EXHIBIT 13
EXCERPTS FROM:
1999 ANNUAL REPORT TO STOCKHOLDERS
17
SELECTED FINANCIAL DATA
Codorus Valley Bancorp, Inc.
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
(in thousands)
Total interest income $20,314 $19,978 $19,513 $18,523 $18,346
Total interest expense 9,534 9,265 9,096 8,756 8,722
- -------------------------------------------------------------------------------------------------------------
Net interest income 10,780 10,713 10,417 9,767 9,624
Provision for loan losses 225 375 275 134 228
Noninterest income 2,237 1,832 1,227 1,090 912
Noninterest expense 9,054 8,446 7,729 6,755 6,559
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 3,738 3,724 3,640 3,968 3,749
Provision for income taxes 1,074 1,188 1,161 1,261 1,155
- -------------------------------------------------------------------------------------------------------------
Net income $ 2,664 $ 2,536 $ 2,479 $ 2,707 $ 2,594
- -------------------------------------------------------------------------------------------------------------
RATIOS (in percentage)
Return on average
stockholders' equity 10.2 10.0 10.4 12.4 13.3
Return on average assets 0.95 0.98 1.00 1.14 1.14
Tier I risk-based capital 11.2 12.4 12.4 13.6 13.4
Total risk-based capital 12.1 13.3 13.5 14.9 14.6
Average stockholders' equity
to average assets 9.3 9.8 9.7 9.2 8.6
PER COMMON SHARE
(adjusted for stock dividends)
Net income, basic and diluted $1.11 $1.05 $1.03 $1.12 $1.08
Cash dividends paid $0.42 $0.38 $0.35 $0.31 $0.27
Stock dividend paid 5% 5% 5% 5% 5%
Stock split effected as stock dividend paid - 100% - - -
Book value $10.83 $10.82 $10.14 $9.43 $8.73
Dividend payout ratio 38.0% 36.4% 33.7% 27.8% 25.4%
Weighted average shares outstanding 2,393,728 2,407,827 2,407,827 2,407,826 2,403,575
SUMMARY OF FINANCIAL CONDITION
AT YEAR-END (in thousands)
Securities $55,629 $56,225 $40,303 $56,859 $61,679
Loans 207,318 189,111 191,342 166,651 160,008
Assets 291,156 273,082 255,058 237,329 234,747
Deposits 238,458 241,913 226,263 209,460 212,440
Borrowings 25,999 3,805 2,802 4,000 0
Equity 25,372 26,058 24,425 22,706 21,032
Trust and investment services
Assets under management (market value) 76,838 70,825 59,863 49,292 40,215
Fee income 542 549 441 321 311
NON-FINANCIAL DATA
Number of bank offices 8 8 8 7 7
Number of employees
(full-time equivalent) 131 130 140 129 128
- -------------------------------------------------------------------------------------------------------------
CVB, Inc.
---------
4
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Codorus Valley Bancorp, Inc.
DECEMBER 31,
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Interest bearing deposits with banks $ 226 $ 203
Noninterest bearing deposits and cash 10,399 10,889
Federal funds sold 568 0
Securities available-for-sale 46,268 56,225
Securities held-to-maturity (market value $8,835) 9,361 0
Loans 207,318 189,111
Less-allowance for loan losses (2,023) (1,865)
- -----------------------------------------------------------------------------------------------------------------------
Total net loans 205,295 187,246
Premises and equipment 9,547 9,345
Interest receivable 1,617 1,588
Other assets 7,875 7,586
- -----------------------------------------------------------------------------------------------------------------------
Total assets $291,156 $273,082
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing demand $ 23,427 $ 25,047
NOW 24,376 26,936
Money market 40,449 36,577
Savings 19,007 20,655
Time CDs less than $100,000 112,251 113,688
Time CDs $100,000 and above 18,948 19,010
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 238,458 241,913
Federal funds purchased 2,657 1,234
Other short-term borrowings 13,000 0
Long-term borrowings 10,342 2,571
Interest payable 731 770
Other liabilities 596 536
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 265,784 247,024
STOCKHOLDERS' EQUITY
Series preferred stock, par value $2.50 per share;
1,000,000 shares authorized; 0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 2,343,183 shares issued
and outstanding for 1999, and 2,303,987 for 1998 6,019 5,760
Additional paid-in capital 11,978 10,279
Retained earnings 9,050 9,561
Accumulated other comprehensive income (523) 458
Less-Treasury stock, 64,544 common shares (1,152) 0
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,372 26,058
Total liabilities and stockholders' equity $ 291,156 $ 273,082
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes.
CVB, Inc.
---------
5
CONSOLIDATED STATEMENTS OF INCOME
Codorus Valley Bancorp, Inc.
YEARS ENDED DECEMBER 31,
(dollars in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees from loans $17,212 $16,832 $16,356
Interest from deposits with banks 11 9 15
Interest from federal funds sold 93 354 162
Interest and dividends from investment securities:
Taxable interest income 2,521 2,448 2,725
Tax-exempt interest income 361 281 201
Dividend income 116 54 54
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 20,314 19,978 19,513
INTEREST EXPENSE
Interest on deposits:
NOW 260 345 381
Money market 1,276 997 869
Savings 417 455 472
Time CDs less than $100,000 6,007 6,179 6,103
Time CDs $100,000 and above 976 1,105 1,010
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense on deposits 8,936 9,081 8,835
Interest on federal funds purchased and other short-term borrowings 194 0 73
Interest on long-term borrowings 404 184 188
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,534 9,265 9,096
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 10,780 10,713 10,417
PROVISION FOR LOAN LOSSES 225 375 275
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,555 10,338 10,142
NONINTEREST INCOME
Trust and investment services fees 542 549 441
Service charges on deposit accounts 573 487 432
Other income 785 396 275
Gain (loss) from sales of securities 305 194 (17)
Gains, other 32 206 96
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,237 1,832 1,227
NONINTEREST EXPENSE
Salaries and benefits 4,637 4,097 4,002
Occupancy of premises 793 806 604
Furniture and equipment 962 926 856
Postage, stationery and supplies 360 359 413
Professional and legal 282 302 223
Marketing and advertising 370 309 341
Other real estate owned, net 119 134 50
Other 1,531 1,513 1,240
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,054 8,446 7,729
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,738 3,724 3,640
PROVISION FOR INCOME TAXES 1,074 1,188 1,161
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 2,664 $ 2,536 $ 2,479
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share, basic and diluted $1.11 $1.05 $1.03
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
CVB, Inc.
---------
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Codorus Valley Bancorp, Inc.
YEARS ENDED DECEMBER 31,
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,664 $ 2,536 $ 2,479
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 844 790 674
Provision for loan losses 225 375 275
Provision for losses on other real estate owned 39 69 18
Deferred federal income tax expense 12 122 153
(Gain) loss on sales of securities (305) (194) 17
Gains, other (32) (206) (96)
(Gain) loss on sales of other real estate owned (3) 8 (17)
(Increase) decrease in interest receivable (29) (50) 104
(Increase) decrease in other assets (364) 90 39
(Decrease) increase in interest payable (39) (50) 24
Increase (decrease) in other liabilities 173 (325) 381
Other, net (14) (118) (145)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,171 3,047 3,906
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale 7,368 9,163 5,240
Proceeds from maturities and calls of securities available-for-sale 17,120 14,368 17,712
Purchase of securities available-for-sale (15,852) (39,300) (6,246)
Purchase of securities held-to-maturity (9,361) 0 0
Net increase in loans made to customers (18,992) (6,701) (29,553)
Proceeds from loan sales 569 6,499 4,487
Proceeds from sales of premises and equipment 45 0 151
Purchases of premises and equipment (1,062) (338) (5,560)
Proceeds from sales of other real estate owned 725 551 649
Investment in cash surrender value life insurance 0 (5,115) 0
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (19,440) (20,873) (13,120)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings deposits (1,956) 17,129 4,404
Net (decrease) increase in time deposits (1,499) (1,479) 12,399
Net increase (decrease) in short-term borrowings 14,423 1,234 (4,000)
Net increase (decrease) in long-term borrowings 7,771 (231) 2,802
Dividends paid (1,011) (923) (836)
Payment to repurchase common stock (1,352) 0 0
Cash paid in lieu of fractional shares (6) (6) (10)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,370 15,724 14,759
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 101 (2,102) 5,545
Cash and cash equivalents at beginning of year 11,092 13,194 7,649
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $11,193 $11,092 $13,194
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest payments $8,975 $9,131 $8,811
Income tax payments $1,032 $1,012 $930
See accompanying notes.
CVB, Inc.
---------
7
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Codorus Valley Bancorp, Inc.
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY TOTAL
(dollars in thousands) STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $2,613 $6,556 $13,191 $346 $22,706
Comprehensive income:
Net income 2,479 2,479
Net change in unrealized gains
(losses) on securities 86 86
------
Comprehensive income 2,565
Cash dividends (836) (836)
5% stock dividend -
51,963 shares at fair value 130 1,507 (1,647) (10)
100% stock divided declared -
1,097,259 shares at par value 2,743 (2,743) 0
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 5,486 8,063 10,444 432 0 24,425
Comprehensive income:
Net income 2,536 2,536
Other comprehensive income, net of tax
Unrealized gains on securities of $154,
net of reclassification adjustment for
gains included in net income of $128 26 26
-------
Comprehensive income 2,562
Cash dividends (923) (923)
5% stock dividend -
109,469 shares at fair value 274 2,216 (2,496) (6)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,760 10,279 9,561 458 0 26,058
Comprehensive income:
Net income 2,664 2,664
Other comprehensive income, net of tax
Unrealized losses on securities of $780,
net of reclassification adjustment for
gains included in net income of $201 (981) (981)
-------
Comprehensive income 1,683
Cash dividends (1,011) (1,011)
5% stock dividend -
114,718 shares at fair value 259 1,699 (2,164) 200 (6)
Purchase of treasury stock (75,422 shares) (1,352) (1,352)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $6,019 $11,978 $9,050 ($523) ($1,152) $25,372
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
CVB, Inc.
---------
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 1-Summary Of Significant Accounting Policies
Basis of Financial Statement Presentation
The accounting and reporting policies of Codorus Valley Bancorp, Inc. and
subsidiaries (Codorus Valley or Corporation) conform with generally accepted
accounting principles (GAAP) and have been followed on a consistent basis.
Principles of Consolidation
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly-owned bank subsidiary, PeoplesBank, and its
wholly-owned nonbank subsidiary, SYC Realty Company, Inc. All significant
intercompany account balances and transactions have been eliminated in
consolidation.
Securities Available-for-Sale and Held-to-Maturity
The classification of securities is determined at the time of acquisition and is
reevaluated at each reporting date. Securities classified as available-for-sale
are carried at fair value, with unrealized gains and losses, net of taxes,
reported as a component of accumulated other comprehensive income in
stockholders' equity. Securities classified as held-to-maturity are carried at
amortized cost. Realized gains and losses from the sale of securities are
computed on the basis of specific identification of the adjusted cost of each
security, and are shown net as a separate line item in the statement of income.
Loans
Interest on loans is credited to income based upon the principal amount
outstanding. Loan fees are generally considered to be adjustments of interest
rate yields and are amortized to interest income over the terms of the related
loans. When circumstances indicate that collection of a loan is doubtful, the
accrual of interest income is discontinued, and unpaid interest on the loan is
reversed and charged against current income. Loans are returned to accrual
status when management determines that circumstances have improved to the extent
that both principal and interest are deemed collectible. In those cases where
collection of principal is in doubt, additions are made to the allowance for
loan losses.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value. The
amount by which cost exceeds market value, if any, is accounted for as a
valuation allowance and is charged to expense in the period of the change.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management, based on information currently available, to absorb potential losses
in the loan portfolio. Recognized loan losses are charged, and recoveries
credited, to the allowance. The Corporation's loan loss provision, charged to
operating income, is determined by management based on such factors as changes
in local economic conditions, prior loss experience, adequacy of collateral, and
risk characteristics of the loan portfolio.
The Corporation accounts for loan impairment in accordance with Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." Under Statement No.
114, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due. The Statement requires that loans be measured based on the present value of
expected future cash flows, discounted at the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than its recorded investment, the Corporation
recognizes an impairment by adjusting a valuation allowance. Statement No. 114
does not apply to large groups of homogeneous loans such as consumer
installment, and bank credit card loans, which are collectively evaluated for
impairment. Smaller balance commercial loans are also excluded from the
application of the Statement. At December 31, 1999 and 1998, impaired loans
consisted solely of nonaccrual, collateral dependent loans.
Loans are charged off when there is permanent impairment of the related recorded
investment. The cash-basis method of recognizing interest income was used for
impaired loans for all reported periods as is consistent with the Corporation's
nonaccrual policy.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation expense is calculated principally on the straight-line method. The
depreciation methods are designed to allocate the cost of the assets over their
estimated useful lives. Estimated useful lives are ten to forty years for
buildings and improvements, and three to ten years for furniture and equipment.
Maintenance and repairs are charged to expense as incurred. The cost of
significant improvements to existing assets is capitalized. When facilities are
retired or otherwise disposed of, the cost is removed from the asset accounts
and any gain or loss is reflected in the statement of income.
CVB, Inc.
---------
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Real Estate Owned
Other real estate owned (OREO), included in other assets, is comprised of
property acquired through a foreclosure proceeding or acceptance of a
deed-in-lieu of foreclosure. OREO is initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
are reviewed quarterly by management and the asset is carried at the lower of
(1) cost or (2) fair value minus estimated costs to sell. If the fair value of
the asset minus the estimated costs to sell the asset is less than the cost of
the asset, the deficiency is immediately recognized as a valuation allowance.
If, however, the fair value minus the costs to sell the asset subsequently
increases above the asset's cost, the valuation allowance is reduced, but not
below zero. Costs related to the improvement of OREO are capitalized until the
real estate reaches a saleable condition. Revenue and expenses from operations
and changes in the valuation allowance are included in OREO expense.
