square feet of space is presently being
negotiated.
CAPITAL INVESTMENT IN TECHNOLOGY
Recently, the board of directors approved the purchase of teller automation
software and compatible printers to automate the teller function at PeoplesBank.
This capital investment is expected to increase productivity and quality
control, and increase fee income. It is also expected to enhance sales and
corporate image. The new system will cost approximately $127,000 and will be
depreciated over a five-year useful life. Plans call for the teller automation
system to be operational by the end of September 2002.
INCOME TAXES
The provision for federal income tax was $171,000 for the current three-month
period, compared to $236,000 for the same period in 2001. The 28 percent
decrease reflects recognition of tax credits from PeoplesBank's investment in a
low-income housing partnership with an affiliate of the YMCA of York,
Pennsylvania, described more fully in the 2001 Annual Report to Stockholders.
BALANCE SHEET REVIEW
INVESTMENTS AND LOANS
On March 31, 2002, overnight investments in federal funds sold increased $17
million from year-end 2001. The increase was primarily attributable to funds
from deposit growth, as customers continued to seek safe haven from depressed
securities markets, and proceeds from the sale of held-for-sale mortgages. The
level of federal funds sold is expected to decline in the period ahead as funds
are redeployed to loan and investment securities portfolios.
On March 31, 2002, held-for-sale mortgages decreased $11 million from year-end
2001. The decrease represented a focused effort by management to liquidate this
portfolio and thereby maximize gains before they dissipated in response to
rising market interest rates.
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DEPOSITS
On March 31, 2002, total deposits increased $12 million from year-end 2001 for
the same reason provided above in Investments and Loans. The addition of two
financial centers in 2001 also contributed to deposit growth in the current
period.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
Stockholders' equity, or capital, as a source of funds, enables Codorus Valley
to maintain asset growth and absorb losses. Total stockholders' equity was
approximately $29,733,000 on March 31, 2002, an increase of $365,000 or 1.2
percent above December 31, 2001. The increase was caused primarily by profitable
operations.
On April 9, 2002, the board of directors declared a quarterly cash dividend of
$0.12 ($0.114 adjusted) per share, payable on or before May 14, 2002, to
shareholders of record April 23, 2002. This follows a $0.12 ($0.114 adjusted)
per share cash dividend paid in February. Also on April 9, 2002, the board
declared a 5 percent stock dividend payable on or before June 6, 2002, to
shareholders of record April 23, 2002. Payment of the stock dividend will result
in the issuance of approximately 128,213 common shares, which was reflected in
the enclosed financial statements. The weighted average number of shares of
common stock outstanding, restated for the stock dividend declared April 9,
2002, was approximately 2,692,474 for the three-month period ended March 31,
2002, and 2,675,341 for the same period of 2001.
Codorus Valley and PeoplesBank are subject to various regulatory capital
requirements administered by banking regulators that involve quantitative
guidelines and qualitative judgements. Quantitative measures established by
regulators pertain to minimum capital ratios, as set forth in Note 4--Regulatory
Matters, to the financial statements. Management believes that Codorus Valley
and PeoplesBank were well capitalized on March 31, 2002, based on FDIC capital
guidelines.
RISK MANAGEMENT
NONPERFORMING ASSETS
Table 1--Nonperforming Assets and Past Due Loans provides a summary of
nonperforming assets and past due loans, and related ratios. The paragraphs
below provide information for selected categories for March 31, 2002, compared
to December 31, 2001.
