EXHIBIT 13
EXCERPTS FROM:
2000 ANNUAL REPORT TO STOCKHOLDERS
Selected Financial Data
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Summary of operations
[in thousands]
Total interest income $ 21,904 $ 20,314 $ 19,978 $ 19,513 $ 18,523
Total interest expense 11,064 9,534 9,265 9,096 8,756
Net interest income 10,840 10,780 10,713 10,417 9,767
Provision for loan losses 119 225 375 275 134
Noninterest income 2,349 2,237 1,832 1,227 1,090
Noninterest expense 9,309 9,054 8,446 7,729 6,755
Income before income taxes 3,761 3,738 3,724 3,640 3,968
Provision for income taxes 1,054 1,074 1,188 1,161 1,261
Net income $ 2,707 $ 2,664 $ 2,536 $ 2,479 $ 2,707
====================================================================================================================
Ratios
[in percentage]
Return on average
stockholders' equity 10.3 10.2 10.0 10.4 12.4
Return on average assets 0.94 0.95 0.98 1.00 1.14
Tier I risk-based capital 11.3 11.2 12.4 12.4 13.6
Total risk-based capital 12.1 12.1 13.3 13.5 14.9
Average stockholders' equity
to average assets 9.1 9.3 9.8 9.7 9.2
Per common share
[adjusted for stock dividends]
Net income, basic and diluted $1.12 $1.09 $1.03 $1.01 $1.10
Cash dividends paid $0.46 $0.41 $0.38 $0.34 $0.31
Stock dividend paid 5% 5% 5% 5% 5%
Stock split effected as stock dividend paid --- --- 100% --- ---
Book value $11.22 $10.61 $10.61 $9.95 $9.25
Dividend payout ratio 40.7% 38.0% 36.4% 33.7% 27.8%
Weighted average shares outstanding 2,418,698 2,440,924 2,455,023 2,455,023 2,455,022
Summary of financial condition
at year-end [in thousands]
Securities $ 49,932 $ 55,629 $ 56,225 $ 40,303 $ 56,859
Loans 217,926 207,318 189,111 191,342 166,651
Assets 295,092 291,156 273,082 255,058 237,329
Deposits 247,414 238,458 241,913 226,263 209,460
Borrowings 19,034 25,999 3,805 2,802 4,000
Equity 27,391 25,372 26,058 24,425 22,706
Trust and investment services
Assets under management [market value] 79,850 76,838 70,825 59,863 49,292
Fee income 670 542 549 441 321
Non-financial data
Number of bank offices 8 8 8 8 7
Number of employees
[full-time equivalent] 136 131 130 140 129
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18
Consolidated Statements of Financial Condition
December 31,
[dollars in thousands] 2000 1999
- ------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks:
Interest bearing deposits with banks $ 283 $ 226
Noninterest bearing deposits and cash 7,485 10,399
Federal funds sold 1,969 568
Securities available-for-sale 40,572 46,268
Securities held-to-maturity (market value $8,719 for 2000 and $8,835 for 1999) 9,360 9,361
Loans 217,926 207,318
Less-allowance for loan losses (1,967) (2,023)
Total net loans 215,959 205,295
Premises and equipment 8,998 9,547
Other assets 10,466 9,492
Total assets $295,092 $291,156
======================================================================================================
Liabilities
Deposits:
Noninterest bearing demand $ 26,670 $ 23,427
NOW 26,313 24,376
Money market 51,434 40,449
Savings 15,169 19,007
Time CDs less than $100,000 108,826 112,251
Time CDs $100,000 and above 19,002 18,948
Total deposits 247,414 238,458
Federal funds purchased 0 2,657
Other short-term borrowings 0 13,000
Long-term borrowings 19,034 10,342
Other liabilities 1,253 1,327
- ------------------------------------------------------------------------------------------------------
Total liabilities 267,701 265,784
Stockholders' equity
Series preferred stock, par value $2.50 per share;
1,000,000 shares authorized; 0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 2,440,423 shares issued
and outstanding for 2000, and 2,343,183 for 1999 6,137 6,019
Additional paid-in capital 12,447 11,978
Retained earnings 8,844 9,050
Accumulated other comprehensive income 126 (523)
Less: Treasury stock, 14,500 common shares for 2000
and 64,544 common shares for 1999 (163) (1,152)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 27,391 25,372
Total liabilities and stockholders' equity $295,092 $291,156
======================================================================================================
See accompanying notes.
19
Consolidated Statements of Income
Years ended December 31,
[dollars in thousands, except per share data] 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Interest income
Interest and fees from loans $18,342 $17,212 $16,832
Interest from deposits with banks 13 11 9
Interest from federal funds sold 166 93 354
Interest and dividends from investment securities:
Taxable interest income 2,683 2,521 2,448
Tax-exempt interest income 473 361 281
Dividend income 227 116 54
Total interest income 21,904 20,314 19,978
Interest expense
Interest on deposits:
NOW 240 260 345
Money market 1,720 1,276 997
Savings 364 417 455
Time CDs less than $100,000 6,309 6,007 6,179
Time CDs $100,000 and above 1,129 976 1,105
Total interest expense on deposits 9,762 8,936 9,081
Interest on federal funds purchased and other short-term borrowings 607 194 0
Interest on long-term borrowings 695 404 184
Total interest expense 11,064 9,534 9,265
Net interest income 10,840 10,780 10,713
Provision for loan losses 119 225 375
Net interest income after provision for loan losses 10,721 10,555 10,338
Noninterest income
Trust and investment services fees 670 542 549
Service charges on deposit accounts 662 573 487
Other income 991 785 396
Gain from sales of securities 29 305 194
Gain (loss), other (3) 32 206
Total noninterest income 2,349 2,237 1,832
Noninterest expense
Salaries and benefits 4,824 4,637 4,097
Occupancy of premises 809 793 806
Furniture and equipment 1,035 962 926
Postage, stationery, and supplies 340 360 359
Professional and legal 191 282 302
Marketing and advertising 369 370 309
Other real estate owned, net 139 119 134
Other 1,602 1,531 1,513
Total noninterest expense 9,309 9,054 8,446
Income before income taxes 3,761 3,738 3,724
Provision for income taxes 1,054 1,074 1,188
=======================================================================================================
Net income $ 2,707 $ 2,664 $ 2,536
=======================================================================================================
Net income per share, basic and diluted $1.12 $1.09 $1.03
=======================================================================================================
See accompanying notes.
20
Consolidated Statements of Cash Flows
Years ended December 31,
[dollars in thousands] 2000 1999 1998
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Cash flows from operating activities
Net income $ 2,707 $ 2,664 $ 2,536
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 908 844 790
Provision for loan losses 119 225 375
Provision for losses on other real estate owned 56 39 69
Deferred federal income tax (benefit) expense (21) 12 122
Gain on sales of securities (29) (305) (194)
Loss (gain), other 3 (32) (206)
(Gain) loss on sales of other real estate owned (71) (3) 8
Increase in interest receivable (164) (29) (50)
(Increase) decrease in other assets (129) (364) 90
Decrease in interest payable (59) (39) (50)
(Decrease) increase in other liabilities (15) 173 (325)
Other, net (157) (14) (118)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,148 3,171 3,047
Cash flows from investing activities
Proceeds from sales of securities available-for-sale 983 7,368 9,163
Proceeds from maturities and calls of securities available-for-sale 15,789 17,120 14,368
Purchase of securities available-for-sale (10,059) (15,852) (39,300)
Purchase of securities held-to-maturity 0 (9,361) 0
Net increase in loans (12,849) (18,992) (6,701)
Proceeds from loan sales 424 569 6,499
Proceeds from sales of premises and equipment 36 45 0
Purchases of premises and equipment (398) (1,062) (338)
Proceeds from sales of other real estate owned 816 725 551
Investment in cash surrender value life insurance 0 0 (5,115)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,258) (19,440) (20,873)
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits 12,327 (1,956) 17,129
Net decrease in time deposits (3,371) (1,499) (1,479)
Net (decrease) increase in short-term borrowings (15,657) 14,423 1,234
Net increase (decrease) in long-term borrowings 8,692 7,771 (231)
Dividends paid (1,102) (1,011) (923)
Payment to repurchase common stock (231) (1,352) 0
Cash paid in lieu of fractional shares (4) (6) (6)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 654 16,370 15,724
Net (decrease) increase in cash and cash equivalents (1,456) 101 (2,102)
Cash and cash equivalents at beginning of year 11,193 11,092 13,194
Cash and cash equivalents at end of year $ 9,737 $11,193 $11,092
========================================================================================================
Supplemental disclosures
Interest paid on deposits and borrowed funds $11,168 $9,503 $9,315
Income taxes paid $1,032 $1,032 $1,012
See accompanying notes.