Trust and Investment Services Assets and Income
Assets held by PeoplesBank in a fiduciary or agency capacity for its customers
are not included in the consolidated financial statements since such items are
not assets of PeoplesBank. Trust and investment services income is reported on a
cash basis, which is not materially different from the accrual basis.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return. Consolidated income tax expense is allocated based on their respective
earnings to total earnings. The Corporation accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under Statement No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities. These differences are then subject to
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Statement No. 109 requires the recognition of future tax
benefits, measured by enacted tax rates, attributable to deductible temporary
differences between the financial statement and income tax basis of assets and
liabilities. In order to realize the deferred tax asset, the Corporation
considered a number of factors, including its recent earnings history and its
expectation of future earnings. Based on these factors the Corporation has
concluded that it is more likely than not the deferred tax asset will be
realized. Accordingly, a deferred tax valuation allowance was not established as
of December 31, 1999. Periodically, the Corporation will assess whether a
valuation allowance for the deferred tax account will be required.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Net Income and Dividends Per Common Share
The Corporation computes net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." All net income per
share amounts for all periods have been presented to conform to Statement 128.
Dividends per common share are computed by dividing total dividends by the
weighted average number of shares of common stock outstanding, adjusted for
stock dividends. The weighted average number of shares of common stock
outstanding used for both net income per share and dividends per common share
was approximately 2,393,728 for 1999 and 2,407,827 for 1998 and 1997.
Stock-Based Compensation
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for shareholder approved employee and director
stock options. Under APB 25, since the exercise price of the Corporation's
employee and director stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, and federal funds sold. Non-cash financing transactions for the
years ended December 31, 1999, 1998 and 1997 consisted of certificates of
deposit which matured and were renewed for new terms. These transactions
amounted to approximately $26,852,000 for 1999, $35,824,000 for 1998 and
$45,071,000 for 1997. Non-cash investing transactions for the years ended
December 31, 1999, 1998 and 1997 consisted of the transfer of loans to other
real estate owned. These transfers amounted to approximately $305,000 for 1999,
$2,171,000 for 1998 and $297,000 for 1997.
CVB, Inc.
---------
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures (see Note 17) for financial instruments.
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate their fair
value at the reporting date.
Investment securities (including mortgage-backed securities): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate and adjustable-rate loans that
reprice frequently and show no significant change in credit risk, fair
values are based on carrying values. For fixed-rate loans, fair values
are estimated by discounting the future cash flows, using market rates
applicable to loans of similar maturities and characteristics, at the
reporting date.
Bank owned life insurance: Bank owned life insurance is carried at fair
value, which approximates the cash surrender value at the reporting date.
Demand and savings deposits: The fair value of demand and savings
deposits is the amount payable on demand at the reporting date.
Time deposits: The carrying value of time certificates of deposit (CDs)
less than $100,000 with an original term of six months or less and
variable rate CDs of less than $100,000 is assumed to approximate market
value. The fair value of all other CDs is estimated by discounting the
future cash flows, using rates offered for deposits of similar remaining
maturities at the reporting date.
Short-term borrowings: The carrying amount reported in the balance sheet
approximates their fair value at the reporting date due to the short
duration of these instruments.
Long-term borrowings: The fair value of long-term borrowings is estimated
by discounting the future cash flows, using rates available for
borrowings of similar maturities at the reporting date.
Off-balance sheet instruments: The fair value of off-balance sheet
instruments, such as commitments to extend credit and standby letters of
credit, are based on fees currently charged to enter into similar
agreements. Generally, fees charged on standby letters of credit and
selected commitments to extend credit, principally for commercial loans,
outstanding at December 31, 1999 are not considered material.
NOTE 2-Current Accounting Developments
During the fourth quarter of 1999, the Financial Accounting Standards Board
(FASB) issued an Exposure Draft on Business Combinations and Intangible Assets.
Under the proposed Draft, companies would be required to: account for all
business combinations using the purchase method; amortize goodwill over its
useful economic life, but in no event over a period longer than 20 years;
present goodwill charges on a net-of-tax basis as the last component of
continuing operations on the income statement; recognize negative goodwill as an
extraordinary gain; and recognize all reliably measurable identifiable
intangible assets at their fair value, among other recommendations. The FASB
expects to issue a final statement in the fourth quarter of 2000, applicable to
business combinations and to intangible assets acquired in transactions
initiated after the issuance date of the final statement.
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the reporting of financial
information from the operating segments in annual and interim financial
statements. This Statement requires that financial information be reported on
the basis that it is reported internally for evaluating segment performance and
deciding how to allocate resources to segments. As management views the
operations of the Corporation on an enterprise-wide basis, no additional
disclosures are necessary.
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The Statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income includes net income plus all other nonowner changes in equity currently
excluded from net income. These other nonowner changes in equity currently
include
CVB, Inc.
---------
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions specified in SFAS No. 52, "Foreign Currency Translation," SFAS No.
80, "Accounting for Futures Contracts," SFAS No. 87, "Employers' Accounting for
Pensions," and SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All periods prior to adoption have been restated to conform
to the requirements of Statement No. 130.
NOTE 3-Restrictions on Cash And Due From Banks
Cash balances reserved to meet regulatory requirements of the Federal Reserve
Board and balances maintained at other banks for compensating balance
requirements amounted to $2,406,000 at December 31, 1999 and $2,048,000 at
December 31, 1998.
NOTE 4-Securities Available-for-sale and held-to-maturity
A summary of available-for-sale and held-to-maturity securities at December 31,
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(dollars in thousands) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
1999
Available-for-Sale:
Debt securities
U.S. agencies $25,220 $ 0 $(423) $24,797
States and municipals 8,648 68 (304) 8,412
Mortgage-backed securities 9,943 0 (134) 9,809
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 43,811 68 (861) 43,018
Equity securities 3,250 0 0 3,250
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $47,061 $68 $(861) $46,268
- ---------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
Debt securities-trust preferred $9,361 $0 $(526) $8,835
- ---------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity $9,361 $0 $(526) $8,835
- ---------------------------------------------------------------------------------------------------------------------------
1998
Available-for-Sale:
Debt securities
U.S. treasuries $ 4,019 $37 $ 0 $ 4,056
U.S. agencies 30,100 380 (7) 30,473
States and municipals 5,922 182 (3) 6,101
Mortgage-backed securities 14,585 59 (38) 14,606
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 54,626 658 (48) 55,236
Equity securities 905 84 0 989
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $55,531 $742 $ (48) $56,225
- ---------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual maturity, are shown below. Mortgage-backed securities are
included in the maturity categories based on average expected life. Actual
maturities may differ from contractual maturities if call options on selected
debt issues are exercised in the future.
DECEMBER 31, 1999
AMORTIZED FAIR
(dollars in thousands) COST VALUE
- ---------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
Due in one year or less $14,363 $14,308
Due after one year through five years 21,882 21,498
Due after five years through ten years 4,100 3,940
Due after ten years 3,466 3,272
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities available-for-sale $43,811 $43,018
- ---------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
Due after ten years $9,361 $8,835
- ---------------------------------------------------------------------------------------------------------------------------
Securities with an amortized cost of $19,367,000 and $21,252,000 on December 31,
1999 and 1998, respectively, were pledged to secure public deposits and for
other purposes.
CVB, Inc.
---------
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-Loans
The composition of the loan portfolio at December 31, is as follows:
(dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Commercial, industrial and agricultural $131,395 $114,313
Real estate - construction and land development 21,956 19,663
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial related loans 153,351 133,976
Real estate - residential mortgages 29,815 31,581
Installment 24,152 23,554
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer related loans 53,967 55,135
- ---------------------------------------------------------------------------------------------------------------------------
Total loans $207,318 $189,111
- ---------------------------------------------------------------------------------------------------------------------------
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities in the same geographic region, or have similar
economic features that could cause their ability to meet contractual obligations
to be similarly affected by changes in economic conditions. Most of the
Corporation's business is with customers in southern York County, Pennsylvania.
Although this may pose a concentration risk geographically, it is believed the
diverse local economy and detailed knowledge about the customer base minimizes
this risk. At year end 1999, there were three concentrations of loans by
industry that exceeded 10 percent of total loans, as follows: commercial
facility leasing, $33.4 million or 16.1 percent; residential facility leasing,
$22.6 million or 10.9 percent; and real estate development, $21.9 million or
10.6 percent. Loans to borrowers within these industries are usually
collateralized by real estate.
The aggregate amount of loans to directors, executive officers, principal
shareholders and any associates of such persons was $2,101,000 at December 31,
1999 and $2,964,000 for 1998. During 1999, total new loan additions amounted to
$869,000 and total payments collected amounted to $1,577,000. Changes in
executive officers resulted in an additional decrease of $155,000. Related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collection. As of
year end 1999, all loans to this group were current and performing in accordance
with original contractual terms.
The Corporation originates and classifies loans as long-term investments;
accordingly, the cost method of accounting is used. Periodically, portions of
the fixed rate residential mortgage loan portfolio are sold, without recourse,
as a means of managing interest rate risk. A determination is made as to whether
any loans are held for sale at reporting periods. Generally, the Corporation
retains servicing rights on the loans it sells. The volume of loans serviced by
the Corporation for others was $13,982,000 at December 31, 1999, $18,135,000 at
December 31, 1998 and $16,820,000 at December 31, 1997.
NOTE 6-Impaired and Past Due Loans
Impaired and past due loans at December 31, were as follows:
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Impaired loans $1,892 $1,706 $2,842
Accruing loans that are contractually past due 90 days or more
as to principal or interest 13 13 107
Amount of impaired loans that have a related allowance 1,892 1,706 2,842
Amount of impaired loans with no related allowance 0 0 0
Allowance for impaired loans 500 456 500
Average investment in impaired loans 2,093 2,891 2,255
Interest income recognized on impaired loans (all cash-basis) 49 73 103
CVB, Inc.
---------
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years ended
December 31, were as follows:
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Balance at beginning of year $1,865 $2,098 $2,110
Provision charged to operating expense 225 375 275
Loans charged off (86) (635) (406)
Recoveries 19 27 119
- --------------------------------------------------------------------------------------------------------
Balance at end of year $2,023 $1,865 $2,098
- --------------------------------------------------------------------------------------------------------
NOTE 8-Other Real Estate Owned (OREO)
Other real estate owned, net of reserve, amounted to $1,385,000 at December 31,
1999, compared to $1,871,000 at December 31, 1998, and $380,000 at December 31,
1997. The net expense associated with OREO was approximately $119,000 for 1999,
$134,000 for 1998 and $50,000 for 1997.
Changes in the allowance for OREO for each of the three years ended December 31,
were as follows:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Balance at beginning of year $63 $48 $108
Provision charged to operating expense 39 69 18
Write-downs to fair value (33) (54) (83)
Recoveries 0 0 5
- -----------------------------------------------------------------------------------------------------
Balance at end of year $69 $63 $ 48
- -----------------------------------------------------------------------------------------------------
NOTE 9-Premises and Equipment
The following is a summary of the premises and equipment accounts at
December 31,
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------
Land $ 1,160 $ 1,168
Buildings and improvements 8,063 7,986
Equipment 5,238 4,874
- ------------------------------------------------------------------------------------
14,461 14,028
Less accumulated depreciation (4,914) (4,683)
- ------------------------------------------------------------------------------------
Net premises and equipment $ 9,547 $ 9,345
- ------------------------------------------------------------------------------------
CVB, Inc.
---------
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-Benefit Plans
Defined Contribution Plan
The Corporation maintains an employee 401(k) savings and investment plan,
covering substantially all employees. Under the plan, employees can contribute a
percentage of their gross salary. In 1999, 1998 and 1997, the Corporation
matched 50 percent of the first 6 percent of the employee's contributions. The
Corporation's expense for the 401(k) savings and investment plan was $57,000 for
1999, $58,000 for 1998, and $51,000 for 1997.
Supplemental Benefit Plans
In 1998, PeoplesBank provided supplemental retirement plans for selected
executives and supplemental life insurance for executive officers and directors.
The supplemental life insurance plans replaced other insurance coverages. The
expense associated with the supplemental retirement plans, and the supplemental
life insurance benefit for executive officers was approximately $98,000 for 1999
and $27,000 for 1998. The accrued liability was $125,000 on December 31, 1999
and $27,000 on December 31, 1998. Investment in bank owned life insurance
policies was used to finance the supplemental benefit plans, and provide a
tax-exempt return to PeoplesBank.
Stock Option Plans
A 1998 Independent Directors' Stock Option Plan ('98 Plan) was approved by the
shareholders at the annual meeting held on May 19, 1998. As of December 31,
1999, 105,000 shares of common stock are reserved for possible issuance, subject
to future adjustment in the event of specified changes in the Corporation's
capital structure. In accordance with the terms of the '98 Plan, the option
exercise price for options is the fair market value of the stock on the date
granted. Options granted cannot be exercised before six months and expire in ten
years. As of December 31, 1999, 49,600 non-qualified stock options were granted
and exercisable. Options outstanding at December 31, 1999, had a weighted
average exercise price of $20.11 and a weighted average remaining contractual
life of 8.8 years.
A 1996 Stock Incentive Plan ('96 Plan), administered by disinterested members of
the Corporation's Board of Directors, was approved by the shareholders at the
annual meeting held on May 21, 1996. As of December 31, 1999, 75,711 shares of
common stock are reserved for possible issuance, subject to future adjustment in
the event of specified changes in the Corporation's capital structure. For
non-qualified options, the option exercise price cannot be less than the par
value of the stock on the date granted. No non-qualified stock options have been
granted under the '96 Plan. For qualified options, the option exercise price
cannot be less than the fair market value of the stock on the date granted. As
of December 31, 1999, 75,711 qualified stock options were outstanding with a
weighted average exercise price of $16.53 and a weighted average remaining
contractual life of 8.3 years. Qualified options granted cannot be exercised
before varying time periods, the minimum is six months, and expire ten years
from grant date. As of December 31, 1999, 32,508 qualified stock options were
exercisable.
A summary of stock options from both Plans, adjusted for stock dividends,
follows:
SHARES OPTION PRICE
UNDER OPTION RANGE PER SHARE
- --------------------------------------------------------------------------------
Balance, December 31, 1996 13,891 $12.31-$12.58
Granted 30,870 $17.01
Exercised 0 0
- --------------------------------------------------------------------------------
Balance, December 31, 1997 44,761 $12.31-$17.01
Granted 53,550 $17.98-$21.00
Exercised 0 0
- --------------------------------------------------------------------------------
Balance, December 31, 1998 98,311 $12.31-$21.00
Granted 27,000 $17.56-$18.25
Exercised 0 0
- --------------------------------------------------------------------------------
Balance, December 31, 1999 125,311 $12.31-$21.00
In accordance with Statement No. 123, the Corporation has elected to disclose
the pro forma information regarding net income and net income per share as if
the stock options had been accounted for under the fair value method of the
Statement. The fair value for these options was estimated as of the grant date
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997: risk-free interest rate of 5.5 percent,
dividend yield of 2.2 percent, a volatility factor of the expected market price
of the Corporation's common stock of .13 and a weighted average expected life of
4.9 years. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options,
CVB, Inc.