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TABLE 1-NONPERFORMING ASSETS AND PAST DUE LOANS
March 31, December 31,
(dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------------
Nonaccrual loans $1,653 $1,411
Foreclosed real estate, net of allowance 755 692
- --------------------------------------------------------------------------------------
Total nonperforming assets $2,408 $2,103
======================================================================================
Accruing loans that are contractually past due
90 days or more as to principal or interest $ 209 $ 164
Ratios:
Nonaccrual loans as a % of total year-end loans 0.73% 0.62%
Nonperforming assets as a % of total year-end
loans and net foreclosed real estate 1.05% 0.93%
Nonperforming assets as a % of total year-end 8.10% 7.16%
stockholders' equity
Allowance for loan losses as a multiple of
nonaccrual loans 1.2x 1.3x
Nonaccrual loans were principally comprised of collateral dependent business
loans. Accordingly, Codorus Valley recognized interest income on a cash basis
for these loans. On March 31, 2002, the nonaccrual loan portfolio was
$1,653,000, an increase of $242,000 or 17 percent above December 31, 2001. The
increase was caused by the addition of a $442,000 business loan, which is not
adequately collateralized in management's judgement. An appropriate loss
allowance has been established for this account, pending collateral liquidation
and debt workout. On March 31, 2002, the nonaccrual loan portfolio was comprised
of fourteen unrelated accounts ranging in size from $2,000 to $442,000. These
loan relationships vary by industry and are generally collateralized with real
estate assets. An allowance for probable loan losses is evaluated at least
quarterly by management and the board of directors.
Foreclosed real estate, net of reserve, totaled $755,000, on March 31, 2002,
which was slightly above the level at year-end 2001. On March 31, 2002, the
foreclosed real estate portfolio was comprised of five unrelated accounts
ranging in size from $63,000 to $502,000. The single largest account, which
management believes is adequately collateralized, makes up 66 percent of the
total portfolio. An allowance for probable losses, which is evaluated at least
quarterly, has been established for foreclosed real estate assets whose
estimated fair value, less selling expenses, is below their financial carrying
costs. On March 31, 2002, the allowance was $39,000. For the first three months
of 2002 a $9,000 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 of 2001. Efforts to liquidate foreclosed real estate are
proceeding as quickly as potential buyers can be located and legal constraints
permit.
Accruing loans that are contractually past due 90 days or more as to principal
or interest totaled $209,000 on March 31, 2002, compared to $164,000 on December
31, 2001. The level for both periods is considered immaterial. Generally, loans
in the past due category are adequately collateralized and in the process of
collection.
ALLOWANCE FOR LOAN LOSSES
Table 2--Analysis of Allowance for Loan Losses, shows a $1,909,000 allowance on
March 31, 2002, which was 0.84 percent of total loans. Based on a recent
evaluation of potential loan losses in the current
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portfolio, management believes that the allowance is adequate to support losses
inherent in the loan portfolio on March 31, 2002.
TABLE 2-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 2002 2001
- ---------------------------------------------------------------------------------
Balance-January 1, $1,898 $1,967
Provision charged to operating expense 20 30
Loans charged off:
Commercial 18 20
Real estate-mortgage 0 0
Consumer 0 1
- ---------------------------------------------------------------------------------
Total loans charged off 18 21
Recoveries:
Commercial 7 2
Real estate-mortgage 0 0
Consumer 2 2
- ---------------------------------------------------------------------------------
Total recoveries 9 4
- ---------------------------------------------------------------------------------
Net charge-offs (recoveries) 9 17
Balance-March 31, $1,909 $1,980
=================================================================================
Ratios:
Net charge-offs (annualized) to average
total loans 0.02% 0.03%
Allowance for loan losses to total loans
at period-end 0.84% 0.92%
Allowance for loan losses to nonaccrual loans
and loans past due 90 days or more 102.5% 68.6%
LIQUIDITY
Since year-end 2001, Codorus Valley's liquidity increased as evidenced by an
increase in federal funds sold (overnight investments) and a decrease in the
loan-to-deposit ratio. The loan-to-deposit ratio was approximately 78.9 percent
on March 31, 2002, compared to 81.5 percent on December 31, 2001. Funds from
deposit growth and the sale of held-for-sale mortgages were the principal causes
for the increase in liquidity.