21
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury Total
[dollars in thousands] Stock Capital Earnings Income (Loss) Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $5,486 $ 8,063 $10,444 $432 $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
Comprehensive income:
Net income 2,707 2,707
Other comprehensive income, net of tax
Unrealized gains on securities of $668
net of reclassification adjustment for gains included
in net income of $19 649 649
Comprehensive income 3,356
Cash dividends (1,102) (1,102)
5% stock dividend - 116,640 shares at fair value 118 469 (1,811) 1,220 (4)
Purchase of treasury stock (19,400 shares) (231) (231)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $6,137 $12,447 $8,844 $126 $(163) $27,391
===================================================================================================================================
See accompanying notes.
22
Notes To Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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 inherent 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 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, 2000, and 1999, impaired loans consisted solely of
nonaccrual, collateral dependent loans.
23
Notes To Consolidated Financial Statements
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.
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.
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 likely the deferred tax asset will be realized; therefore,
a deferred tax valuation allowance was not established as of December 31, 2000.
On a quarterly basis, the Corporation assesses whether a valuation allowance for
the deferred tax account is 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 2,418,698 for 2000, 2,440,924 for 1999, and 2,455,023 for
1998.
24
Notes To Consolidated Financial Statements
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, 2000, 1999, and 1998 consisted of certificates of
deposit which matured and were renewed for new terms. These transactions
amounted to approximately $53,412,000 for 2000, $26,852,000 for 1999, and
$35,824,000 for 1998. Non-cash investing transactions for the years ended
December 31, 2000, 1999, and 1998 consisted of the transfer of loans to other
real estate owned. These transfers amounted to approximately $1,795,000 for
2000, $305,000 for 1999, and $2,171,000 for 1998.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures (see Note 16) for financial instruments.
o Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximates their fair
value at the reporting date.
o 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.
o 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
using quoted market prices.
o Bank owned life insurance: Bank owned life insurance is carried at fair
value, which approximates the cash surrender value at the reporting date.
o Demand and savings deposits: The fair value of demand and savings deposits
is the amount payable on demand at the reporting date.
o 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.
o 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.
o 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 remaining maturities at the reporting date.
o 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. Fees charged on standby letters of credit and selected
commitments to extend credit outstanding, principally for commercial loans,
at December 31, 2000 are not considered material.
NOTE 2---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 $3,034,000 at December 31, 2000 and $2,406,000 at
December 31, 1999.
25
Notes To Consolidated Financial Statements
NOTE 3---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
- ------------------------------------------------------------------------------------------------------
2000
Available-for-Sale:
Debt securities
U.S. agencies $19,642 $120 $(104) $19,658
States and municipals 11,076 264 (46) 11,294
Mortgage-backed securities 6,413 3 (47) 6,369
- ------------------------------------------------------------------------------------------------------
Total debt securities 37,131 387 (197) 37,321
Equity securities 3,251 0 0 3,251
Total available-for-sale $40,382 $387 $(197) $40,572
======================================================================================================
Held-to-Maturity:
Debt securities-trust preferred $9,360 $0 $(641) $8,719
Total held-to-maturity $9,360 $0 $(641) $8,719
======================================================================================================
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
======================================================================================================
The amortized cost and estimated fair value of debt securities at December 31,
2000, 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, 2000
[dollars in thousands] Amortized Cost Fair Value
- --------------------------------------------------------------------------------
Available-for-Sale:
Due in one year or less $ 10,868 $ 10,798
Due after one year through five years 16,536 16,660
Due after five years through ten years 4,270 4,251
Due after ten years 5,457 5,612
- --------------------------------------------------------------------------------
Total debt securities available-for-sale $37,131 $37,321
================================================================================
Held-to-Maturity:
Due after ten years $9,360 $8,719
================================================================================
Securities with an amortized cost of $18,595,000 and $19,367,000 on December 31,
2000 and 1999, respectively, were pledged to secure public deposits and for
certain other purposes.
26
Notes To Consolidated Financial Statements
NOTE 4---Loans
The composition of the loan portfolio at December 31, is as follows:
[dollars in thousands] 2000 1999
- --------------------------------------------------------------------------------
Commercial, industrial, and agricultural $140,388 $131,395
Real estate - construction and land development 19,365 21,956
- --------------------------------------------------------------------------------
Total commercial related loans 159,753 153,351
Real estate - residential mortgages 30,831 29,815
Installment 27,342 24,152
- --------------------------------------------------------------------------------
Total consumer related loans 58,173 53,967
- --------------------------------------------------------------------------------
Total loans $217,926 $207,318
================================================================================
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 York County, Pennsylvania and
northern Maryland. 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 2000, the total loan portfolio
included one industry concentration that exceeded 10 percent. The commercial
facility leasing industry accounted for $48.6 million or 22.3 percent of the
total loan portfolio. Loans to borrowers within this industry are usually
collateralized by real estate.
The aggregate amount of loans to directors, executive officers, principal
shareholders, and any associates of such persons was $2,372,000 at December 31,
2000 and $2,101,000 for 1999. During 2000, total loan additions amounted to
$1,416,000 and total payments collected amounted to $1,145,000. 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 2000, 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 $11,733,000 at December 31, 2000, $13,982,000 at
December 31, 1999, and $18,135,000 at December 31, 1998.
NOTE 5---Impaired and Past Due Loans
Impaired and past due loans at December 31, were as follows:
[dollars in thousands] 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Impaired loans $2,006 $1,892 $1,706
Accruing loans that are contractually past due 90 days or more
as to principal or interest 346 13 13
Amount of impaired loans that have a related allowance 2,006 1,892 1,706
Amount of impaired loans with no related allowance 0 0 0
Allowance for impaired loans 376 500 456
Average investment in impaired loans 2,528 2,093 2,891
Interest income recognized on impaired loans (all cash-basis) 37 49 73
27
Notes To Consolidated Financial Statements
NOTE 6---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] 2000 1999 1998
- -------------------------------------------------------------------------------------------
Balance at beginning of year $2,023 $1,865 $2,098
Provision charged to operating expense 119 225 375
Loans charged off (238) (86) (635)
Recoveries 63 19 27
- -------------------------------------------------------------------------------------------
Balance at end of year $1,967 $2,023 $1,865
===========================================================================================
NOTE 7---Other Real Estate Owned (OREO)
Other real estate owned, net of reserve, amounted to $2,390,000 at December 31,
2000, compared to $1,385,000 at December 31, 1999, and $1,871,000 at December
31, 1998. The net expense associated with OREO was approximately $139,000 for
2000, $119,000 for 1999, and $134,000 for 1998.
Changes in the allowance for OREO for each of the three years ended December 31,
were as follows:
[dollars in thousands] 2000 1999 1998
- -------------------------------------------------------------------------------------------
Balance at beginning of year $69 $63 $48
Provision charged to operating expense 56 39 69
Write-downs to fair value (91) (33) (54)
Recoveries 0 0 0
- -------------------------------------------------------------------------------------------
Balance at end of year $34 $69 $63
===========================================================================================
NOTE 8---Premises and Equipment
A summary of the premises and equipment accounts at December 31, was as follows:
[dollars in thousands] 2000 1999
- ------------------------------------------------------------------------------
Land $ 1,150 $ 1,160
Buildings and improvements 8,121 8,063
Equipment 5,544 5,238
- ------------------------------------------------------------------------------
14,815 14,461
Less accumulated depreciation (5,817) (4,914)
- ------------------------------------------------------------------------------
Net premises and equipment $ 8,998 $ 9,547
==============================================================================
NOTE 9---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 2000, 1999, and 1998, the Corporation
matched 50 percent of the first 6 percent of an employee's contribution. The
Corporation's expense for the 401(k) savings and investment plan was $67,000 for
2000, $57,000 for 1999, and $58,000 for 1998.