---------
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require input of highly subjective assumptions including
the expected stock price volatility. Since the Corporation's employee stock
options have characteristics different from those of traded options, and changes
in subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of fair value of its employee stock options. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The effect of applying
Statement No. 123's fair value method to the Corporation's stock-based awards
results in pro forma net income and earnings per share, adjusted for stock
dividends, as follows:
(dollars in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Pro forma net income $2,532 $2,356 $2,451
Pro forma net income per share, basic and diluted $1.06 $.98 $1.02
NOTE 11-Short-term and Long-term Borrowings
The schedule below provides a summary of short-term borrowings which consist of
federal funds purchased and other borrowings. Federal funds purchased from
correspondent banks usually mature in one business day. Other short-term
borrowings consist of credit available through Federal Home Loan Bank of
Pittsburgh (FHLBP). Based on the most recent analysis, total credit available
from FHLBP, for both short and long-term credit needs, was approximately $61.4
million, which is collateralized by the unpledged portion of PeoplesBank's
investment securities portfolio and qualifying mortgage loan receivables. The
interest rate for short-term borrowings reprices daily based on the federal
funds rate or the open repo market depending on the borrowing program. As of
December 31, 1999, total unused credit with the FHLBP was approximately $40.0
million.
A summary of aggregate short-term borrowings for the three years ended December
31, is as follows:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Amount outstanding at end of year 15,657 $1,234 $0
Weighted average interest rate at end of year 4.75% 5.69% 0.00%
Maximum amount outstanding at any month-end $15,657 $1,234 $8,542
Daily average amount outstanding $3,539 $8 $1,281
Approximate weighted average interest rate for the year 5.48% 5.70% 5.71%
A summary of long-term borrowings for the two years ended December 31 is as
follows:
(dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------
Notes issued by PeoplesBank to FHLB Pittsburgh:
Due 2004, 5.12%, 5 year bullet $ 1,025 $ 0
Due 2007, 6.82%, 10 year amortizing 2,324 2,571
Due 2014, 6.43%, convertible quarterly after July
2009, 15 year bullet (convertible select) 5,000 0
Note issued by Codorus Valley Bancorp, Inc. to
York Federal Savings and Loan Association:
Due 2009, 7.35%, payment based on 20 year amortization,
10 year bullet 1,993 0
- ---------------------------------------------------------------------------------------------------
Total $10,342 $2,571
- ---------------------------------------------------------------------------------------------------
The FHLBP notes payable are fixed rate and fixed/floating rate (convertible
select) instruments. The 15 year convertible select is fixed for 10 years.
During the remaining 5 years, the FHLBP has the option to convert the rate to a
floating rate based on the 3 month Libor plus 16 basis points. If the FHLBP
elects to exercise the conversion option, PeoplesBank can repay the loan without
a prepayment penalty. The York Federal Savings and Loan Association note payable
is secured by a mortgage on the Codorus Valley Corporate Center office building
at 105 Leader Heights Road, York, Pennsylvania.
CVB, Inc.
---------
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-Dividend Payment Restrictions
The Corporation is subject to restrictions on the payment of dividends to its
shareholders pursuant the Pennsylvania Business Corporation Law of 1988, as
amended (BCL). The BCL prevents dividend payments if the effect would render the
Corporation insolvent and result in negative net worth, as defined. Payment of
dividends to the Corporation by PeoplesBank is subject to restrictions set forth
in the Pennsylvania Banking Code of 1965, as amended. Accordingly, PeoplesBank's
additional paid-in capital (surplus) account balance of $3,424,000, was
restricted as of December 31, 1999.
NOTE 13-Stockholders' Equity
The Corporation declared a 5 percent stock dividend in April 1999, which was
paid on June 10, 1999. The stock dividend resulted in the issuance of 103,840
common shares from common stock and the reissuance of 10,878 common shares from
treasury stock. The Corporation declared a 5 percent stock dividend in April
1998, which was paid on June 11, 1998. The stock dividend resulted in the
issuance of 109,469 common shares. Additionally, the Corporation paid a
two-for-one stock split effected in the form of a 100 percent stock dividend on
January 26, 1998, which was declared December 9, 1997. The 100 percent stock
dividend resulted in the issuance of 1,097,259 common shares. All per share
amounts were retroactively adjusted for stock dividends.
In February 1999, the board authorized the purchase, in the open market and
privately negotiated transactions, of up to 112,500 shares of its outstanding
common stock, or approximately 4.9 percent of the then outstanding shares. As of
December 31, 1999, the Corporation had purchased 75,422 shares of its common
stock for approximately $1,352,000. Of this total, 10,878 shares were reissued
to partially satisfy the 5 percent stock dividend paid in June 1999. The
repurchases were funded from retained earnings.
Codorus Valley maintains a Dividend Reinvestment and Stock Purchase Plan (Plan).
Shareholders of common stock may participate in the Plan, which provides that
additional shares of common stock may be purchased with reinvested dividends at
prevailing market prices. To the extent that shares are not available in the
open market, 134,009 shares of common stock have been reserved for issuance
under the Plan. Open market purchases are usually made by an independent
purchasing agent retained to act as agent for Plan participants, and the
purchase price to participants will be the actual price paid, excluding
brokerage commissions and other expenses which will be paid by the Corporation.
The Plan also permits participants to make additional voluntary cash payments
toward the purchase of shares of the Corporation's common stock.
The Corporation also maintains a Stock Incentive Plan and an Independent
Directors' Stock Option Plan. At year end 1999, 75,711 shares of common stock
were reserved for possible issuance under the Stock Incentive Plan and 105,000
shares under the Directors' Stock Option Plan. Plan detail can be found in Note
10-Benefit Plans.
Stockholders' equity, or capital, is evaluated in relation to total assets and
the risk associated with those assets. PeoplesBank exceeded all minimum
quantitative standards 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 ratio, 6 percent; total risk-based capital, 10 percent; and leverage
ratio, 5 percent. At the state level, the Pennsylvania Department of Banking
uses a leverage ratio guideline of 6 percent. The Corporation's and
PeoplesBank's capital amounts and classification are also subject to qualitative
judgements by regulators.The following table depicts the capital ratios for the
Corporation and PeoplesBank for the periods ended December 31.
CORPORATION PEOPLESBANK
Ratios 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
Tier I risk-based capital 11.18% 12.40% 9.23% 10.14%
Total risk-based capital 12.06 13.32 10.13 11.08
Leverage 9.27 9.90 7.58 8.09
CVB, Inc.
---------
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities at December 31, are as
follows:
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------
Deferred tax assets
Loan loss $529 $475
Net unrealized losses on securities available-for-sale 270 0
- --------------------------------------------------------------------------------------------
Total deferred tax assets 799 475
- --------------------------------------------------------------------------------------------
Deferred tax liabilities
Deferred loan fees 81 28
Depreciation 281 265
Net unrealized gains on securities available-for-sale 0 236
Other 56 59
- --------------------------------------------------------------------------------------------
Total deferred tax liabilities 418 588
- --------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $381 ($113)
- --------------------------------------------------------------------------------------------
Analysis of federal income taxes reflected in the income statements is as
follows:
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
Current tax provision $1,062 $1,066 $1,008
Deferred tax provision 12 122 153
- --------------------------------------------------------------------------------------------
Total tax provision $1,074 $1,188 $1,161
- --------------------------------------------------------------------------------------------
The reasons for the difference between the provision for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before income taxes are as follows:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Income before income taxes $3,738 $3,724 $3,640
- -----------------------------------------------------------------------------------------------------
Computed tax at 34% $1,271 $1,266 $1,238
Increase (reduction) in taxes resulting from:
Tax-exempt interest income (128) (99) (88)
Interest expense disallowance 18 14 10
Tax-exempt income from bank owned life insurance (93) (22) 0
Other, net 6 29 1
- -----------------------------------------------------------------------------------------------------
Provision for income taxes $1,074 $1,188 $1,161
- -----------------------------------------------------------------------------------------------------
The provision for income taxes includes $104,000, $66,000 and ($6,000) of
applicable income tax expense (benefit) related to investment security gains
(losses) of $305,000, $194,000 and ($17,000) in 1999, 1998 and 1997,
respectively.
CVB, Inc.
---------
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15-Financial Instruments with Off-Balance Sheet Risk
In the normal course of business the Corporation is a party to various financial
transactions that are not funded as of the balance sheet date. Off-balance sheet
financial instruments, which enable bank customers to meet their financing
needs, are comprised mainly of commitments to extend credit and letters of
credit.
To varying degrees, these instruments contain elements of credit and market risk
similar to those on-balance sheet financial instruments. To manage these risks
the Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Normally,
off-balance sheet instruments have fixed expiration dates or termination
clauses, are at specific rates and are for specific purposes. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Off-balance sheet instruments do not represent unusual risks for the Corporation
and management does not anticipate any significant losses as a result of these
transactions. As of December 31, 1999, outstanding commitments to extend credit
were comprised of approximately $26,050,000 in variable rate instruments, and
$21,133,000 in fixed rate instruments with rates varying from 7.12 percent to
10.00 percent. Standby letters of credit were all variable rate instruments as
of December 31, 1999.
The following is a summary of significant commitments:
DECEMBER 31,
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------
Commitments to extend credit $47,183 $54,455
Standby letters of credit 3,243 2,264
NOTE 16-Contingent Liabilities
In the opinion of the management of the Corporation, there are no proceedings
pending to which the Corporation and PeoplesBank are a party or to which its
property is subject, which, if determined adversely to the Corporation and
PeoplesBank, would be material in relation to the Corporation's and
PeoplesBank's financial condition. There are no proceedings pending other than
ordinary routine litigation incident to the business of the Corporation and
PeoplesBank. In addition, no material proceedings arepending or are known to be
threatened or contemplated against the Corporation and PeoplesBank by government
authorities.
CVB, Inc.
---------
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17-Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Therefore, derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Corporation. The methods and assumptions used to estimate fair value can be
found in the "Fair Value of Financial Instruments" section in Note 1 of the
consolidated financial statements.
An analysis of financial instruments is as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998
CARRYING FAIR CARRYING FAIR
(dollars in thousands) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 10,625 $ 10,625 $ 11,092 $ 11,092
Federal funds sold 568 568 0 0
Securities available-for-sale 46,268 46,268 56,225 56,225
Securities held-to-maturity 9,361 8,835 0 0
Loans 207,318 201,100 189,111 187,301
Less: allowance for loan losses (2,023) (2,023) (1,865) (1,865)
Interest receivable 1,617 1,617 1,588 1,588
Bank owned life insurance 5,456 5,456 5,181 5,181
- ---------------------------------------------------------------------------------------------------------------------------
Total financial assets $279,190 $272,446 $261,332 $259,522
- ---------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Demand and savings deposits $107,259 $107,259 $109,215 $109,215
Time deposits 131,199 131,640 132,698 134,284
Short-term borrowings 15,657 15,657 1,234 1,234
Long-term borrowings 10,342 9,837 2,571 2,701
Interest payable 731 731 770 770
- ---------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $265,188 $265,124 $246,488 $248,204
- ---------------------------------------------------------------------------------------------------------------------------
CVB, Inc.
---------
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18-Condensed Financial Information-Parent Company Only
Codorus Valley Bancorp, Inc.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
(dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks 260 $ 86
Securities available-for-sale 13 73
Securities held-to-maturity (market value $4,138) 4,289 0
Investment in subsidiaries 20,212 20,886
Premises and equipment 4,757 4,911
Other assets 121 116
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $29,652 $26,072
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Long-term borrowings $ 4,239 $ 0
Other liabilities 41 14
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 4,280 $ 14
STOCKHOLDERS' EQUITY
Series preferred stock 0 0
Common stock 6,019 5,760
Additional paid-in capital 11,978 10,279
Retained earnings 9,050 9,561
Accumulated other comprehensive income (523) 458
Less: Treasury stock (1,152) 0
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,372 $26,058
Total liabilities and stockholders' equity $29,652 $26,072
- ---------------------------------------------------------------------------------------------------------------------------
Codorus Valley Bancorp, Inc.
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INCOME
Interest from investment securities $ 110 $ 0 $ 0
Dividends from PeoplesBank, A Codorus Valley Company 2,354 1,189 4,392
Rental income 426 352 128
Gains from sales of securities 109 0 0
Gains from sales of fixed assets 0 0 22
Other 4 3 7
- ---------------------------------------------------------------------------------------------------------------------------
Total income 3,003 1,544 4,549
EXPENSES
Interest expense on long-term borrowings 60 0 0
Other 588 605 377
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 648 605 377
Income before applicable income tax benefit and
undistributed earnings of subsidiaries 2,355 939 4,172
Applicable income tax benefit 1 85 81
- ---------------------------------------------------------------------------------------------------------------------------
Income before undistributed earnings of subsidiaries 2,356 1,024 4,253
Undistributed earnings of subsidiaries 308 1,512 0
Distributions of subsidiaries in excess of earnings 0 0 (1,774)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $2,664 $2,536 $2,479
- ---------------------------------------------------------------------------------------------------------------------------
CVB, Inc.
---------
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18-Condensed Financial Information-Parent Company Only (continued)
Codorus Valley Bancorp, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $2,664 $2,536 $2,479
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 164 164 74
Undistributed earnings of subsidiaries (308) (1,512) 0
Distributions of subsidiaries in excess of earnings 0 0 1,774
Gain on sale of premises and equipment and securities (109) 0 (22)
Other, net 23 (337) 262
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,434 851 4,567
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 169 0 0
Purchase of securities available-for-sale 0 (1) 0
Purchase of securities held-to-maturity (4,289) 0 0
Proceeds from investment in subsidiary 0 34 0
Purchases of premises and equipment (10) (55) (3,789)
Proceeds from sales of premises and equipment 0 0 127
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4,130) (22) (3,662)
Cash Flows Used For Financing Activities:
Net increase in long-term borrowings 4,239 0 0
Dividends paid (1,011) (923) (836)
Payment to repurchase common stock (1,352) 0 0
Cash paid in lieu of fractional shares (6) (6) (10)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 1,870 (929) (846)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 174 (100) 59
Cash and cash equivalents at beginning of year 86 186 127
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 260 $ 86 $ 186
- ---------------------------------------------------------------------------------------------------------------------------
CVB, Inc.