Codorus Valley's financial statements do not reflect various commitments that
are made in the normal course of business, which may involve some liquidity
risk. These commitments consist primarily of commitments to grant new loans,
unfunded commitments of existing loans, and letters of credit made under the
same standards as on-balance sheet instruments. Unused commitments on March 31,
2002 totaled $49,822,000, which consisted of $34,381,000 in unfunded commitments
of existing loans, $12,261,000 to grant new loans and $3,180,000 in letters of
credit. Due to fixed maturity dates and specified conditions within these
instruments, many will expire without being drawn upon. Management believes that
amounts actually drawn upon can be funded in the normal course of operations and
therefore do not present a significant liquidity risk to Codorus Valley.
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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 management manages interest rate risk. A detailed discussion of
market interest risk is provided in SEC Form 10-K for the period ended December
31, 2001.
Codorus Valley performed a simulation on its balance sheet for March 31, 2002.
The results of that point-in-time analysis are shown in Table 3--Interest Rate
Sensitivity. Since year-end 2001, Codorus Valley's balance sheet has become more
asset sensitive in response to market interest rates and economic uncertainty.
Liquidity increased at PeoplesBank, and throughout the financial services
industry, as deposit customers sought safe haven from depressed securities
markets, loan customers refinanced and bond issuers called bonds.
TABLE 3-INTEREST RATE SENSITIVITY
at March 31, 2002
- ------------------------------------------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- ------------------------------------------------------------------------------------------------------
+200 High 348 13.1
0 Flat (baseline) 0 0
-200 Low (450) (17.0)
+150 Most likely 216 8.2
at December 31, 2001
- ------------------------------------------------------------------------------------------------------
Change in
Change in interest rates Forecasted interest net income
(basis points) over 12 mos rate scenario $000's %
- ------------------------------------------------------------------------------------------------------
+200 High 304 10.2
0 Flat (baseline) 0 0
-200 Low (458) (15.4)
+175 Most likely 35 1.2
OTHER RISKS
More grand acts of terrorism in the United States of America, or in other
countries, could 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 Codorus Valley.
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 such legislation would
affect the business of Codorus Valley and its subsidiaries.
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 others' businesses after complying with certain conditions and
regulations. The law grants to community banks the power to enter new
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financial markets as a matter of right that larger institutions have managed to
do on an ad hoc basis. At this time, Codorus Valley has no plans to pursue these
additional possibilities. Management does not believe that the Financial
Services Modernization Act will have a material effect on Codorus Valley's
operations. However, the law may result in increased competition from larger
financial service 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 will
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 upon the liquidity, capital resources, or
results of operations. Although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future may
have, a negative impact on Codorus Valley's results of operations.
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.
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.
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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
Number Description of Exhibit
- ------- ----------------------
3(i) Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to Current Report on Form 8-K, filed with the
Commission on March 29, 2001.)
3(ii) By-laws (Incorporated by reference to Exhibit 3(ii) to
Current Report on Form 8-K, filed with the Commission on
March 29, 2001.)
4 Rights Agreement dated as of November 4, 1995 (Incorporated
by reference to Current Report on 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 Amendments 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. (Incor- porated by reference
to Exhibit 10.1 to Registrant's Current Report on Form 8-K,
dated and filed with the Commission on March 13, 1998.)
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 the Registrant's Current Report on 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 the Registrant's Current Report on Form 8-K,
filed with the Commission on 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 June 30, 2000.)
10.7 2001 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.)
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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.
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Registrant
has caused this report to be signed on its behalf by the authorized undersigned.
Codorus Valley Bancorp, Inc.
(Registrant)
May 9, 2002 /s/ LARRY J. MILLER
- ----------- -------------------------------
Date Larry J. Miller
President & CEO
(Principal executive officer)
May 9, 2002
- ----------- /s/ JANN A. WEAVER
Date -------------------------------
Jann A. Weaver
Treasurer & Assistant Secretary
(Principal financial and accounting officer)
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