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 coverage. The
expense associated with the supplemental retirement plans, and the supplemental
life insurance benefit for executive officers was approximately $109,000 for
2000, $98,000 for 1999, and $27,000 for 1998. The accrued liability was $234,000
at December 31, 2000, and $125,000 at December 31, 1999. Investment in bank
owned life insurance policies was used to finance the supplemental benefit
plans, and provide a tax-exempt return to PeoplesBank.
28
Notes To Consolidated Financial Statements
Stock Option Plans
A 2000 Stock Incentive Plan ('00 Plan), administered by disinterested members of
the Corporation's board of directors, was approved by the shareholders at the
annual meeting held on May 16, 2000. As of December 31, 2000, 100,000 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. Awards
may be made under the '00 Plan in the form of (a) qualified options, (b)
non-qualified options, (c) stock appreciation rights, or (d) restricted stock.
For qualified options under the '00 Plan, the option exercise price shall not be
less than the fair market value of the stock on the date granted. For
non-qualified options under the '00 Plan, the option exercise price cannot be
less than the par value of the stock on the grant date. Qualified and
nonqualified options granted cannot be exercised before a minimum of six months,
and expire ten years from grant date. No qualified or non-qualified options have
been granted under the '00 Plan.
A stock appreciation right (sar), under the '00 Plan, entitles the participant
to receive all or a portion of the excess of the fair market value at the time
of exercise over a specified price which cannot be less than the stock's fair
market value at the time the sar is granted. Stock appreciation rights cannot be
exercised before six months from the grant date; however, no sar connected with
another award under the plan shall be exercisable after the last date that award
is exercisable. No stock appreciation rights have been granted under the '00
Plan.
Restricted stock consists of shares of stock that may be acquired by and issued
to a participant. Under the '00 Plan, a participant holding restricted stock
shall have all the same voting rights as a shareholder with certain restrictions
applicable to transferring or disposing of the shares. No shares of restricted
stock have been issued under the '00 Plan.
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,
2000, 110,250 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 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, 2000, 68,080 non-qualified stock options were granted and
exercisable. Options outstanding at December 31, 2000, had a weighted average
exercise price of $17.47 and a weighted average remaining contractual life of
8.2 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, 2000, 79,492 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, 2000, 79,492 qualified stock options were outstanding with a
weighted average exercise price of $15.74 and a weighted average remaining
contractual life of 7.3 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, 2000, 51,095 qualified stock options were
exercisable.
A summary of stock options from all Plans, adjusted for stock dividends,
follows:
Shares Option Price
Under Option Range per share
- --------------------------------------------------------------------------------
Balance, December 31, 1997 46,997 $11.72-$16.20
Granted 56,227 $17.12-$20.00
Exercised 0 0
Balance, December 31, 1998 103,224 $11.72-$20.00
Granted 28,348 $16.73-$17.38
Exercised 0 0
Balance, December 31, 1999 131,572 $11.72-$20.00
Granted 16,000 $12.00
Exercised 0 0
================================================================================
Balance, December 31, 2000 147,572 $11.72-$20.00
29
Notes To Consolidated Financial Statements
The grant-date fair value of options granted during the year was $3.20 for 2000,
$3.31 for 1999, and $3.85 for 1998. These values were calculated using the
Black-Scholes option valuation model. The following significant assumptions were
used:
2000 1999 1998
- --------------------------------------------------------------------------
Expected life (in years) 5.25 5.48 5.47
Risk free interest rate 5.75% 5.50% 5.50%
Expected volatility 27.1% 13.0% 13.0%
Expected dividends 2.6% 2.2% 2.2%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, 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. In accordance with Financial Accounting Standard 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. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. Applying Statement No. 123's fair value method
the Corporation's stock-based awards would have resulted in the pro forma
amounts indicated below:
[dollars in thousands, except per share data] 2000 1999 1998
- --------------------------------------------------------------------------------
Pro forma net income $2,608 $2,532 $2,356
Pro forma net income per share, basic and diluted $1.08 $1.04 $.96
NOTE 10---Short-term and Long-term Borrowings
The schedule below provides a summary of short-term borrowings that 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 the FHLBP, for both short and long-term credit needs, was approximately $66
million. Obligations to the FHLBP are secured by FHLB stock and qualifying
collateral, principally 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, 2000,
total unused credit with the FHLBP was approximately $49 million.
A summary of aggregate short-term borrowings for the three years ended December
31 is as follows:
[dollars in thousands] 2000 1999 1998
- ------------------------------------------------------------------------------------------
Amount outstanding at end of year $0 $15,657 $1,234
Weighted average interest rate at end of year 0.00% 4.75% 5.69%
Maximum amount outstanding at any month end $18,100 $15,657 $1,234
Daily average amount outstanding $9,603 $3,539 $8
Approximate weighted average interest rate for the year 6.32% 5.48% 5.70%
30
Notes To Consolidated Financial Statements
A summary of long-term borrowings for the two years ended December 31 is as
follows:
[dollars in thousands] 2000 1999
- --------------------------------------------------------------------------------
Obligations of PeoplesBank to FHLB Pittsburgh:
Due 2002, 6.03% $ 3,000 $0
Due 2004, 5.12% 1,025 1,025
Due 2005, 5.36%, convertible quarterly after
December 2002 6,000 0
Due 2007, 6.82%, amortizing 2,060 2,324
Due 2014, 6.43%, convertible quarterly after
July 2009 5,000 5,000
Obligation of Codorus Valley Bancorp, Inc.:
Due 2009, 7.35%, amortizing 1,949 1,993
- --------------------------------------------------------------------------------
Total $19,034 $10,342
================================================================================
PeoplesBank's obligations to FHLBP are fixed rate and fixed/floating
(convertible) rate instruments. The FHLBP has an option on the convertible
borrowings to convert the rate to a floating rate after the expiration of a
specified period. The floating rate is based on the Libor index plus a spread.
If the FHLBP elects to exercise its conversion option, PeoplesBank can repay the
converted loan without a prepayment penalty. The obligation of Codorus Valley
Bancorp is secured by a mortgage on the Codorus Valley Corporate Center office
building at 105 Leader Heights Road, York, Pennsylvania.
NOTE 11---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, 2000.
NOTE 12---Stockholders' Equity
The Corporation declared a 5 percent stock dividend in April 2000, which was
paid June 23, 2000. The stock dividend resulted in the issuance of 47,196 common
shares from common stock and the reissuance of 69,444 common shares from
treasury. The Corporation declared a 5 percent stock dividend in April 1999,
which was paid 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.
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 currently outstanding shares.
As of December 31, 2000, the Corporation had purchased 94,822 shares of its
common stock for approximately $1,584,000. Of this total, 69,444 shares were
reissued to partially satisfy the 5 percent dividend paid in June 2000 and
10,878 shares were reissued to partially satisfy the 5 percent stock dividend
paid in June 1999. Retained earnings funded the repurchases.
Codorus Valley maintains a Dividend Reinvestment and Stock Purchase Plan (Plan).
Shareholders of common stock may participate in the Plan, which allows
additional shares of common stock to be purchased with reinvested dividends at
prevailing market prices. To the extent that shares are not available in the
open market, 140,710 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.
31
Notes To Consolidated Financial Statements
The Corporation also maintains Stock Incentive Plans and an Independent
Directors' Stock Option Plan. At year-end 2000, 179,492 shares of common stock
were reserved for possible issuance under the Stock Incentive Plans and 110,250
shares under the Directors' Stock Option Plan. Plan detail can be found in Note
9-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 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Tier I risk-based capital 11.26% 11.18% 9.47% 9.23%
Total risk-based capital 12.07 12.06 10.31 10.13
Leverage 9.41 9.27 7.88 7.58
NOTE 13---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] 2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets
Loan loss $504 $529
Net unrealized losses on securities available-for-sale 0 270
- --------------------------------------------------------------------------------
Total deferred tax assets 504 799
- --------------------------------------------------------------------------------
Deferred tax liabilities
Deferred loan fees 60 81
Depreciation 298 281
Net unrealized gains on securities available-for-sale 65 0
Other, net 14 56
- --------------------------------------------------------------------------------
Total deferred tax liabilities 437 418
- --------------------------------------------------------------------------------
Net deferred tax asset $ 67 $381
================================================================================
Analysis of federal income taxes reflected in the income statements is as
follows:
[dollars in thousands] 2000 1999 1998
- --------------------------------------------------------------------------------
Current tax provision $1,075 $1,062 $1,066
Deferred tax provision (21) 12 122
- --------------------------------------------------------------------------------
Total tax provision $1,054 $1,074 $1,188
================================================================================
32
Notes To Consolidated Financial Statements
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] 2000 1999 1998
- -------------------------------------------------------------------------------------------
Income before income taxes $3,761 $3,738 $3,724
===========================================================================================
Computed tax at 34% $1,279 $1,271 $1,266
Increase (reduction) in taxes resulting from:
Tax-exempt interest income (165) (128) (99)
Interest expense disallowance 26 18 14
Tax-exempt income from bank owned life insurance (92) (93) (22)
Other, net 6 6 29
- -------------------------------------------------------------------------------------------
Provision for income taxes $1,054 $1,074 $1,188
===========================================================================================
The provision for income taxes includes $10,000, $104,000, and $66,000 of
applicable income tax expense related to investment security gains of $29,000,
$305,000, and $194,000 in 2000, 1999, and 1998, respectively.