---------
22
[Letterhead--Ernst & Young LLP]
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Codorus Valley Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Codorus Valley Bancorp, Inc. as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Codorus
Valley Bancorp, Inc. at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Harrisburg, Pennsylvania
January 14, 2000
CVB, Inc.
---------
23
MANAGEMENT'S DISCUSSION 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., a bank
holding company (Codorus Valley or Corporation), and its wholly-owned
subsidiary, PeoplesBank, A Codorus Valley Company (PeoplesBank), are provided
below. Codorus Valley's consolidated financial condition and results of
operations consist almost entirely of PeoplesBank's financial condition and
results of operations. Current performance does not guarantee and may not be
indicative of similar performance in the future.
Management has made forward-looking statements in this report, and in documents
that are incorporated by reference, that are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of Codorus Valley, PeoplesBank or the combined
company. Management is making forward-looking statements when it uses words such
as "believes," "expects," "anticipates" or other similar expressions.
Shareholders 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 Codorus Valley,
PeoplesBank or the combined company and could cause those results to differ
materially from those expressed in management's forward-looking statements
contained or incorporated by reference in this document. These factors include:
o operating, legal and regulatory risks;
o economic, political and competitive forces affecting banking,
securities, asset management and credit services businesses; and
o 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.
OVERVIEW
- -------------------------------------------------------------------------------
The Economy
The national economy continued to expand in 1999 for the ninth consecutive year,
the longest peacetime expansion on record. For the fifth consecutive year, the
major stock market indices produced double-digit returns. Elements that helped
drive stocks higher were low inflation, low interest rates, high employment,
strong consumer spending and a continuous flow of money into stock market mutual
funds. In June 1999, the Federal Reserve Board (Fed) began a series of interest
rate increases in response to concerns about inflation as a result of strong
consumer spending, high employment and improving foreign markets. By year end
1999, the U.S. Prime rate had increased 75 basis points to 8.50 percent and the
30 year U.S. Treasury bond increased 139 basis points to 6.48 percent from year
end 1998. At this time, most market watchers are predicting that market interest
rates will continue to rise in 2000. Rising market interest rates negatively
affect financial institution stocks because they reduce the demand for credit
and lower the value of their fixed rate assets.
By comparison, in 1998, the markets were roiled by international concerns about
the decline of Asian and Latin American economies, and a Russian monetary
devaluation and default. The continued concern about a decline in international
demand for U.S. goods and services, and low domestic inflation prompted the Fed
to lower interest rates 25 basis points on three separate occasions during
September through November 1998. As a result, the U.S. Prime rate declined 75
basis points to 7.75 percent by year end 1998. The yield on the 30 year U.S.
Treasury bond also declined from 5.92 percent at the start of 1998 to 5.09
percent by year end.
The Financial Services Industry
Based on information provided by the FDIC for the first nine months of 1999 (the
latest information available), the commercial banking industry appears headed
toward achieving record profits for the eighth consecutive year. For the first
nine months, industry earnings increased 15 percent above the same period in
1998. Growth in commercial bank earnings is attributable to an increase in
noninterest income, a lower provision for possible loan losses indicative of
improved credit quality, and a relatively small increase in operating expenses.
Commercial bank assets grew 4.5 percent from September 30, 1998, to September
30, 1999, financed in part by borrowings from the Federal Home Loan Bank system
which increased 62 percent over the same period.
During 1999, in spite of positive growth and earnings trends, financial sector
stock prices continued their descent as investors favored the growth prospects
of the technology sector. The allure of emerging dot.com stocks propelled the
technology-heavy Nasdaq composite index to over 4,000 by year end 1999,
thirty-six trading days after it eclipsed the 3,000 point level. The rush to buy
these stocks has developed into what many longtime market observers view as a
mania. Some dot.com companies will be very successful but many, perhaps most,
will not.
Financial sector stock prices may also be depressed in the future by a new
accounting rule which is expected to be effective on January 1, 2001, by
constraining or eliminating the merger premium currently reflected in many
financial institution stock prices. The new rule will eliminate the
pooling-of-interests accounting method and mandate the use of purchase
accounting for all business combinations. Pooling-of-interests has always been
the preferred method for combinations in the financial services industry because
it is simple to apply and avoids the recognition of expense associated with the
intangible asset goodwill. An overview of the new accounting rule can be found
in Note 2-Current Accounting Developments within this report.
CVB, Inc.
---------
24
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of legal and industry changes, it is probable that the industry will
continue to consolidate as a strategy to increase profits and market share. In
November 1999, Congress enacted the Financial Institutions Modernization Act.
This law will dramatically change the financial services industry by eliminating
the barriers among commercial banking, insurance and securities industries,
which have existed since enactment of the Glass-Steagall Act during the height
of the Great Depression. With an emphasis on strengthening customer
relationships and finding new ways to generate fee income, it is likely that the
industry will increase the diversity of financial products and services.
Management believes that industry consolidation and product diversification may
enhance its competitive position as a community bank.
Business Strategies
Throughout 1999, management and the board of directors continued to implement a
series of initiatives, as guided by the Corporation's long-range strategic plan.
The more significant initiatives included: addition of check imaging
capabilities in connection with replacement of an item processing system that
was not year 2000 compliant; addition of CashFlow Lease, a commercial equipment
leasing service made available through a third-party provider; addition of
Internet banking and online bill pay service through third-party providers;
creation of the subsidiary SYC Insurance Services, Inc. by PeoplesBank to sell
investment products through a third-party marketing arrangement; and completion
of year 2000 readiness.
During 1998, strategic initiatives included: Year 2000 readiness, implementation
of a formal sales and product training program, creation of the subsidiary SYC
Settlement Services, Inc. by PeoplesBank to provide real estate title and
settlement services, addition of MasterCard's MasterMoney Debit/ATM Card
program, addition of tenants for the Codorus Valley Corporate Center and Glen
Rock Community Office, and feasibility studies and recommendations relative to
expansion, systems and new business opportunities. During 1997, strategic
initiatives included: completion and occupancy of the Corporate Center, addition
of the East York community banking office, changing the name of Codorus Valley's
banking subsidiary to eliminate the geographical reference, addition of
telephone banking, and quotation of Codorus Valley's common stock on the Nasdaq
National Market System.
For 2000 and beyond, management and the board will focus on profitability and
expanding its volume of business. Franchise growth may take both a traditional
path, through growth of the branch banking network, or a more strategic path,
through creation or acquisition of financial services companies that will
complement traditional bank products.
Over the past three years, Codorus Valley carried out necessary strategic
initiatives to improve its infrastructure, upgrade its operating systems and
offer new services. Management believes that these strategies will improve its
ability to compete and to create long-term value for it shareholders and
customers. Management believes that the completion of these strategic
initiatives and future projects will improve the financial results of Codorus
Valley in the long term.
Corporate Performance
The Corporation earned $2,664,000 or $1.11 per share for 1999, compared to
$2,536,000 or $1.05 per share for 1998, and $2,479,000 or $1.03 per share for
1997. All per share amounts were adjusted for stock dividends. The 5 percent
increase in net income for 1999 was caused by an increase in noninterest income
and a decrease in loan loss and tax provision expenses, which more than offset
an increase in noninterest operating expenses. Noninterest income increased due
to increases in the cash surrender value of bank owned life insurance, ATM fees,
rental income, and fees from real estate services. The decrease in the loan loss
provision reflected improved asset quality, and the decrease in the tax
provision reflected a greater level of tax-exempt income. The increase in
noninterest operating expenses was caused primarily by an increase in salary and
benefit expenses.
Comparatively, the 2.3 percent increase in net income for 1998 was caused by an
increase in net interest income and noninterest income which more than offset an
increase in noninterest expense and a higher provision for loan losses. The
increase in net interest income was attributable to a larger volume of earning
assets. Noninterest income increased primarily from growth in fee income from
the Trust and Investment Services Division, and gains from planned asset sales.
The increase in noninterest expense was caused by the long-term investment in
facilities and technology, and normal business growth.
Annual cash dividends per share, as adjusted, were $.42 for 1999, compared to
$.38 for 1998, and $.35 for 1997. Additionally, a 5 percent stock dividend was
paid in 1999, 1998 and 1997. In January 1998, the Corporation also paid a
two-for-one stock split effected in the form of a 100 percent stock dividend.
Book value per share, as adjusted, was $10.83 for year end 1999, compared to
$10.82 for 1998 and $10.14 for 1997.
Net income as a percentage of average stockholders' equity, or return on equity
(ROE), was 10.2 percent for 1999, compared to 10.0 percent for 1998, and 10.4
percent for 1997. Net income as a percentage of total average assets, or return
on assets (ROA), was .95 percent for 1999, compared to .98 percent for 1998 and
1.00 percent for 1997.
At December 31, 1999, nonperforming assets as a percentage of total loans and
other real estate owned was approximately 1.57 percent, compared to 1.87 percent
for year end 1998 and 1.68 percent for year end 1997. Information regarding
nonperforming assets is provided in the Risk Management section of this report,
including Table 8-Nonperforming Assets and Past Due Loans.
The allowance (reserve) for possible loan losses as a percentage of total loans
was .98 percent at December 31, 1999, compared to .99 percent at December 31,
1998 and 1.10 percent at December 31, 1997. The decline in the loan loss reserve
ratio reflected improving asset quality. Additional information is provided in
the Risk Management section of this commentary, including Tables 9 and 10. Based
on a recent evaluation of potential loan losses and the current loan portfolio,
management believes that the allowance is adequate to support losses inherent in
the portfolio at December 31, 1999.
CVB, Inc.
---------
25
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Throughout 1999, Codorus Valley maintained a capital level well above minimum
regulatory quantitative requirements. Currently, there are three federal
regulatory definitions of capital that take the form of minimum ratios. Table
7-Capital Ratios, depicts that the Corporation exceeds all current federal
minimum regulatory standards.
A more detailed analysis of the factors and trends affecting corporate earnings
follows.
INCOME STATEMENT ANALYSIS
- -------------------------------------------------------------------------------
Net Interest Income
The Corporation's principal source of revenue is net interest income, the
difference between interest income earned on loans and investment securities,
and interest expense incurred on deposits and borrowed funds. The fluctuation in
net interest income from year to year is caused by changes in interest rates, in
volumes, and in the composition or mix of interest sensitive assets and
liabilities.
For analytical purposes, Table 1-Net Interest Income, Table 2-Rate/Volume
Analysis of Changes in Net Interest Income, and Table 3-Average Balances and
Interest Rates, are presented on a tax equivalent basis to make it easier to
compare taxable and tax-exempt assets. Income from tax-exempt assets, primarily
loans to or securities issued by state and local governments, is increased by an
amount equivalent to the federal income taxes which would have been incurred if
the income was taxable at the statutory rate of 34 percent.
Net interest income on a tax equivalent basis was $10,972,000 for 1999, an
increase of $110,000 or one percent more than the $10,862,000 earned in 1998.
Net interest income increased due to growth in interest earning assets,
partially offset by a reduction in asset yield. Growth in the commercial loan
portfolio was the major driver of growth in interest earning assets, which
averaged $254 million for 1999, compared to $237 million for 1998. The tax
equivalent yield on total interest earning assets was 8.08 percent for 1999
compared to 8.48 percent for 1998. The decline in the yield on total interest
earning assets was caused primarily by the timing of loan additions and
competitive price pressures. Commercial loan growth was achieved mainly during
late 1998 through mid-1999, a period of low market interest rates. The weighted
average yield on total loans was 8.63 percent for 1999 compared to 9.13 for
1998. Other factors which constrained net interest income included a relatively
flat yield curve, and a $5 million investment in bank owned life insurance
(boli) in September 1998, which was funded by the partial liquidation of
overnight investments. The investment in boli caused income to shift from an
interest income category to a tax-exempt noninterest income category on the
income statement. The same factors that constrained interest income also
constrained the net yield on average interest earning assets, which was 4.32
percent for 1999 compared to 4.58 percent for 1998.
Comparatively, net interest income for 1998 was $10,862,000, an increase of
$327,000 or 3.1 percent more than the $10,535,000 earned in 1997. The increase
in net interest income was due primarily to growth in interest earning assets,
which averaged $237 million for 1998, compared to $229 million for 1997. Growth
in the average volume of interest earning assets occurred primarily in the
commercial loan portfolio. A $238,000 increase in loan fees for 1998, which
resulted in part from early loan payoffs and refinancings, also contributed to
the increase in net interest income. Declining market interest rates lowered
asset yields and liability funding costs during 1998. The tax equivalent yield
on interest earning assets for 1998 was 8.48 percent compared to 8.57 percent
for 1997. The weighted average cost of interest bearing liabilities was 4.38
percent for 1998 compared to 4.46 percent for 1997. The net yield on average
interest earning assets was 4.58 for 1998 compared to 4.60 percent for 1997.
TABLE 1-NET INTEREST INCOME (tax equivalent basis)
DECEMBER 31, 5-YR
(dollars in thousands) 1999 1998 1997 1996 1995 CGR*
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income $ 20,314 $ 19,978 $ 19,513 $ 18,523 $ 18,346 4.8%
Tax equivalent adjustment 192 149 118 144 197 n/a
- ---------------------------------------------------------------------------------------------------------------
Adjusted total interest income 20,506 20,127 19,631 18,667 18,543 4.8%
Total interest expense 9,534 9,265 9,096 8,756 8,722 6.6%
- ---------------------------------------------------------------------------------------------------------------
Net interest income $ 10,972 $ 10,862 $ 10,535 $ 9,911 $ 9,821 3.4%
Average earning assets $253,800 $237,378 $229,047 $223,203 $216,429 4.5%
Average interest bearing liabilities 228,163 211,754 203,831 196,860 191,701 4.9%
Yield on earning assets 8.08% 8.48% 8.57% 8.36% 8.57%
Rate on interest bearing liabilities 4.18% 4.38% 4.46% 4.45% 4.55%
- ---------------------------------------------------------------------------------------------------------------
Interest rate spread 3.90% 4.10% 4.11% 3.91% 4.02%
Net yield on average earning assets 4.32% 4.58% 4.60% 4.44% 4.54%
* Compound growth rate (CGR) is the average annual growth over the five year
period which began in 1994.