NOTE 14---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, 2000, outstanding commitments to extend credit
were comprised of approximately $25,138,000 in variable rate instruments and
$15,936,000 in fixed rate instruments with rates varying from 7.12 percent to
11.00 percent. Standby letters of credit were substantially all variable rate
instruments as of December 31, 2000.
The following is a summary of significant commitments:
December 31,
[dollars in thousands] 2000 1999
- --------------------------------------------------------------------------------
Commitments to extend credit $41,074 $47,183
Standby letters of credit 2,228 3,243
33
Notes To Consolidated Financial Statements
NOTE 15---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 are pending or are known to be
threatened or contemplated against the Corporation and PeoplesBank by government
authorities.
NOTE 16---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. In that regard, 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, 2000 December 31, 1999
Carrying Fair Carrying Fair
[dollars in thousands] Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 7,768 $ 7,768 $ 10,625 $ 10,625
Federal funds sold 1,969 1,969 568 568
Securities available-for-sale 40,572 40,572 46,268 46,268
Securities held-to-maturity 9,360 8,719 9,361 8,835
Loans 217,926 218,505 207,318 201,100
Less: allowance for loan losses (1,967) (1,967) (2,023) (2,023)
Interest receivable 1,781 1,781 1,617 1,617
Bank owned life insurance 5,728 5,728 5,456 5,456
- -------------------------------------------------------------------------------------------------------
Total financial assets $283,137 $283,075 $279,190 $272,446
=======================================================================================================
Financial liabilities:
Demand and savings deposits $119,586 $119,586 $107,259 $107,259
Time deposits 127,828 128,917 131,199 131,640
Short-term borrowings 0 0 15,657 15,657
Long-term borrowings 19,034 18,919 10,342 9,837
Interest payable 697 697 731 731
- -------------------------------------------------------------------------------------------------------
Total financial liabilities $267,145 $268,119 $265,188 $265,124
=======================================================================================================
34
Notes To Consolidated Financial Statements
NOTE 17---Condensed Financial Information-Parent Company Only
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31,
[dollars in thousands] 2000 1999
- -----------------------------------------------------------------------------
Assets
Cash and due from banks $ 75 $ 260
Securities available-for-sale 14 13
Securities held-to-maturity (market value
$4,007 for 2000 and $4,138 for 1999) 4,290 4,289
Investment in subsidiaries 22,412 20,212
Premises and equipment 4,646 4,757
Other assets 128 121
- -----------------------------------------------------------------------------
Total assets $31,565 $29,652
=============================================================================
Liabilities
Long-term borrowings $ 4,148 $ 4,239
Other liabilities 26 41
- -----------------------------------------------------------------------------
Total liabilities 4,174 4,280
Stockholders' equity
Series preferred stock 0 0
Common stock 6,137 6,019
Additional paid-in capital 12,447 11,978
Retained earnings 8,844 9,050
Accumulated other comprehensive income 126 (523)
Less: Treasury stock (163) (1,152)
- -----------------------------------------------------------------------------
Total stockholders' equity 27,391 25,372
Total liabilities and stockholders' equity $31,565 $29,652
=============================================================================
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
[dollars in thousands] 2000 1999 1998
- -------------------------------------------------------------------------------------------
Income
Interest from investment securities $393 $110 $0
Dividends from PeoplesBank, A Codorus Valley Company 1,179 2,354 1,189
Rental income 479 426 352
Gains, other 0 113 3
- -------------------------------------------------------------------------------------------
Total income 2,051 3,003 1,544
Expenses
Interest expense on long-term borrowings 327 60 0
Other 581 588 605
- -------------------------------------------------------------------------------------------
Total expenses 908 648 605
Income before applicable income tax benefit and
undistributed earnings of subsidiaries 1,143 2,355 939
Applicable income tax benefit 13 1 85
Income before undistributed earnings of subsidiaries 1,156 2,356 1,024
Undistributed earnings of subsidiaries 1,551 308 1,512
Distributions of subsidiaries in excess of earnings 0 0 0
- -------------------------------------------------------------------------------------------
Net income $2,707 $2,664 $2,536
===========================================================================================
35
Notes To Consolidated Financial Statements
Note 17---Condensed Financial Information-Parent Company Only [continued]
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
[dollars in thousands] 2000 1999 1998
- -------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,707 $ 2,664 $ 2,536
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 169 164 164
Undistributed earnings of subsidiaries (1,551) (308) (1,512)
Gain on sale of premises and equipment and securities 0 (109) 0
Other, net (23) 23 (337)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,302 2,434 851
Cash flows from investing activities
Proceeds from sales of securities available-for-sale 0 169 0
Purchase of securities available-for-sale (1) 0 (1)
Purchase of securities held-to-maturity 0 (4,289) 0
Proceeds from investment in subsidiary 0 0 34
Purchases of premises and equipment (58) (10) (55)
- -------------------------------------------------------------------------------------------
Net cash used for investing activities (59) (4,130) (22)
Cash flows from financing activities
Net (decrease) increase in long-term borrowings (91) 4,239 0
Dividends paid (1,102) (1,011) (923)
Payment to repurchase common stock (231) (1,352) 0
Cash paid in lieu of fractional shares (4) (6) (6)
- -------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,428) 1,870 (929)
Net increase (decrease) in cash and cash equivalents (185) 174 (100)
Cash and cash equivalents at beginning of year 260 86 186
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $75 $260 $86
===========================================================================================
36
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, 2000 and 1999, and the
related consolidated statements of income, stockholders equity, and cash flows
for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
--------------------------------
Ernst & Young LLP
Harrisburg, Pennsylvania
February 5, 2001
37
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 of the Corporation has made forward-looking statements in this
Annual Report. These forward-looking statements may be subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Corporation and its
subsidiaries. When words such as "believes," "expects," "anticipates" or similar
expressions occur in this Annual Report, management is making forward-looking
statements.
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 the Corporation and its
subsidiaries, both individually and collectively, and could cause those results
to differ materially from those expressed in the forward-looking statements
contained or incorporated by reference in this Annual Report. These factors
include the following:
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 analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that Codorus Valley files periodically with the
Securities and Exchange Commission.
OVERVIEW
The Economy
For 2000, the national economy continued its expansion for the tenth consecutive
year, the longest peacetime expansion on record. The Federal Reserve Board
(Fed), concerned about excessive economic growth continued its tightening
policy, started in 1999, by increasing short-term interest rates 100 basis
points from February to May, 2000. The Fed rate increases accomplished the goal
and by the latter part of 2000 the economy slowed and market interest rates
began to decline. By year-end 2000, the US Prime rate increased 100 basis points
to 9.5 percent, while the 10-year US treasury bond decreased 131 basis points to
5.1 percent from year-end 1999.
After five consecutive years of double-digit returns, all major stock market
indices declined by the end of 2000, most notably the tech-heavy Nasdaq which
lost 38 percent of its value. Declines in stock prices were attributable to
investor concerns about slower economic growth and decreased corporate earnings,
caused primarily by the level of interest rates, rising energy costs and eroding
consumer and business confidence.
Comparatively, in 1999, the Fed began a series of interest rate increases
starting in June in response to concerns about inflation from strong consumer
spending, high employment and improving foreign markets. By year-end 1999, the
US Prime rate increased 75 basis points to 8.50 percent and the 10-year US
treasury bond increased 171 basis points to 6.41 percent from year-end 1998.
The Financial Services Industry
Based on information provided by the FDIC for the first nine months of 2000, the
latest information available, the commercial banking industry may break its
eight year trend of earnings growth. Commercial bank earnings, comprised of
approximately 8,375 reporting institutions, were down 1.4 percent below the
level of a year ago due to decreasing net interest margins and increasing loan
loss provisions. As short-term interest rates increased, banks' average funding
costs escalated more rapidly than the average yields on their assets. Moreover,
as core deposit funding slowed, banks shifted to higher cost funding sources
such as certificates of deposit. These factors negatively impacted net interest
margins. Commercial banks continued to finance asset growth in part, through
borrowing. The increase in loss provisions reflected rising loan losses and
growing inventories of noncurrent loans.
During 2000, financial sector stock prices generally improved as the allure of
dot.com stocks faded. However, prices were constrained by investor concerns
about possible declines in asset quality and earnings in light of declining
economic growth and consumer and business confidence. The biggest increase in
bank stock prices occured with companies that had strong asset quality or earned
significant revenue from fee income, as opposed to spread income.
38
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 principal strategy to increase profits and market
share. In November 1999, the Financial Institutions Modernization Act became
law. This law dramatically changes the financial services industry landscape 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 2000, 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: completing negotiations and
operational plans for adding a ninth full service financial center which opened
February 1, 2001; adding a cash management/sweep program, fixed rate annuity and
mutual fund investments; upgrading the host computer system; expanding the local
area network (LAN) to community banking offices; and promoting internet banking.
For 2001 and beyond, management and the board will focus on profitability and
balance sheet growth. 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.
Financial Highlights The Corporation earned $2,707,000 or $1.12 per share for
2000, compared to $2,664,000 or $1.09 per share for 1999, and $2,536,000 or
$1.03 per share for 1998. All per share amounts were adjusted for stock
divdends. Increases in net interest income and noninterest income, and a
decrease in the provision for possible loan losses caused the 1.6 percent
increase in net income for 2000. These favorable factors more than offset an
increase in noninterest expense. Operating earnings for 2000, which exclude
periodic gains and losses from asset sales, increased approximately $248,000 or
10 percent above 1999. Comparatively, 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
expense. Management continued to focus on increasing fee-based (noninterest)
income as a percentage of total revenue. Excluding periodic gains and losses
from asset sales, noninterest income as a percentage of total revenue (tax
equivalent basis) was 10 percent for 2000, compared to 9 percent for 1999, and
6.7 percent for 1998. The increases in noninterest expense for all periods
reflect the implementation of strategic initiatives to expand, staff and equip
the organization, in addition to normal business growth.
Annual cash dividends per share, as adjusted, were $.46 for 2000, compared to
$.41 for 1999. Additionally, a 5 percent stock dividend was paid in 2000 and
1999. Book value per share, as adjusted, was $11.22 for year-end 2000, compared
to $10.61 for 1999.
Net income as a percentage of average stockholders' equity, or return on equity
(ROE), was 10.3 percent for 2000, compared to 10.2 percent for 1999. Net income
as a percentage of average total assets, or return on assets (ROA), was .94
percent for 2000, compared to .95 percent for 1999.
At December 31, 2000, nonperforming assets as a percentage of total loans and
other real estate owned was approximately 2 percent, compared to 1.6 percent for
year-end 1999. 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 .90 percent at December 31, 2000, compared to .98
percent at December 31, 1999. Information about the allowance 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, 2000.
Throughout 2000, 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
39
Management's Discussion of Consolidated
Financial Condition and Results of Operations
fluctuation in net interest income from year to year is caused by changes in
interest rates, volumes, and the composition or mix of interest rate 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 $11,089,000 for 2000, an
increase of $117,000 or 1 percent above the $10,972,000 earned in 1999. Net
interest income increased due to increases in volume and yield on interest
earning assets, partially offset by higher funding costs. Growth in the
commercial and installment loan portfolios caused most of the growth in interest
earning assets, which averaged $264 million for 2000, compared to $254 million
for 1999. Growth in commercial loans for the current period was constrained by
an unusually large volume of early payoffs. The tax equivalent yield on total
interest earning assets was 8.39 percent for 2000 compared to 8.08 percent for
1999. Rising market interest rates during 2000 positively impacted yields on
earning assets. Rising rates, combined with competitive price pressures,
increased funding costs, particularly for certificates of deposit, money
market accounts and borrowed funds. The weighted average rate paid on interest
bearing liabilities was 4.66 percent for 2000 compared to 4.18 percent for 1999.
An inverted US Treasury yield curve for most of the current period also dampened
the increase in net interest income. The same factors that constrained net
interest income also constrained the net yield on average interest earning
assets, which was 4.20 percent for 2000 compared to 4.32 percent for 1999.
Comparatively, net interest income for 1999 was $10,972,000, an increase of
$110,000 or 1 percent above the $10,862,000 earned in 1998. The increase in net
interest income was due primarily to growth in the average volume of 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 relatively low market interest rates.
The weighted average yield on total loans was 8.63 percent for 1999 compared to
9.13 for 1998. The yield on earning assets was also dampened by a $5 million
investment in bank owned life insurance (BOLI) in September 1998, which was
funded by the partial liquidation of overnight investments. The boli investment
caused income to shift from an interest income category to a tax-exempt
noninterest income category on the income statement. During 1999, Codorus Valley
and PeoplesBank
Table 1-Net Interest Income (tax equivalent basis)
December 31, 5-yr
[dollars in thousands] 2000 1999 1998 1997 1996 CGR*
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 21,904 $ 20,314 $ 19,978 $ 19,513 $ 18,523 3.6%
Tax equivalent adjustment 249 192 149 118 144 n/a
Adjusted total interest income 22,153 20,506 20,127 19,631 18,667 3.6%
Total interest expense 11,064 9,534 9,265 9,096 8,756 4.9%
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,089 $ 10,972 $ 10,862 $ 10,535 $9,911 2.5%
Average earning assets $264,174 $253,800 $237,378 $229,047 $223,203 4.0%
Average interest bearing liabilities $237,537 $228,163 $211,754 $203,831 $196,860 4.4%
Yield on earning assets 8.39% 8.08% 8.48% 8.57% 8.36%
Rate on interest bearing liabilities 4.66% 4.18% 4.38% 4.46% 4.45%
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.73% 3.90% 4.10% 4.11% 3.91%
Net yield on average earning assets 4.20% 4.32% 4.58% 4.60% 4.44%
* Compound growth rate (CGR) is the average annual growth over the five year
period which began in 1995.
40
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)
Year ended 2000 compared to 1999
December 31, Increase Change due to
[dollars in thousands] 2000 1999 (Decrease) Volume Rate
- ---------------------------------------------------------------------------------------------------------------------
Interest Income
Interest bearing deposits with banks $ 13 $ 11 $ 2 $ 1 $ 1
Federal funds sold 166 93 73 36 37
Securities, taxable 2,910 2,637 273 24 249
Securities, tax-exempt 717 547 170 157 13
Loans, taxable * 18,331 17,201 1,130 607 523
Loans, tax-exempt 16 17 (1) (1) 0
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 22,153 20,506 1,647 824 823
Interest Expense
Deposits:
Interest bearing demand 1,960 1,536 424 99 325
Savings 364 417 (53) (56) 3
Time deposits under $100,000 6,309 6,007 302 (148) 450
Time deposits $100,000 and above 1,129 976 153 22 131
Short-term borrowings 607 194 413 332 81
Long-term borrowings 695 404 291 267 24
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 11,064 9,534 1,530 516 1,014
Net interest income $11,089 $10,972 $117 $308 $(191)
=====================================================================================================================
Year ended 1999 compared to 1998
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)
======================================================================================================================
* Includes loan fees of $526,000 in 2000, $457,000 in 1999, and $567,000 in
1998.