CVB, Inc.
---------
26
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TABLE 2-RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(tax equivalent basis)
1999 COMPARED TO 1998
YEAR ENDED ---------------------
DECEMBER 31, INCREASE CHANGE DUE TO
(dollars in thousands) 1999 1998 (DECREASE) VOLUME RATE
- -------------------------------------------------------------------------------------------------------------------
Interest Income
Interest bearing deposits with banks $ 11 $ 9 $ 2 $ 3 $ (1)
Federal funds sold 93 354 (261) (250) (11)
Securities, taxable 2,637 2,502 135 236 (101)
Securities, tax-exempt 547 426 121 165 (44)
Loans, taxable * 17,201 16,824 377 1,360 (983)
Loans, tax-exempt 17 12 5 5 0
- -------------------------------------------------------------------------------------------------------------------
Total interest income 20,506 20,127 379 1,519 (1,140)
Interest Expense
Deposits:
Interest bearing demand 1,536 1,342 194 242 (48)
Savings 417 455 (38) 0 (38)
Time deposits under $100,000 6,007 6,179 (172) 58 (230)
Time deposits $100,000 and above 976 1,105 (129) (100) (29)
Short-term borrowings 194 0 194 194 0
Long-term borrowings 404 184 220 247 (27)
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 9,534 9,265 269 641 (372)
Net interest income $10,972 $10,862 $ 110 $ 878 $ (768)
- -------------------------------------------------------------------------------------------------------------------
1998 COMPARED TO 1997
YEAR ENDED ---------------------
DECEMBER 31, INCREASE CHANGE DUE TO
(dollars in thousands) 1998 1997 (DECREASE) VOLUME RATE
- -------------------------------------------------------------------------------------------------------------------
Interest Income
Interest bearing deposits with banks $ 9 $ 15 $ (6) $ (5) $ (1)
Federal funds sold 354 162 192 195 (3)
Securities, taxable 2,502 2,779 (277) (205) (72)
Securities, tax-exempt 426 305 121 147 (26)
Loans, taxable * 16,824 16,329 495 623 (128)
Loans, tax-exempt 12 41 (29) (33) 4
- -------------------------------------------------------------------------------------------------------------------
Total interest income 20,127 19,631 496 722 (226)
Interest Expense
Deposits:
Interest bearing demand 1,342 1,250 92 123 (31)
Savings 455 472 (17) (1) (16)
Time deposits under $100,000 6,179 6,103 76 129 (53)
Time deposits $100,000 and above 1,105 1,010 95 108 (13)
Short-term borrowings 0 73 (73) (73) 0
Long-term borrowings 184 188 (4) (3) (1)
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 9,265 9,096 169 283 (114)
Net interest income $10,862 $10,535 $ 327 $ 439 $ (112)
- -------------------------------------------------------------------------------------------------------------------
* Includes loan fees of $457,000 in 1999, $567,000 in 1998, and $329,000 in
1997.
CVB, Inc.
---------
27
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TABLE 3-AVERAGE BALANCES AND INTEREST RATES (tax equivalent basis)
1999 1998 1997
--------------------------------- --------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
(dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest bearing deposits
with banks $ 223 $ 11 4.93% $ 161 $ 9 5.59% $ 237 $ 15 6.33%
Federal funds sold 1,904 93 4.88 6,475 354 5.47 2,938 162 5.51
Investment securities:
Taxable 44,599 2,637 5.91 40,751 2,502 6.14 44,005 2,779 6.32
Tax-exempt 7,626 547 7.17 5,495 426 7.75 3,709 305 8.22
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment
securities 52,225 3,184 6.10 46,246 2,928 6.33 47,714 3,084 6.46
Loans:
Taxable (1) 199,295 17,201 8.63 184,388 16,824 9.12 177,609 16,329 9.19
Tax-exempt 153 17 11.11 108 12 11.11 549 41 7.47
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 199,448 17,218 8.63 184,496 16,836 9.13 178,158 16,370 9.19
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 253,800 20,506 8.08 237,378 20,127 8.48 229,047 19,631 8.57
Other assets (2) 25,339 21,081 17,385
Total assets $279,139 $258,459 $246,432
==================================================================================================================================
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Interest bearing demand $ 65,929 1,536 2.33 $ 55,873 1,342 2.40 $ 50,851 1,250 2.46
Savings 20,701 417 2.01 20,717 455 2.20 20,776 472 2.27
Time deposits under $100,000 113,147 6,007 5.31 112,090 6,179 5.51 109,769 6,103 5.56
Time deposits $100,000
and above 18,525 976 5.27 20,370 1,105 5.42 18,410 1,010 5.49
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 218,302 8,936 4.09 209,050 9,081 4.34 199,806 8,835 4.42
Short-term borrowings 3,539 194 5.48 8 0 0.00 1,281 73 5.70
Long-term borrowings 6,322 404 6.39 2,696 184 6.82 2,744 188 6.85
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest
bearing liabilities 228,163 9,534 4.18 211,754 9,265 4.38 203,831 9,096 4.46
Noninterest bearing deposits 20,805 19,965 17,493
Other liabilities 4,126 1,451 1,234
Stockholders' equity 26,045 25,289 23,874
Total liabilities and
stockholders' equity $279,139 $258,459 $246,432
==================================================================================================================================
Net interest income $ 10,972 $ 10,862 $10,535
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.90% 4.10% 4.11%
- ----------------------------------------------------------------------------------------------------------------------------------
Net yield on earning assets 4.32% 4.58% 4.60%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loan fees of $457,000 in 1999, $567,000 in 1998 and $329,000 in
1997.
(2) Includes average nonaccrual loans of $2,093,000 in 1999, $2,891,000 in 1998
and $2,255,000 in 1997.
CVB, Inc.
---------
28
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management anticipates modest balance sheet growth and continuation of the
challenging competitive environment in the period ahead. Information about
interest rate risk is provided in the Market Risk Management section of this
report.
Leverage growth strategy
During 1999, Codorus Valley and PeoplesBank executed a planned $9.4 million
leverage growth strategy which involved investment in long-term, fixed rate
trust preferred securities, i.e., corporate bonds, funded primarily by
long-term, fixed rate borrowings from third parties. The purpose of the leverage
strategy was to generate additional net interest income to help offset financial
opportunity costs associated with the long-term investment in the Codorus Valley
Corporate Center. The weighted average annualized yield on the investment is
8.45 percent and the weighted average annualized funding cost is approximately
6.45 percent. More information about this strategy can be found under the
headings Investment Securities and Short-term and Long-term Borrowings within
the Balance Sheet Review section of this report.
Commercial equipment leasing program
In May 1999, PeoplesBank entered into a third party commercial leasing
arrangement in order to provide an additional source of interest income and fees
and expand its menu of commercial services. Under the arrangement, PeoplesBank
funds those leases that meet its credit risk standards with assignment of the
lease and a security interest in the leased equipment as collateral. Third-party
responsibilities include entering into the lease agreement with the lessee,
equipment purchase and disposition, marketing and administrative support, and
providing commercial leasing expertise. Start-up costs were approximately
$10,000 and ongoing expenses are expected to be insignificant. As of December
31, 1999, PeoplesBank had not funded any commercial equipment leasing
transactions.
Provision for Loan Losses
The provision for possible loan losses is an estimated expense charged to
earnings in anticipation of losses attributable to uncollectible loans. The
provision reflects management's judgement of an appropriate level for the
allowance (reserve) for loan losses. The section, Risk Management, including
Tables 8, 9, and 10, within this report provides detailed information about the
allowance, provision and credit risk.
In 1999, the provision expense was $225,000 to support growth in the commercial
loan portfolio. The current period provision expense and allowance to total
loans ratio (at year end) were both less than 1998 due to improved credit
quality. Comparatively, the provision expense for 1998 was $375,000 which
supported a higher level of net charged off loans. Net loan charge-offs in 1998
reflected a $456,000 charge-off associated with a single commercial borrower
whose account was deemed partially uncollectible.
Noninterest Income
Noninterest income for 1999 was $2,237,000, an increase of $405,000 or 22
percent above 1998. The overall increase was due primarily to a $389,000 or 98
percent increase in the other income category, which reflects increases in: the
cash surrender value of bank owned life insurance (boli), ATM fees, rental
income, and fees from real estate services. Income from the boli investment was
the most significant component and accounted for $208,000 of the increase in
other income. For 1999, boli income was earned for the full twelve months
compared to approximately three months for 1998. Service charges on deposit
accounts increased $86,000 or approximately 18 percent above the prior year due
to a larger deposit base and price increases. During 1999, Codorus Valley and
PeoplesBank recognized gains from the sale of available-for-sale investment
securities, which totaled $305,000, compared to $194,000 for 1998. Other gains
totaled $32,000 for 1999 compared to $206,000 for 1998. Other gains for 1998
were primarily from the periodic sale of held-for-sale residential mortgage
loans.
Noninterest income for 1998 was $1,832,000, an increase of $605,000 or 49
percent above 1997. The increase in noninterest income was due primarily to the
periodic recognition of net gains from asset sales, trust and investment
services fees, increase in cash surrender value of boli, and normal business
growth. Net gains from asset sales totaled $400,000 for 1998 compared to $79,000
for 1997. Approximately $206,000 in gains was generated from the sale of
held-for-sale residential mortgage loans and the remaining $194,000 was
generated from the sale of available-for-sale investment securities.
Periodically, selected assets are sold to generate income and liquidity, and
manage interest rate risk. Trust and investment services fees were $549,000 for
1998, an increase of $108,000 or 24 percent above 1997. The increase in trust
and investment services fees was due to asset appreciation, new business, and
estate fees. In September 1998, PeoplesBank purchased $5 million of boli and
recognized $66,000 of tax-exempt income from the increase in cash surrender
values. More information about this investment is provided in the Other Assets
section of this report.
For the year 2000, noninterest income is expected to exceed the 1999 level, with
the exception of gains from asset sales, based on a presumption of normal
business growth and a moderately successful planned sale of alternative
investment products.
Fee-based subsidiaries
Management believes that fee income has been and will continue to be important
to Codorus Valley's profitability. To that end, PeoplesBank created two
subsidiary companies which offer fee-based products. In January 1999,
PeoplesBank's subsidiary, SYC Settlement Services, Inc. began operations. SYC
Settlement generates fee income for PeoplesBank by providing real estate title
and settlement services. Start-up and operating costs for this subsidiary were
immaterial. In January 2000, PeoplesBank's subsidiary, SYC Insurance Services,
Inc. began operations. SYC Insurance was created to generate fee income by
facilitating the sale
CVB, Inc.
---------
29
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
of investment products through a third-party marketing arrangement. These
products are not FDIC insured, not obligations of nor guaranteed by PeoplesBank,
and are subject to investment risk including the possible loss of principal. The
initial product offering is a fixed rate annuity, to be followed soon by
additional investment products. Sales of investment products are conducted by
licensed sales representatives who operate throughout PeoplesBank. Start-up
costs for this subsidiary were immaterial and on-going operating expenses are
expected to be immaterial.
Noninterest Expense
Generally, increases in noninterest expense for 1999, 1998 and 1997 reflect the
implementation of strategic initiatives to expand, staff and equip the
organization, in addition to normal business growth. Long-term capital
investments made during this three-year period were necessary to position
Codorus Valley for future expansion and increase its service capabilities.
Noninterest expense for 1999 was $9,054,000, an increase of $608,000 or 7
percent above 1998. Explanations of the change in selected expenses for 1999
versus 1998 are as follows. The $540,000 or 13 percent increase in salary and
benefit expenses for 1999 reflects staff additions, merit raises, higher
replacement and recruiting expenses, and increases in the cost of health and
retirement benefit plans. Additionally, the prior year included a one-time
$58,000 expense reduction associated with the termination of PeoplesBank's
defined benefits retirement plan. The $61,000 or 20 percent increase in
marketing and advertising expense reflected a larger marketing budget to support
planned growth.
Noninterest expense for 1998 was $8,446,000, an increase of $717,000 or 9
percent above 1997. Explanations of the change in selected expenses for 1998
versus 1997 are as follows. The $202,000 or 33 percent increase in occupancy
expense for 1998 reflects a full year's impact of depreciation, maintenance and
property tax expenses associated with a community banking office addition in
April 1997, and construction and occupancy of the Codorus Valley Corporate
Center (Corporate Center) which was operational in August 1997. The $70,000 or 8
percent increase in furniture and equipment for 1998 reflects increased
depreciation and maintenance contract expenses from increased investment in
computer equipment and systems in 1997, and increased depreciation expense
resulting from furnishing the Corporate Center. Postage, stationery and supplies
expense declined $54,000 or 13 percent in 1998 since 1997 included expenses
associated with the Bank's name change and the addition of a new community
banking office. Professional and legal expense increased $79,000 or 35 percent
in 1998 due primarily to consulting fees associated with the preparation of
feasibility studies of new business opportunities, a new investment management
arrangement for trust and investment services accounts, financial issues, and
technology issues, including Year 2000 compliance. Other real estate owned (net)
increased $84,000 or 168 percent in 1998 due to greater carrying costs and
deterioration in the market value of selected properties. Other expense
increased $273,000 or 22 percent in 1998 due primarily to implementation costs
associated with a sales and product training program, accounting
reclassifications, and increases in the Capital Stock Tax, Pennsylvania Shares
Tax, and telephone expense.
Noninterest expense is expected to increase in 2000 due to past and planned
strategic initiatives, higher staffing costs caused by a tight labor market, an
industry-wide increase in FDIC assessments, and normal business growth.
Capital investment in technology
In accordance with the Corporation's strategic technology plan, PeoplesBank
focused on three key technology projects during 1999. These projects, described
below, have been implemented.
To improve customer convenience through the use of technology, PeoplesBank
implemented an Internet banking system with online bill payment and other useful
features during the fourth quarter of 1999. The capital investment, exclusive of
marketing and maintenance expenses, was approximately $61,000. Annual
depreciation is approximately $20,000 for this system based on an expected
three-year useful life. The Internet banking system was introduced to
PeoplesBank customers in January 2000.