41
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 3-Average Balances and Interest Rates (tax equivalent basis)
2000 1999 1998
Average Average Average
[dollars in thousands] Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest bearing
deposits with banks $ 240 $ 13 5.42% $ 223 $ 11 4.93% $ 161 $ 9 5.59%
Federal funds sold 2,633 166 6.30 1,904 93 4.88 6,475 354 5.47
Investment securities:
Taxable 45,003 2,910 6.47 44,599 2,637 5.91 40,751 2,502 6.14
Tax-exempt 9,820 717 7.30 7,626 547 7.17 5,495 426 7.75
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 54,823 3,627 6.62 52,225 3,184 6.10 46,246 2,928 6.33
Loans:
Taxable (1) 206,332 18,331 8.88 199,295 17,201 8.63 184,388 16,824 9.12
Tax-exempt 146 16 0.96 153 17 11.11 108 12 11.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 206,478 18,347 8.89 199,448 17,218 8.63 184,496 16,836 9.13
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 264,174 22,153 8.39 253,800 20,506 8.08 237,378 20,127 8.48
Other assets (2) 24,998 25,339 21,081
Total assets $289,172 $279,139 $258,459
====================================================================================================================================
Liabilities and
Stockholders' Equity
Interest bearing deposits:
Interest bearing demand $ 70,183 1,960 2.79 $ 65,929 1,536 2.33 $ 55,873 1,342 2.40
Savings 17,934 364 2.03 20,701 417 2.01 20,717 455 2.20
Time deposits
under $100,000 110,368 6,309 5.72 113,147 6,007 5.31 112,090 6,179 5.51
Time deposits
$100,000 and above 18,949 1,129 5.96 18,525 976 5.27 20,370 1,105 5.42
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest
bearing deposits 217,434 9,762 4.49 218,302 8,936 4.09 209,050 9,081 4.34
Short-term borrowings 9,603 607 6.32 3,539 194 5.48 8 0 0.00
Long-term borrowings 10,500 695 6.62 6,322 404 6.39 2,696 184 6.82
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest
bearing liabilities 237,537 11,064 4.66 228,163 9,534 4.18 211,754 9,265 4.38
Noninterest
bearing deposits 24,162 23,507 19,965
Other liabilities 1,276 1,424 1,451
Stockholders' equity 26,197 26,045 25,289
Total liabilities and
stockholders' equity $289,172 $279,139 $258,459
====================================================================================================================================
Net interest income $11,089 $10,972 $10,862
Interest rate spread 3.73% 3.90% 4.10%
Net yield on earning assets 4.20% 4.32% 4.58%
(1) Includes loan fees of $526,000 in 2000, $457,000 in 1999, and $567,000 in
1998.
(2) Includes average nonaccrual loans of $2,528,000 in 2000, $2,093,000 in 1999,
and $2,891,000 in 1998.
42
Management's Discussion of Consolidated
Financial Condition and Results of Operations
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 was 8.45 percent and the weighted average
annualized funding cost was approximately 6.45 percent. 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.
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 Risk Management section, including
Tables 8, 9, and 10, of this report provides detailed information about the
allowance, provision, and credit risk. For 2000, the provision expense for
possible loan losses was $119,000, which supported a higher level of net
charge-offs. Comparatively, for 1999, the provision expense was $225,000, which
supported growth in the commercial loan portfolio.
Noninterest Income
Noninterest income for 2000 was $2,349,000, an increase of $112,000 or 5 percent
above 1999. All categories of noninterest income increased except
for gains from asset sales. The prior year included $311,000 more in gains from
the periodic sale of assets, principally investment securities. To achieve
comparability in noninterest income from normal operations, infrequent gains and
losses from the sale of assets should be excluded. On an adjusted basis, total
noninterest income for 2000 exceeded 1999 by $423,000 or 22 percent. Trust and
investment service fees increased $128,000 or 24 percent due primarily to a
price increase which took effect July 1, 1999. Service charges on deposit
accounts increased $89,000 or 16 percent due primarily to selected price
increases. Other income increased $206,000 or 26 percent due to an increase in
fee income from PeoplesBank subsidiaries, principally SYC Insurance Services,
Inc., which began operations in January 2000.
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 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.
For the year 2001, noninterest income is expected to moderately exceed the 2000
level, based on a presumption of normal business growth, planned gains from the
sale of selected assets and continued promotion of fee-based investment
products.
Fee-based product and service additions
In January 2000, PeoplesBank subsidiary, SYC Insurance Services, Inc., (SYC
Insurance) began operations. For 2000, sales and fee income exceeded
management's expectations. SYC Insurance was created by PeoplesBank at nominal
cost to generate fee income by facilitating the sale of investment products
through a third-party marketing arrangement. The initial product offering was
fixed annuities. SYC Insurance plans to offer variable annuities in early 2001.
Additionally, PeoplesBank began offering mutual fund products in the fourth
quarter of 2000. Licensed PeoplesBank employees, registered as representatives
of third-party product providers, sell these products. The sale of investment
products compete with and constrain deposit growth, particularly certificates of
deposit. Investment products were added to the product menu in response to
growing customer demand. Investment products sold by SYC Insurance and
PeoplesBank are not FDIC insured, not obligations of nor guaranteed by
PeoplesBank, and are subject to market risks including the possible loss of
principal. PeoplesBank subsidiary, SYC Settlement Service, Inc., which began
operations in January 1999, to provide real estate title and settlement
services, also met management's income expectations for 2000.
Noninterest Expense
Generally, increases in noninterest expense for 2000, 1999, and 1998 reflect the
implementation of strategic initiatives to expand, staff and equip the
organization, in addition to normal business growth. Long-term
43
Management's Discussion of Consolidated
Financial Condition and Results of Operations
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 2000 was $9,309,000, an increase of $255,000 or 3
percent above 1999. The increase in noninterest expense primarily reflects
increases in salaries and benefits, equipment, and other operating expense. The
$187,000 or 4 percent increase in salary and benefit expense reflects planned
staff additions, merit raises, and higher replacement costs. The $73,000 or 8
percent increase in equipment expense reflects increased investment in
technology. The $71,000 or 5 percent increase in other expense was caused
primarily by a $67,000 increase in problem loan carrying costs. The $91,000
decrease in professional and legal expense reflects the termination of a
temporary investment management arrangement by the trust and investment services
division of PeoplesBank.
Noninterest expense for 1999 was $9,054,000, an increase of $608,000 or 7
percent above 1998. The increase in noninterest expense primarily reflects
increases in salaries and benefits, and marketing. The $540,000 or 13 percent
increase in salaries and benefits expenses for 1999 reflects staff additions,
merit raises, higher replacement and recruiting expenses, and increases in the
cost of health insurance 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 is expected to increase in 2001 due to normal business
growth and implementation of strategic initiatives such as staff additions,
franchise expansion, and technology investments.
Franchise expansion
On February 1, 2001, PeoplesBank opened its ninth financial center. The new full
service office is located in South Hanover, Pennsylvania at the intersection of
Baltimore Street (Rt. 94) and Grandview Road. The 1,850 square foot facility,
leased under a long-term contract, is attached to a convenience store/gas
operation, for customer convenience. The annual lease expense is approximately
$106,000. Estimated fixed asset project costs total $195,000, which include
equipment, furniture and leasehold improvements. Annual depreciation expense, is
approximately $34,000.
Capital investment in technology
In accordance with the Corporation's strategic technology plan, PeoplesBank
implemented three key technology projects during 2000. In July 2000, PeoplesBank
expanded its local area network (LAN) to include all community banking offices
and the credit services department. E-mail, internet access, centralized file
backup, file sharing, and other benefits of a LAN environment are now available
bank-wide. The total cost for the LAN expansion project was approximately
$90,000, which is being depreciated over a three-year expected useful life.
In April 2000, PeoplesBank upgraded its IBM AS400 host computer system, which
was nearing its processing capacity. The upgrade, which cost approximately
$90,000, is expected to extend the system life by three years. Annual
depreciation is approximately $30,000. The benefits of this investment include
increased processing capacity and speed, which translate to better customer
service and increased processing efficiencies.
In January 2000, PeoplesBank began offering internet banking with on-line bill
payment. To date, customer response has been very positive and usage has met
management's expectations. Capital investment in the internet banking system,
exclusive of marketing and maintenance expenses, was approximately $61,000.
Annual depreciation is approximately $20,000 based on a three-year expected
useful life.
In the period ahead, PeoplesBank will focus on installing software that will
interface with its imaging and internet banking systems. This will enable
customers who use PeoplesBank's internet banking system to view images of their
PeoplesBank checks and statements online. This project is expected to cost
approximately $55,000, excluding marketing and maintenance expenses, and will be
depreciated over a three-year expected useful life. PeoplesBank plans to offer
and promote image access in the second quarter of 2001.
Sales and product training
In March 2001, PeoplesBank will complete all phases of a comprehensive retail
sales training program that began in January 1998. Since inception, the program
cost approximately $172,000. Of the total cost, $45,000 was expended in 2000.
The program had two primary objectives. First, to expedite the transformation of
PeoplesBank to a customer-focused corporate culture, and second, to increase
sales through improved selling skills. Management believes that both objectives
of this program were met. PeoplesBank will maintain the training program at
minimal cost, to educate future retail employees.
Income Taxes
The provision for federal income tax was $1,054,000 for 2000, a decrease of
$20,000 or 2 percent below 1999. The decrease in tax was primarily the result of
an increase in tax-exempt income. Comparatively, the tax
44
provision for 1999 was $1,074,000, a decrease of $114,000 or 10 percent below
1998. This decrease was also the result of a higher level of tax-exempt income,
particularly from the investment in bank owned life insurance. For additional
information on income taxes, see Note 13-Income Taxes.
BALANCE SHEET REVIEW
Investment Securities
The investment securities portfolio is an interest earning asset, second 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.
On December 31, 2000, securities available-for-sale totaled $40.5 million
reflecting a $5.7 million or 12 percent decrease from December 31, 1999.
Decisions to purchase or sell securities are based on an assessment of current
economic and financial conditions, including the interest rate environment, and
liquidity and income requirements. Securities available-for-sale are limited to
high quality debt instruments as depicted in Note 3-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),
a requirement of borrowing. Note 3 depicts an increase in unrealized gains (net
of unrealized losses) on the available-for-sale portfolio at year-end 2000
compared to year-end 1999. The increase in unrealized gains was attributable to
declining market interest rates during the latter half of 2000. Table 4-Analysis
of Investment Securities depicts that the weighted average maturity of the
available-for-sale portfolio was 3.9 years at year-end 2000, compared to 2.9
years for 1999, and 2.3 years for 1998.
On December 31, 2000, securities held-to-maturity totaled $9.4 million,
approximately the same level as year-end 1999. The held-to-maturity portfolio
consisted of fixed rate, long-term preferred stock (trust preferreds) issued by
commercial bank holding companies. These trust preferreds are substantially
junior subordinated debt, pay interest semi-annually, are callable, and mature
in years 2026-2028. Table 4 depicts the portfolio as having a weighted average
yield of 8.44 percent and a weighted average remaining maturity of 26 years.
Approximately $5 million, held by PeoplesBank, are rated investment grade by a
national rating service. The remaining $4.4 million, held by the Corporation,
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 history. The trust preferred portfolio, part of a leverage growth
strategy in 1999, was financed primarily by borrowing from the FHLBP and a local
financial institution.
Loans
On December 31, 2000, total loans were $218 million, an increase of $10.6
million or 5 percent above year-end 1999. Table 5-Loan Portfolio Composition
presents the composition of total loans on a comparative basis for five year-end
periods. The table reflects the Corporation's emphasis on commercial lending. At
year-end 2000, commercial and installment loans increased 4 percent and 13
percent, respectively, above year-end 1999. On September 29, 2000, PeoplesBank
purchased, in the form of a loan participation, a portfolio of commercial loans
for $14.6 million on a nonrecourse basis, at par value, directly from another
commercial bank. The portfolio was comprised primarily of fixed rate
instruments, with a weighted average yield of 8.79 percent and a weighted
average remaining term of four years. The purchase had the effect of replacing
commercial loan volume that was lost during the year from an unusually large
volume of early payoffs. Early loan payoffs were caused by competition, the sale
of assets by customers and other factors.
Table 6-Selected Loan Maturities and Interest Rate Sensitivity reveals that at
December 31, 2000, the commercial loan portfolio was comprised of $121 million,
or 76 percent, in fixed rate loans and $39 million, or 24 percent, in floating
or adjustable rate loans. Comparatively, at December 31, 1999, the commercial
loan portfolio was comprised of 69 percent fixed rate loans and 31 percent in
floating or adjustable rate loans. Floating rate loans reprice periodically
with changes in the PeoplesBank's base rate or the US Prime rate as reported in
The Wall Street Journal. Adjustable rate loans reprice at annual intervals based
on the US treasury yield curve. Additional loan information can be found in Note
4-Loans and within the Risk Management section of this report.
FUNDING
Deposits
Deposits are a principal source of funding for earning assets. On December 31,
2000, total deposits were $247 million reflecting a $9 million or 4 percent
increase above year-end 1999. However, total average deposits for 2000 were $242
million, approximately the same as 1999. While the average balance of CDs and
savings deposits decreased $5 million in total for the current period, average
money market deposits increased $4.7 million. The increase in money market
deposits reflected a change in marketing strategy. In June, PeoplesBank began
offering its Peoples Index Fund money market account to individuals. Prior to
45
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, 2000
Available-for-sale portfolio
Maturity
Within one year $10,868 $10,868 5.69%
One to five years 13,687 2,849 16,536 6.54
Five to ten years 1,500 2,770 4,270 6.48
Over ten years 5,457 5,457 7.55
No set maturity 3,251 3,251
- --------------------------------------------------------------------------------------------------------------------
Amortized cost $0 $26,055 $11,076 $3,251 $0 $40,382 6.42
====================================================================================================================
Average maturity 3.9 years
Held-to-maturity portfolio
Maturity
Over ten years $9,360 $9,360 8.44%
- --------------------------------------------------------------------------------------------------------------------
Amortized cost $0 $0 $0 $0 $9,360 $9,360 8.44
====================================================================================================================
Average maturity 26.2 years
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 $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
(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.
46
Management's Discussion of Consolidated
Financial Condition and Results of Operations
June, this account was only available to businesses. The minimum balance on this
account was also significantly reduced. For 2000, overall deposit growth was
constrained by sales of investment products, which competed with deposit
products. Investment products, described in the Noninterest Income section of
this report, were added to the product menu in response to growing customer
demand. The average rate paid on interest bearing deposits was 4.49 percent for
2000 compared to 4.09 percent for 1999. The increase in deposit funding costs
reflected rising market interest rates and competitive price pressures.
At December 31, 2000, total certificates of deposit were $128 million and are
scheduled to mature in the following years: $56 million in 2001; $40 million in
2002; $16 million in 2003; $7 million in 2004; and $9 million in 2005. At 2000
year-end, the balance of certificates $100,000 and above was $19 million. Of
this total: $4 million mature within three months; $2 million mature after three
months, but within six months; $3 million mature after six months, but within
twelve months; and the remaining $10 million mature beyond twelve months.
For 2001, average deposits are expected to increase moderately due primarily to
the addition of a ninth full service financial center in February.
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. On December 31, 2000, PeoplesBank had no outstanding short-term
borrowings compared to $15.7 million for year-end 1999.
Long-term borrowings are a primary funding source for asset growth. On December
31, 2000, long-term borrowings were $19 million compared to $10.3 million at
year-end 1999. In December, PeoplesBank borrowed $9 million in total from the
FHLBP to partially fund the $14.6 million commercial loan purchase described in
the Loans section of this report. A list of long-term borrowing agreements and
terms is provided in this report at Note 10-Short-term and Long-term Borrowings.
In 2001, the amount of long-term borrowings that mature is insignificant.
Generally, funds for the payment of long-term borrowings will come from
operations and refinancings.
PeoplesBank's maximum borrowing capacity, as established quarterly by the FHLBP,
was approximately $66 million as of September 30, 2000, the most recent
available date. On December 31, 2000, PeoplesBank had approximately $17 million
outstanding on its account with the FHLBP at an average rate of 5.95 percent.