To improve staff productivity through the use of technology, PeoplesBank
implemented a local area network (LAN) during the third quarter of 1999. The LAN
infrastructure enables selected employees to access e-mail, the Internet, and
the latest desktop application systems, and facilitates centralized file
sharing, storage and backup. The initial capital investment, exclusive of user
training expense, was approximately $82,000. Annual depreciation is
approximately $27,000 for this system, based on an expected three-year useful
life.
During the second quarter of 1999, PeoplesBank installed an item-processing
system with check imaging enhancement. This mission critical system replaced an
aged, fully depreciated item-processing system that was not Y2K compliant. The
new system, which is more efficient and has more processing capacity, cost
approximately $663,000. This system was financed internally with funds from
operations and is being depreciated over an expected useful life that ranges
from five to seven years depending on the system component. Annual depreciation
expense will approximate $112,000. PeoplesBank introduced check imaging to its
customers in July 1999.
Year 2000 (Y2K) compliance
As a result of a great deal of planning and testing, Y2K came and went without
incident. Management's best estimate of the total cost for Y2K readiness was
$86,000. No attempt was made to measure staff costs associated with this
project. Management believes that if staff costs were quantified they would be
substantial. Of the $86,000 estimate, $4,000 was incurred in 2000, $49,000 in
1999 and $33,000 in 1998. Y2K expenditures were incurred principally for
external technician
CVB, Inc.
---------
30
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
expertise for system test plans and system testing, software upgrades, Y2K
communications, and lost income associated with maintaining a larger-than-normal
cash inventory during November and December 1999, and early 2000.
Sales and product training
In January 1998, PeoplesBank contracted with Financial Selling Systems, a
national sales training and consulting firm, to implement a sales and product
training program. The program is focused on the retail banking staff and has two
primary objectives: first, to expedite the transformation of PeoplesBank to a
customer-focused corporate culture, based upon superior sales and service;
second, to increase sales through improved selling skills, increased product
knowledge and confidence, and sales incentives. Formal training of the retail
banking staff began in May 1998. This comprehensive retail-training program is
expected to take approximately thirty months to complete all phases at an
estimated cost of $175,000. As of December 31, 1999, PeoplesBank expended
approximately $127,000 in total for this program, $32,000 in 1999 and $95,000 in
1998.
Income Taxes
The provision for federal income taxes was $1,074,000 for 1999, a decrease of
$114,000 or 10 percent below 1998. The decrease in federal income taxes was
primarily the result of a higher level of tax-exempt income. During 1999,
PEOPLESBANK recorded tax-exempt income for the full year on bank owned life
insurance investments, and increased its investment in municipal bonds.
Comparatively, the tax provision expense for 1998 was $27,000 or 2 percent above
1997 due to the increase in income before income taxes. For additional
information on income taxes, see Note 14-Income Taxes.
BALANCE SHEET REVIEW
- -----------------------------------------------------------------------------
Investment Securities
The investment securities portfolio is an interest earning asset, second only in
size to the loan portfolio. Investment securities serve as an important source
of revenue, a primary source of liquidity, and as collateral for public and
trust deposits. Investment securities are accounted for in accordance with
Financial Accounting Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (Statement No. 115). This statement requires the
classification of investment securities into three categories:
available-for-sale, held-to-maturity and trading. Securities classified as
available-for-sale must be reported at fair value with the difference between
fair value and amortized cost recorded, net of taxes, as a component of
stockholders' equity. Securities classified as held-to-maturity are reported at
amortized cost and, except for limited circumstances, may not be sold prior to
maturity. Presently, the Corporation does not engage in trading activity as
defined by Statement No. 115.
On December 31, 1999, the available-for-sale securities portfolio was $46
million, reflecting a $10 million or 18 percent decrease below year end 1998.
During 1999, proceeds from maturities and sales were invested in loans.
Available-for-sale securities are limited to high quality debt instruments as
depicted in Note 4-Securities Available-for-Sale and Held-to-Maturity. Equity
securities within this category are primarily stock issued by the Federal Home
Loan Bank of Pittsburgh (FHLBP). PeoplesBank, like all FHLBP members, is
required to invest in FHLBP stock when it borrows from the FHLBP. The FHLBP pays
quarterly dividends based on a spread to the 6 month U.S. Treasury note. Note 4
depicts an increase in gross unrealized losses on the available-for-sale
portfolio at year end 1999 compared to year end 1998. The increase in gross
unrealized losses was attributable to rising market interest rates during 1999,
which devalued fixed rate instruments. Table 4-Analysis of Investment Securities
depicts that the weighted average maturity of the available-for-sale portfolio
was 2.9 years for year ended 1999, compared to 2.3 years for 1998 and 2.1 years
for 1997.
On December 31, 1999, the held-to-maturity securities portfolio was $9.4
million; there were no comparable investments in 1998. Pursuant to a planned
leverage growth strategy during 1999, the Corporation invested in trust
preferred stock (trust preferreds) issued by commercial bank holding companies.
Trust preferreds are substantially junior subordinated debt, pay interest
semi-annually, are callable, and mature in years 2026-2028. The portfolio is
comprised of fixed rate instruments, with a weighted average yield of 8.45
percent. Approximately $5 million are rated investment grade by two national
rating services, the remaining $4.4 million are either not rated or rated below
investment grade. Generally, investment was limited to $500,000 per issuer based
on an analysis of the issuer's financial and strategic track record. The trust
preferred portfolio was financed in part by borrowing from the FHLBP and a local
financial institution. More information about the held-to-maturity portfolio can
be found at Note 4-Securities Available-For-Sale and Held-to-Maturity and Table
4-Analysis of Investment Securities.
Loans
Table 5-Loan Portfolio Composition presents the composition of total loans on a
comparative basis for a five-year period. The table reflects the Corporation's
emphasis on commercial lending. At December 31, 1999, total loans increased $18
million or approximately 10 percent above year end 1998, primarily within the
fixed rate commercial loan category.
Table 6-Selected Loan Maturities and Interest Rate Sensitivity reveals that at
December 31, 1999, the commercial loan portfolio was comprised of $106 million
or 69 percent fixed rate loans and $47 million or 31 percent floating or
adjustable rate loans. Comparatively, at December 31, 1998, the commercial loan
portfolio was comprised of 64 percent fixed rate loans and 36 percent floating
or adjustable rate loans. Floating rate loans reprice periodically with changes
in PeoplesBank's base rate or the prime rate as reported in the Wall Street
Journal. Adjustable rate loans reprice at annual intervals based on the U.S.
Treasury yield curve. Additional loan information can be found in Note 5-Loans
and within the Risk Management section of this report. In the period
CVB, Inc.
---------
31
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TABLE 4-ANALYSIS OF INVESTMENT SECURITIES
WEIGHTED
U.S. U.S. STATE & TRUST AVERAGE
(dollars in thousands) TREASURY AGENCY (1) MUNICIPAL STOCK PREFERRED TOTAL YIELD (2)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
Available-for-sale portfolio
Maturity:
Within one year $13,545 $ 818 $14,363 5.91%
One to five years 20,118 1,764 21,882 5.88
Five to ten years 1,500 2,600 4,100 6.47
Over ten years 3,466 3,466 7.04
No set maturity 3,250 3,250
Amortized cost $ 0 $35,163 $ 8,648 $ 3,250 $ 0 $47,061 6.03
==============================================================================================================
Average maturity 2.9 YEARS
Held-to-maturity portfolio
Maturity:
Over ten years $ 0 $ 0 $ 0 $ 0 $ 9,361 $ 9,361 8.44%
- --------------------------------------------------------------------------------------------------------------
Amortized cost $ 0 $ 0 $ 0 $ 0 $ 9,361 $ 9,361 8.44
==============================================================================================================
Average maturity 27.2 YEARS
DECEMBER 31, 1998
Available-for-sale portfolio
Maturity:
Within one year $ 4,019 $11,107 $ 257 $15,383 6.14%
One to five years 32,595 1,358 33,953 5.84
Five to ten years 983 2,484 3,467 7.77
Over ten years 1,823 1,823 6.85
No set maturity 905 905
- --------------------------------------------------------------------------------------------------------------
Amortized cost $ 4,019 $44,685 $ 5,922 $ 905 $ 0 $55,531 6.08
==============================================================================================================
Average maturity 2.3 YEARS
DECEMBER 31, 1997
Available-for-sale portfolio
Maturity:
Within one year $ 2,990 $ 9,764 $ 729 $13,483 6.23%
One to five years 6,555 13,466 1,414 21,435 6.66
Five to ten years 2,455 1,414 3,869 8.16
No set maturity 861 861
- --------------------------------------------------------------------------------------------------------------
Amortized cost $ 9,545 $25,685 $ 3,557 $ 861 $ 0 $39,648 6.66
==============================================================================================================
Average maturity 2.1 YEARS
(1) U.S. agency mortgage-backed instruments are included in the maturity
categories based on average expected life.
(2) Yields on tax-exempt obligations were computed on a tax equivalent basis
using a 34% tax rate.
- --------------------------------------------------------------------------------
ahead, rising market interest rates and competitive pressures could constrain
loan growth.
Other Assets
In the third quarter of 1998, PeoplesBank invested approximately $5 million in
cash surrender value life insurance policies (bank owned life insurance or
boli). The boli investment provides a tax-exempt return to PeoplesBank, and
offsets the costs associated with supplemental benefit plans created in 1998 for
selected executive officers and board members. The tax-exempt yield on boli is
projected to range from 5.5 to 6.0 percent. This investment, included in other
assets on the statement of financial condition, was funded by the liquidation of
short-term investments with correspondent banks.
Funding
- --------------------------------------------------------------------------------
Deposits
Deposits are a principal source of funding for earning assets. At December 31,
1999, total deposits were $238 million reflecting a $3 million decrease from
year end 1998. Total average deposits for 1999 were $239 million, an increase of
$10 million or 4.4 percent above 1998. The average rate paid on interest bearing
deposits was 4.09 percent for 1999
CVB, Inc.
---------
32
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TABLE 5-LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
(dollars in thousands) 1999 % 1998 % 1997 % 1996 % 1995 %
- --------------------------------------------------------------------------------------------------------------------------------
Commercial, industrial and agricultural $131,395 63.4 $114,313 60.4 $111,074 58.1 $ 91,744 55.0 $ 81,119 50.7
Real estate-construction and
land development 21,956 10.6 19,663 10.4 21,456 11.2 15,449 9.3 19,817 12.4
- --------------------------------------------------------------------------------------------------------------------------------
Total commercial related loans 153,351 74.0 133,976 70.8 132,530 69.3 107,193 64.3 100,936 63.1
Real estate-residential mortgages 29,815 14.4 31,581 16.7 34,029 17.8 35,444 21.3 36,286 22.7
Installment 24,152 11.6 23,554 12.5 24,783 12.9 24,014 14.4 22,786 14.2
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer related loans 53,967 26.0 55,135 29.2 58,812 30.7 59,458 35.7 59,072 36.9
Total loans $207,318 100.0 $189,111 100.0 $191,342 100.0 $166,651 100.0 $160,008 100.0
================================================================================================================================
TABLE 6-SELECTED LOAN MATURITIES AND INTEREST RATE SENSITIVITY
DECEMBER 31, 1999
YEARS TO MATURITY
(dollars in thousands) 1 OR LESS 1 TO 5 OVER 5 TOTAL
- ---------------------------------------------------------------------------------------------------
Commercial, industrial and agricultural $17,316 $26,976 $87,103 $131,395
Real estate-construction and land development 11,186 4,134 6,636 21,956
- ---------------------------------------------------------------------------------------------------
Total commercial related $28,502 $31,110 $93,739 $153,351
===================================================================================================
Fixed interest rates $ 3,819 $24,063 $78,540 $106,422
Floating or adjustable interest rates 24,683 7,047 15,199 46,929
- ---------------------------------------------------------------------------------------------------
Total commercial related $28,502 $31,110 $93,739 $153,351
===================================================================================================
compared to 4.34 percent for 1998. Growth in average deposit balances was due
primarily to an increase in the relatively low cost demand deposit category. The
average balance of the CD portfolio was flat between periods. Management
believes that growth in average core deposits during 1999 was attributable to
the increased selling effectiveness of the retail banking staff, a result of
formal sales and product training. New customers who left selected bank
competitors that merged with, or were acquired by, large non-local financial
corporations also contributed to the growth in core deposits.
At 1999 year end, total certificates of deposit were $131.2 million and are
scheduled to mature in the following years: $90.7 in 2000, $19.6 in 2001, $8.8
in 2002, $7.3 in 2003 and $4.8 in 2004. At 1999 year end, the balance of
certificates $100,000 and above was $18.9 million. Of this total: $7.6 mature
within three months; $2.7 mature after three months but within six months; $4.5
mature after six months but within twelve months; and the remaining $4.1 mature
beyond twelve months.
For 2000, the average volume of deposits is expected to increase moderately for
the same reasons discussed earlier, in addition to normal business growth. It is
probable that competitive pressures, including the emergence of new competitors,
will constrain deposit growth for PeoplesBank in the period ahead. Furthermore,
double-digit returns in the stock and mutual funds markets have constrained
deposit growth for the commercial banking industry in the past, and will
continue to do so if these returns are sustained in the period ahead.
Short-term and Long-term Borrowings
To meet day-to-day funding needs, PeoplesBank may borrow from larger
correspondent banks in the form of federal funds purchased. It also utilizes
available credit through the Federal Home Loan Bank of Pittsburgh (FHLBP). The
rate is established daily based on prevailing market conditions for overnight
funds. At December 31, 1999, federal funds purchased and other short-term
borrowings totaled $15.6 million compared to $1.2 million at year end 1998. The
increase in short-term borrowings partially funded growth in earning assets and
an increase in cash for anticipated Y2K deposit withdrawals.
Long-term borrowings are a primary funding source for asset growth. At December
31, 1999, long-term borrowings were $10.3 million compared to $2.6 million at
year end 1998. During September 1999, the Corporation borrowed $2 million from a
local financial institution. Under the loan arrangement the rate is fixed at
7.35 percent for 10 years based on a 20 year principal amortization, with no
prepayment penalty. In July 1999, PeoplesBank borrowed $5 million for 15 years
from the FHLBP. Under the loan arrangement with the FHLBP, the rate is fixed at
6.43 percent for 10 years. During the remaining 5 years, the FHLBP has the
option to convert the rate to a float-
CVB, Inc.
---------
33
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ing rate based on the 3 month Libor index plus 16 basis points. If the FHLBP
elects its conversion option, PeoplesBank can repay the loan without a
prepayment penalty.
PeoplesBank's maximum borrowing capacity, as established quarterly by the FHLBP,
was approximately $61 million as of September 30, 1999, the most recent
available date. At December 31, 1999, PeoplesBank had approximately $21 million
outstanding on its account with the FHLBP. Additional information about
short-term and long-term borrowings is provided in Note 11 to the 1999
consolidated financial statements.
Stockholders' Equity
Stockholders' equity, or capital, is a source of funds, which enables the
Corporation to maintain asset growth and to absorb losses. Total shareholders'
equity was $25 million at December 31, 1999, slightly below the $26 million for
year end 1998. The decline in equity was primarily attributable to unrealized
holding losses on available-for-sale investment securities caused by rising
market interest rates, and stock repurchases which more than offset the positive
impact from earnings.
The level of capital for the Corporation and PeoplesBank remained sound for
1999. 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 well capitalized
institutions are as follows: tier I risk-based capital, 6 percent; total
risk-based capital, 10 percent; and leverage ratio, 5 percent. At the state
level, the Pennsylvania Department of Banking uses a leverage ratio guideline of
6 percent. Codorus Valley's and PeoplesBank's capital amounts and classification
are also subject to qualitative judgements by regulators. Table 7 depicts
capital ratios for the Corporation and PeoplesBank compared to regulatory
minimums for adequately capitalized and well capitalized commercial banks.
The Corporation pays cash dividends on a quarterly basis.
The board determines the dividend rate after considering the Corporation's
capital requirements, current and projected net income, and other factors.
Annual cash dividends on a per common share basis were $.42 for 1999, $.38 for
1998, and $.35 for 1997. All per share amounts were adjusted for stock
dividends. Codorus Valley and PeoplesBank are subject to restrictions on the
payment of dividends as depicted in Note 12-Dividend Payment Restrictions.
Periodically, Codorus Valley pays stock dividends as another means of enhancing
long-term shareholder value. In June of 1999, 1998, and 1997, the Corporation
paid a 5 percent stock dividend. Payment of these 5 percent stock dividends
resulted in the issuance of 103,840 common shares and the reissuance of 10,878
shares from treasury in 1999, 109,469 common shares in 1998 and 51,963 shares in
1997. In January 1998, Codorus Valley paid a two-for-one stock split effected in
the form of a 100 percent stock dividend. The stock split resulted in the
issuance of 1,097,259 shares of common stock. The weighted average number of
shares of common stock outstanding was approximately 2,393,728 for 1999 and
2,407,827 for 1998 and 1997.
In February 1999, the Corporation publicly announced that its board authorized
the purchase, in open market and privately negotiated transactions, of up to
112,500 shares or approximately 4.9 percent of its then outstanding common
shares. Purchases are authorized when market conditions warrant, and are
expected to be funded from retained earnings. As of December 31, 1999, Codorus
Valley purchased 75,422 shares of its common stock for approximately $1,352,000.
Of this total, 10,878 shares were reissued to partially satisfy the 5 percent
stock dividend paid in June 1999. The remaining 64,544 shares were held in
treasury as of December 31, 1999.
Table 7-CAPITAL RATIOS
FEDERAL FEDERAL CAPITAL*
DECEMBER 31, MINIMUM WELL AT DECEMBER 31,
(dollars in thousands) 1999 1998 REQUIRED CAPITALIZED 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Tier I risk-based capital 4.00% 6.00%
(as a percentage of risk weighted assets)
Codorus Valley Bancorp, Inc. consolidated 11.18% 12.40% $25,887 $25,590
PeoplesBank 9.23% 10.14 20,725 20,415
Total risk-based capital 8.00% 10.00%
(as a percentage of risk weighted assets)
Codorus Valley Bancorp, Inc. consolidated 12.06% 13.32% $27,910 $27,493
PeoplesBank 10.13% 11.08 22,748 22,318
Leverage 4.00% 5.00%
(Tier 1 capital as a percentage of average
total assets)
Codorus Valley Bancorp, Inc. consolidated 9.27% 9.90% $25,887 $25,590
PeoplesBank 7.58% 8.09 20,725 20,415
* Net unrealized gains and losses on securities available-for-sale, net of
taxes, are disregarded for capital ratio computation purposes in accordance
with federal regulatory banking guidelines.
CVB, Inc.
---------
34
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As previously disclosed in this report, the Corporation maintains various
employee, director and shareholder benefit plans that could result in the
issuance of its common stock. Information about these plans can be found in Note
10-Benefit Plans and Note 13-Stockholders' Equity of the consolidated financial
statements.
Past and future capital investment will impact current and future earnings and
capital growth. Possible future investments could include expansion of the
community office franchise, investment in communication and computer technology,
and creation or acquisition of other financial services companies. Management
and the board believe that capital investment, guided by a long-term strategic
plan, is necessary to develop an infrastructure to grow market share and net
income over the long-term, and is an important component of the overall strategy
of enhancing long-term shareholder value.
RISK MANAGEMENT
- ------------------------------------------------------------------------------
Credit Risk Management
The Corporation emphasizes the management of credit risk. To support this
objective a sound lending policy framework has been established. Within this
framework are six basic policies that guide the lending process and minimize
risk. First, the Corporation follows detailed written lending policies and
procedures. Second, loan approval authority is granted commensurate with dollar
amount, loan type, level of risk, and the experience of the loan officer. Third,
loan review committees function at both the senior lending officer level and the
board level to review and authorize loans that exceed preestablished dollar
thresholds and/or meet other criteria. Fourth, the Corporation makes most of its
loans within its primary geographical market area, York County, Pennsylvania.
Although this may pose a geographical concentration risk, the diverse local
economy and knowledge of customers minimizes this risk. Fifth, the loan
portfolio is diversified to prevent dependency upon a single customer or small
group of related customers. And sixth, the Corporation does not make loans to
foreign countries or persons residing therein.
In addition to a comprehensive lending policy, numerous internal reviews of the
loan and OREO portfolios occur throughout the year. In addition to internal
controls, PeoplesBank uses a disinterested third party loan review specialist to
review its commercial loan portfolio. Furthermore, these portfolios are reviewed
annually by independent auditors in connection with their audit of the financial
statements, and are examined periodically by bank regulators.
At year end 1999, there were three concentrations of loans by industry that
exceeded 10 percent of total loans, as follows: commercial facility leasing,
$33.4 million or 16.1 percent; residential facility leasing, $22.6 million or
10.9 percent; and real estate development, $21.9 million or 10.6 percent.
Comparatively, at year end 1998, concentrations within these three industries
were as follows: commercial facility leasing, $32.4 million or 17.2 percent;
residential facility leasing, $21.3 million or 11.8 percent; and real estate
development, $19.7 million or 10.4 percent. Loans to borrowers within these
industries are usually collateralized by real estate.
Nonperforming Assets
A primary measure of loan quality is the percentage of loans that move from an
earnings category to a nonperforming category. Table 8-Nonperforming Assets and
Past Due Loans depicts asset categories posing the greatest risk of loss. A loan
is considered impaired when, based on current information and events, it is
probable that PeoplesBank will be unable to collect all amounts due. Internal
loan classifications such as nonaccrual and troubled debt restructurings are
examples of impaired loans. It is PeoplesBank's policy to reclassify loans to an
impaired status when either principal or interest payments become 90 days past
due, unless the value of the supporting collateral is adequate and the loan is
in the process of collection. An impaired classification may be made prior to 90
days past due if management believes that the collection of interest or
principal is doubtful. Other real estate owned (OREO) is primarily real estate
assets that were acquired to satisfy debts owed to PeoplesBank. The final
category, loans past due 90 days or more and still accruing interest, are
contractually past due, but are well collateralized and in the process of
collection.
Table 8 depicts that on December 31, 1999, total nonperforming assets were
$3,277,000, a decrease of $300,000 or 8 percent below year end 1998. The
reduction in nonperforming assets coupled with loan growth improved the
nonperforming assets ratio by 30 basis points, 1.57 percent for year end 1999
versus 1.87 percent for year end 1998. A major component of nonperforming assets
is impaired loans. At year end 1999, the impaired loans category was $1,892,000,
which reflected an 11 percent increase from year end 1998. The increase was
caused by the addition of one commercial account, adequately collateralized by
real estate assets, which totaled $759,000. To date, $271,000 has been collected
on this account from a partial sale of collateral. At December 31, 1999, the
impaired loan portfolio was comprised of twenty unrelated accounts, primarily
commercial loan relationships, ranging in size from $9,000 to $488,000. These
loan relationships vary by industry and are generally collateralized with real
estate assets. A loss allowance, which is evaluated quarterly, has been
established for accounts that appear to be under-collateralized. Efforts to
modify contractual terms for individual accounts, based on prevailing market
conditions, or liquidate collateral assets, are proceeding as quickly as
potential buyers can be located and legal constraints permit.
OREO, net of reserve, was $1,385,000 at year end 1999, a decrease of $486,000 or
25 percent below year end 1998. The decrease was caused by the liquidation of
assets. On December 31, 1999, the OREO portfolio was comprised of real
CVB, Inc.
---------
35
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Table 8-NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Impaired loans (1) $1,892 $1,706 $2,842 $2,063 $3,583
Other real estate owned, net of reserve 1,385 1,871 380 780 695
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,277 $3,577 $3,222 $2,843 $4,278
===========================================================================================================================
Accruing loans that are contractually past due 90 $13 $13 $107 $524 $1,755
days or more as to principal or interest
Ratios:
Impaired loans as a % of total year end loans 0.91% 0.90% 1.49% 1.24% 2.24%
Nonperforming assets as a % of total year end
loans and other real estate owned, net of reserve 1.57% 1.87% 1.68% 1.70% 2.66%
Nonperforming assets as a % of total year end
stockholders' equity 12.92% 13.73% 13.19% 12.52% 20.34%
Allowance for loan losses as a multiple of impaired loans 1.1x 1.1x .7x 1.0x .6x
Interest not recognized on impaired loans at period end: (2)
Contractual interest due $240 $312 $398 $246 $306
Interest revenue recognized 49 73 103 18 120
- ---------------------------------------------------------------------------------------------------------------------------
Interest not recognized in operations $191 $239 $295 $228 $186
(1) Comprised solely of nonaccrual loans.
(2) This table includes interest not recognized on loans which were classified
as impaired at year end. While every effort is being made to collect this
interest revenue, it is probable a portion will never be recovered.
estate assets from six former commercial loan relationships. The largest
property had a carrying value of $996,000, which made up 72 percent of the OREO
(net of allowance) portfolio. Management believes that the net realizable value
of this property is greater than the carrying value based on a recent external
appraisal. A loss allowance, which is evaluated quarterly, has been established
for OREO assets whose estimated fair value, less selling expenses, is below
their financial carrying costs. At December 31, 1999, the allowance for OREO was
$69,000. The provision expense for OREO, due to declines in the fair value of
individual assets, was $39,000 for 1999 compared to $69,000 for 1998 and $18,000
for 1997. At December 31, 1999, there were no potential problem loans, as
defined by the Securities and Exchange Commission, identified by management.
However, management was monitoring loans of approximately $7.5 million for which
the ability of the borrower to comply with present repayment terms was
uncertain. These loans were not included in the Table 8 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 $7.5 million on December 31,
1998.
Allowance for Loan Losses
Although the Corporation maintains sound credit policies, certain loans
deteriorate and the Corporation must charge them off as losses. The allowance
(reserve) for loan losses is maintained to absorb these potential losses. The
allowance is increased by provisions charged to expense and is reduced by loan
charge-offs, net of recoveries. In analyzing the adequacy of the allowance,
management considers the results of internal and external credit reviews, past
loss experience, changes in the size and character of the loan portfolio,
adequacy of collateral, general economic conditions and the local business
outlook. Table 9-Analysis of Allowance For Loan Losses presents an analysis of
the activity in the allowance for loan losses over a five-year period.
Commentary is provided below for each period presented.
For 1999, the allowance was $2,023,000, representing a $158,000 or 8 percent
increase from year end 1998. The increase in the allowance reflects additional
provisions during 1999 to support commercial loan growth. For 1999, net
charge-offs were $67,000, the smallest loss during the five-year period
presented.
For 1998, the allowance was $1,865,000, representing a $233,000 or 11 percent
decline from year end 1997. The decline
CVB, Inc.
---------
36
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Table 9-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Balance - beginning of year $1,865 $2,098 $2,110 $2,286 $2,249
Provision charged to operating expense 225 375 275 134 228
Loans charged off:
Commercial 23 610 340 265 276
Real estate-mortgage 0 0 0 27 0
Consumer 63 25 66 95 66
- ---------------------------------------------------------------------------------------------------------------------------
Total loans charged off 86 635 406 387 342
Recoveries:
Commercial 12 13 112 26 134
Real estate-mortgage 0 0 0 0 0
Consumer 7 14 7 51 17
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 19 27 119 77 151
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 67 608 287 310 191
Balance - end of year $2,023 $1,865 $2,098 $2,110 $2,286
===========================================================================================================================
Ratios:
Net charge-offs to average total loans 0.03% 0.32% 0.16% 0.19% 0.12%
Allowance for loan losses to total loans at year-end 0.98 0.99 1.10 1.27 1.43
Allowance for loan losses to impaired
loans and loans past due 90 days or more 106.2 108.5 71.1 81.6 42.8
- ---------------------------------------------------------------------------------------------------------------------------
was primarily the result of a $456,000 charge-off attributable to a single
commercial borrower whose account was deemed partially uncollectible in June
1998. The loan loss provision was $375,000 for 1998, an increase of $100,000
above 1997 to partially offset a higher level of net charge-offs. With the
exception of the charge-off for the single commercial borrower, the reduction in
the allowance reflects overall improvement in the quality of the loan portfolio.
For 1997, the allowance was $2,098,000, representing a small decline from year
end 1996. The provision expense was $275,000 for 1997 which was $141,000 higher
than the prior year due primarily to commercial loan growth and net charge-offs.
Of the total $406,000 charged off in 1997, $172,000 or 42 percent was
attributable to one commercial loan borrower whose accounts were deemed
uncollectible. The decline in the allowance level and the ratio of allowance to
total loans reflects improvement in the quality of individual loans within the
loan portfolios.
For 1996, the allowance was $2,110,000, reflecting a decrease of $176,000 from
year end 1995 due to a lower level of nonperforming assets. The reduction in the
allowance lowered the unallocated reserve component, depicted in Table 10, which
was deemed sufficient at year end 1996. The provision expense was $134,000 for
1996, which primarily supported loan growth, principally commercial loans. Of
the total $387,000 charged off for the year, $251,000 was attributable to one
commercial loan borrower whose accounts were deemed uncollectible.
For 1995, the allowance was $2,286,000, slightly above the level for year end
1994. The increase was due to a higher level of nonperforming assets and to
support a larger volume of loans. The provision expense was $228,000 in 1995,
which primarily supported loan growth and losses due to charge-offs. Of the
total $342,000 charged off for the year, $141,000 was attributable to one
commercial loan borrower whose accounts were deemed uncollectible.
Based on a recent evaluation of potential loan losses and the current loan
portfolio, management believes that the allowance is adequate to support losses
inherent in the loan portfolio at December 31, 1999. Table 10-Allocation of the
Allowance For Loan Losses presents an allocation of the allowance for potential
loan losses by major loan category.
Liquidity
Maintaining adequate liquidity provides the Corporation with the ability to meet
financial obligations to its depositors, loan customers, employees, and
stockholders on a timely and cost effective basis in the normal course of
business. Additionally, it provides funds for growth and business opportunities
as they arise. Liquidity is generated from transactions relating to both the
Corporation's assets and liabilities. The primary sources of asset liquidity are
scheduled investment security maturities and cash inflows, funds received from
customer loan payments, and asset sales. The primary sources of liability
liquidity are deposit growth and short-term and long-term borrowings. Retained
earnings from profitable operations is another source of liquidity. The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities.
CVB, Inc.
---------
37
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Corporation manages liquidity through the use of ratios and forecasts of
selected cash flows. At year end 1999, the loan-to-deposit ratio was 87 percent
compared to 78 percent for year end 1998. In the period ahead the
loan-to-deposit ratio could increase due to competitive forces which may
constrain deposit growth. By necessity, short-term and long-term borrowings will
play an increasingly important role in funding.
Market Risk Management
In the normal course of conducting business activities the Corporation 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 that may affect cash flows, income, expense and
the values of financial instruments. PeoplesBank is particularly vulnerable to
changes in the short-term U.S. Prime interest rate (Prime rate). Interest rate
risk is managed by an Asset-Liability Committee comprised of members of senior
management and an outside director. The committee's objective is to maximize net
interest income within acceptable levels of liquidity and interest rate risk and
within capital adequacy constraints. PeoplesBank is not subject to foreign
currency or commodity price risk, nor does it own any trading assets.
The committee manages interest rate risk primarily through sensitivity analysis.
A computerized asset-liability management simulation model is used to measure
the potential loss in future net income based on hypothetical changes in
interest rates. Interest rate forecasts are supplied by a national forecasting
service and integrated with the model. The Corporation's policy limit for the
maximum negative impact on net income is 10 percent over a twelve-month period.
This policy limit is tested periodically by measuring the change in net income
from a "baseline" scenario where interest rates are held constant, compared to a
gradual 200 basis point increase and decrease in interest rates over a twelve
month period; or if more practicable the forecasting service's "high rate," "low
rate" and "most likely rate" scenarios for the upcoming twelve month period.
Important modeling assumptions include: the use of contractual cash flows;
varying levels of prepayments for commercial and mortgage loans, and
mortgage-backed securities; stability of consumer loan and core deposit volumes,
and noninterest income and expense; and reinvestment of repriceable cash flows
in the same type of asset or liability. The ALM model includes significant
balance sheet variables that are identified as being affected by interest rates
such as rate change differentials, and rate caps and floors. These and certain
other effects are evaluated in developing the scenarios from which sensitivity
of net income to changes in interest rates is determined.
The Corporation performed a simulation on the balance sheet at December 31,
1999. The results of that point-in-time analysis revealed that the Corporation's
balance sheet was liability sensitive, i.e., more liabilities will reprice than
assets over the next twelve months. This implies that net income will decrease
if market interest rates rise and increase if rates fall. Model results
projected net income, based on the forecasting service's rate scenarios, as
follows: decline 11.6 percent if market rates increase 300 basis points (high
rate scenario), decline 2.8 percent if market rates increase 50 basis points
(most likely scenario), and increase 6.9 percent if market rates decline 175
basis points (low rate scenario). One factor that increased liability
sensitivity at the measurement date was the increase in overnight borrowings
caused in part by the need to temporarily finance the purchase of noninterest
earning cash inventory for anticipated Y2K withdrawals.
Table 10-ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
1999 1998 1997 1996 1995
-------------- -------------- --------------- --------------- --------------
% TOTAL % TOTAL % TOTAL % TOTAL % TOTAL
(dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ---------------------------------------------------------------------------------------------------------------------------
Commercial, industrial
and agricultural $972 63.4 $1,329 60.4 $1,263 58.1 $1,335 55.0 $1,233 50.7
Real estate - construction
and land development 196 10.6 174 10.4 268 11.2 319 9.3 268 12.4
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial related loans 1,168 74.0 1,503 70.8 1,531 69.3 1,654 64.3 1,501 63.1
Real estate - residential
mortgages 155 14.4 74 16.7 95 17.8 86 21.3 94 22.7
Installment 50 11.6 73 12.5 54 12.9 79 14.4 8 14.2
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer related loans 205 26.0 147 29.2 149 30.7 165 35.7 102 36.9
Unallocated 650 N/A 215 n/a 418 n/a 291 n/a 683 n/a
- ---------------------------------------------------------------------------------------------------------------------------
Total $2,023 100.0 $1,865 100.0 $2,098 100.0 $2,110 100.0 $2,286 100.0
===========================================================================================================================
Note: The specific allocation for any particular loan category may be
reallocated in the future as risk perceptions change. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within that category since the total allowance is a
general allowance applicable to the entire loan portfolio.
CVB, Inc.
---------
38
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In 1998, the Corporation made two significant changes to the asset-liability
management process. First, a dated asset-liability model was replaced with a new
model that has a solid national reputation. Second, PeoplesBank subscribed to an
economic and interest rate forecasting service. Also in 1998, the Corporation
changed its interest rate risk policy limit to focus on net income, as opposed
to net interest income. A simulation was performed using 1999 budget data as a
baseline. The baseline reflected a most likely interest rate scenario; e.g., the
Prime rate (a driver rate) would decline 75 basis points over 1999. The ALM
model projected net income for the baseline rate scenario compared to the
forecasting service's high rate (Prime rate gradually increases 225 basis points
by year end 1999) and low rate (Prime rate gradually declines 175 basis points
by year end 1999) scenarios. The ALM model projected relatively stable net
income over a 12 month period. For 1999, net income would decline 0.7 percent if
interest rates rise and 1.6 percent if interest rates fall, compared to the
baseline scenario.
Measurement of interest rate risk requires many assumptions. These assumptions
are inherently uncertain and, as a result, the model cannot precisely estimate
net interest income or precisely predict the impact of higher or lower rates on
net income. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes, customer behavior, and changes
in market conditions and management strategies, among other factors.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
However, inflation does have an important impact on the growth of total assets
in the banking industry and the resulting need to increase equity capital at
higher than normal rates in order to maintain an appropriate equity-to-assets
ratio. Inflation also significantly affects noninterest expenses, which tend to
rise during periods of general inflation. The level of inflation can be measured
by the change in the Consumer Price Index (CPI) for all urban consumers
(December vs. December). The change in the CPI for 1999 was 2.7 percent,
compared to 1.6 percent for 1998 and 1.7 percent for 1997. The increase in the
CPI for 1999 was due primarily to increases in energy prices.
Management believes the most significant impact on financial results is the
Corporation's ability to react to changes in market interest rates. As discussed
previously, management strives to structure the balance sheet to increase net
interest income by managing interest rate sensitive assets and liabilities in
such a way that they reprice in response to changes in market interest rates.
Additionally, management is focused on increasing fee income, which is less
sensitive to changes in market interest rates.
Other Risks
Periodically, various types of federal and state legislation are proposed that
could result in additional regulation of, or restrictions on, the business of
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.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999, which is also known as the Financial Services Modernization Act.
The act repeals Depression-era banking laws and will permit banks, insurance
companies and securities firms to engage in each others' businesses after
complying with certain conditions and regulations which are yet to be finalized.
The act grants to community banks the power to enter new financial markets as a
matter of right that larger institutions have managed to do on an ad hoc basis.
At this time, the Corporation has no plans to pursue these additional
possibilities. Management does not believe that the Financial Services
Modernization Act will have an immediate positive or negative material effect on
Codorus Valley's operations. However, the act may result in increased
competition from larger financial service companies, many of whom have
substantially more financial resources than Codorus Valley, and now may offer
banking services in addition to insurance and brokerage services.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation which, if implemented, would have
a material adverse effect upon the liquidity, capital resources, or results of
operations. Although the general cost of compliance with numerous and multiple
federal and state laws and regulations does have, and in the future may have, a
negative impact on Codorus Valley's results of operations.
CVB, Inc.
---------
39
MANAGEMENT'S DISCUSSION OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Table 11-SUMMARY OF QUARTERLY FINANCIAL DATA
1999 1998
(dollars in thousands, FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
except per share data) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $5,278 $5,124 $5,020 $4,892 $4,947 $4,960 $5,073 $4,998
Interest expense 2,551 2,421 2,291 2,271 2,315 2,345 2,312 2,293
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 2,727 2,703 2,729 2,621 2,632 2,615 2,761 2,705
Provision for loan losses 25 50 75 75 0 75 225 75
Noninterest income 498 461 489 452 454 314 356 308
Noninterest expense 2,240 2,295 2,324 2,195 2,246 2,098 2,059 2,043
- ---------------------------------------------------------------------------------------------------------------------------
Net operating income 960 819 819 803 840 756 833 895
Gains from sales of securities 80 182 6 37 0 72 0 122
Gains, other 14 14 4 0 98 4 104 0
- ---------------------------------------------------------------------------------------------------------------------------
Pretax income 1,054 1,015 829 840 938 832 937 1,017
Provision for income taxes 312 293 230 239 284 227 341 336
===========================================================================================================================
Net income $ 742 $ 722 $ 599 $ 601 $ 654 $ 605 $ 596 $ 681
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share,
basic and diluted* $0.31 $0.30 $0.25 $0.25 $0.27 $0.25 $0.25 $0.28
===========================================================================================================================
* Adjusted for stock dividends declared through December 31, 1999.
CVB, Inc.
---------
40
CORPORATE INFORMATION
CORPORATE PROFILE
Codorus Valley Bancorp, Inc. is a Pennsylvania business incorporated in 1986
which became a bank holding company on March 2, 1987, under the Bank Holding
Company Act of 1956. PeoplesBank, A Codorus Valley Company, is its wholly-owned
banking subsidiary and SYC Realty Co., Inc. is its wholly-owned nonbank
subsidiary. Organized in 1934, PeoplesBank, offers a full range of commercial
and consumer banking services through eight full service banking office
locations in York County, Pennsylvania. The deposits of PeoplesBank are fully
insured by the Federal Deposit Insurance Corporation (FDIC) to the maximum
extent provided by law. PeoplesBank also offers trust and investment services at
the Codorus Valley Corporate Center. In 1998, PeoplesBank created SYC Settlement
Services, Inc., as a wholly-owned subsidiary, to provide real estate settlement
services. In 1999, PeoplesBank created SYC Insurance Services, Inc., as a
wholly-owned subsidary, to facilitate the sale of investment products through a
third-party marketing arrangement.
HEADQUARTERS
Codorus Valley Bancorp, Inc., Codorus Valley Corporate Center, 105 Leader
Heights Road, York, PA 17403
STOCK, DIVIDEND AND BROKER INFORMATION
Outstanding common stock of Codorus Valley Bancorp, Inc. is quoted under the
symbol "CVLY" on the Nasdaq National Market System. On December 31, 1999, there
were approximately 998 stockholders of record.
Prices presented below are based on the close price as quoted on the Nasdaq
National Market System.Cash dividends paid for the most recent eight quarters
are also provided in the table below. Cash dividends per share (rounded) and
market prices are adjusted for stock dividends.
1999 1998
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE HIGH LOW PER SHARE
- -----------------------------------------------------------------------------------------------------
First $18.57 $16.19 $0.10 $21.09 $19.96 $0.09
Second 18.93 17.00 0.10 21.91 20.32 0.09
Third 19.38 17.75 0.11 21.91 18.57 0.10
Fourth 19.38 17.13 0.11 19.52 17.38 0.10
For further information, we refer you to the following market-makers in our
common stock:
Ryan, Beck & Co. Janney Montgomery Scott, LLC Tucker Anthony Inc.
800-223-8969 800-999-0503 800-526-6371
F.J. Morrissey & Co., Inc. Sandler O'Neill & Partners, LP
800-842-8928 800-635-6851
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Tuesday, May 16, 2000 at 9:00
a.m. eastern daylight-saving time, at the Codorus Valley Corporate Center, 105
Leader Heights Road, York, Pennsylvania.
TRANSFER AGENT
Norwest Bank Minnesota, N.A., P. O. Box 64854, St. Paul, MN 55164-0854
800-468-9716
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Information regarding the Corporation's Dividend Reinvestment and Stock Purchase
Plan may be obtained by calling 800-468-9716 or by writing to: Norwest Bank
Minnesota, N.A., P. O. Box 64854, St. Paul, MN 55164-0854
FORM 10-K REQUEST
The form 10-K Report filed with the Securities and Exchange Commission (SEC) may
be obtained, without charge, as follows:
Via the Internet: www.peoplesbanknet.com, select Codorus Valley Bancorp, Inc.,
then select the Securities and Exchange Commission link, or visit the SEC
website at www.sec.gov/edgarhp.htm
Write to: Chief Financial Officer, Codorus Valley Bancorp, Inc., P. O. Box 2887,
York, PA 17405-2887.
E.O.E. M/F/D/V
CVB, Inc.
---------
Inside Back Cover