Stockholders' Equity
Stockholders' equity, or capital, is a source of funds, which enables the
Corporation to maintain asset growth and to absorb losses. Total stockholders'
equity was $27 million on December 31, 2000, compared to $25 million for
year-end 1999. The increase in equity was
Table 5-Loan Portfolio Composition
December 31,
[dollars in thousands] 2000 % 1999 % 1998 % 1997 % 1996 %
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, industrial
and agricultural $140,388 64.4 $131,395 63.4 $114,313 60.4 $111,074 58.1 $91,744 55.0
Real estate construction
and land development 19,365 8.9 21,956 10.6 19,663 10.4 21,456 11.2 15,449 9.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial
related loans 159,753 73.3 153,351 74.0 133,976 70.8 132,530 69.3 107,193 64.3
Real estate-residential
mortgages 30,831 14.2 29,815 14.4 31,581 16.7 34,029 17.8 35,444 21.3
Installment 27,342 12.5 24,152 11.6 23,554 12.5 24,783 12.9 24,014 14.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer
related loans 58,173 26.7 53,967 26.0 55,135 29.2 58,812 30.7 59,458 35.7
Total loans $217,926 100.0 $207,318 100.0 $189,111 100.0 $191,342 100.0 $166,651 100.0
====================================================================================================================================
47
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 6-Selected Loan Maturities and Interest Rate Sensitivity
December 31, 2000
Years to Maturity
[dollars in thousands] 1 or less 1 to 5 over 5 Total
- ------------------------------------------------------------------------------------------------------
Commercial, industrial, and agricultural $12,333 $34,523 $93,532 $140,388
Real estate construction and land development 9,068 4,187 6,110 19,365
- ------------------------------------------------------------------------------------------------------
Total commercial related $21,401 $38,710 $99,642 $159,753
======================================================================================================
Fixed interest rates $ 6,761 $28,734 $85,362 $120,857
Floating or adjustable interest rates 14,640 9,976 14,280 38,896
- ------------------------------------------------------------------------------------------------------
Total commercial related $21,401 $38,710 $99,642 $159,753
======================================================================================================
primarily attributable to an increase in retained earnings from profitable
operations and an increase in unrealized holding gains on available-for-sale
investment securities caused by rising market interest rates.
The level of capital for the Corporation and PeoplesBank remained sound for
2000. 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 of directors
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 $.46 for 2000 and $.41 for 1999. All
per share amounts were adjusted for stock dividends. Codorus Valley and
PeoplesBank are subject to restrictions on the payment of dividends as disclosed
in Note 11-Dividend Payment Restrictions.
Periodically, Codorus Valley pays stock dividends as another means of enhancing
long-term shareholder value. In June of 2000 and 1999, the Corporation paid a 5
percent stock dividend. Payment of the stock dividend in 2000 resulted in the
issuance of 47,196 common shares and the reissuance of 69,444 shares from
treasury. Payment of the stock dividend in 1999 resulted in the issuance of
103,840 common shares and the reissuance of 10,878 shares from treasury. The
weighted average number of shares of common stock outstanding was approximately
2,418,698 for 2000, 2,440,924 for 1999, and 2,455,023 for 1998.
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 operations using available retained capital. From
inception of the stock purchase plan to December 31, 2000, the Corporation
purchased 94,822 shares of its common stock for approximately $1,584,000. Of
this total, 80,322 shares were reissued to partially satisfy the payment of
stock dividends. On December 31, 2000, 14,500 shares were retained as treasury
stock.
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
9-Benefit Plans and Note 10-Stockholders' Equity of the consolidated financial
statements.
Past and future capital investment will impact earnings and capital growth.
Possible future investments could include expansion of the community office
franchise, investment in communication and computer technologies, 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.
48
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 7-Capital Ratios
Federal Federal Capital*
December 31, Minimum Well at December 31,
[dollars in thousands] 2000 1999 Required Capitalized 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Tier I risk-based capital 4.00% 6.00%
(as a percentage of risk weighted assets)
Codorus Valley Bancorp, Inc. consolidated 11.26% 11.18% $27,258 $25,887
PeoplesBank 9.47 9.23 22,277 20,725
Total risk-based capital 8.00% 10.00%
(as a percentage of risk weighted assets)
Codorus Valley Bancorp, Inc. consolidated 12.07% 12.06% $29,225 $27,910
PeoplesBank 10.31 10.13 24,244 22,748
Leverage 4.00% 5.00%
(Tier 1 capital as a percentage of
average total assets)
Codorus Valley Bancorp, Inc. consolidated 9.41% 9.27% $27,258 $25,887
PeoplesBank 7.88 7.58 22,277 20,725
*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.
- -------------------------------------------------------------------------------------------------------------------------------
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 and
northern Maryland. 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 other real estate owned 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 by independent auditors in connection with their annual
financial statement audit, and are examined periodically by bank regulators.
At year-end 2000, the total loan portfolio included one industry concentration
that exceeded 10 percent. The commercial facility leasing industry accounted for
approximately $48.6 million or 22.3 percent of total loans. Comparatively, at
year-end 1999 there were three industry concentrations, 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.
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
49
Management's Discussion of Consolidated
Financial Condition and Results of Operations
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 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-Nonperforming Assets and Past Due Loans
December 31,
[dollars in thousands] 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Impaired loans (1) $2,006 $1,892 $1,706 $2,842 $2,063
Other real estate owned, net of reserve 2,390 1,385 1,871 380 780
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $4,396 $3,277 $3,577 $3,222 $2,843
======================================================================================================================
Accruing loans that are contractually past due 90 days
or more as to principal or interest $346 $13 $13 $107 $524
Ratios:
Impaired loans as a % of total year-end loans 0.92% 0.91% 0.90% 1.49% 1.24%
Nonperforming assets as a % of total year-end loans
and other real estate owned 2.00% 1.57% 1.87% 1.68% 1.70%
Nonperforming assets as a % of total year-end
stockholders' equity 16.05% 12.92% 13.73% 13.19% 12.52%
Allowance for loan losses as a multiple of
impaired loans 1.0x 1.1x 1.1x .7x 1.0x
Interest not recognized on impaired loans at period-end: (2)
Contractual interest due $220 $240 $312 $398 $246
Interest revenue recognized 37 49 73 103 18
- ----------------------------------------------------------------------------------------------------------------------
Interest not recognized in operations $183 $191 $239 $295 $228
(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.
50
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 8 depicts that on December 31, 2000, total nonperforming assets were
$4,396,000, an increase of $1,119,000 or 34 percent above 1999. The overall
increase, caused by an increase in OREO, raised the nonperforming asset ratio 43
basis points to 2 percent. A major component of nonperforming assets is impaired
loans. At year-end 2000, the impaired loans category was $2,006,000, reflecting
a 6 percent increase from year-end 1999. On December 31, 2000, the impaired loan
portfolio was comprised of twenty-four unrelated accounts, primarily commercial
loan relationships, ranging in size from $4,700 to $464,000. 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. Subsequent to the date of this report,
certain events occurred in January that caused management to reclassify two
unrelated commercial accounts, totaling $872,000 to the impaired category.
Management believes that the net realizable value for both accounts is
sufficient to cover their carrying value based on external appraisals.
OREO, net of reserve, was $2,390,000 at year-end 2000, an increase of $1,005,000
or 73 percent above year-end 1999. The increase was caused primarily by the
addition of a $1,184,000 commercial account. Management believes that the net
realizable value of appraised properties taken in satisfaction of this debt, in
addition to a guarantor on the account, is sufficient to cover its carrying
value. On December 31, 2000, the OREO portfolio was comprised of real estate
assets from six former commercial loan relationships. The two largest
properties, which are unrelated, have carrying values of approximately
$1,184,000 and $997,000, which in total, represents 91 percent of the OREO (net
of allowance) portfolio. 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, 2000, the
allowance for OREO was $34,000. The provision expense for OREO, due to declines
in the fair value of individual assets, was $56,000 for 2000, compared to
$39,000 for 1999 and $69,000 for 1998. Efforts to liquidate OREO are proceeding
as quickly as potential buyers can be located and legal constraints permit.
At December 31, 2000, there were no potential problem loans, as defined by the
Securities and Exchange Commission, identified by management. However,
management was monitoring loans of approximately $9 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, 1999.
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 losses inherent in the
portfolio at December 31, 2000. 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 2000, the allowance was $1,967,000, representing a $56,000 or 3 percent
decrease from year-end 1999, which was 0.90 percent of total loans. The current
period allowance declined below 1999 due to an increase in loan charge-offs and
a decrease in the loan loss provision. Of the total net charge-offs during the
current period, $107,000 was attributable to one commercial loan account. The
provision expense for 2000 was $119,000, compared to $225,000 for 1999. Based on
a recent evaluation of potential loan losses in the current portfolio,
management believes that the allowance is adequate to support losses inherent in
the loan portfolio on December 31, 2000.
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 was primarily the result of a $456,000
charge-off attributable to a single commercial borrower whose account was deemed
partially uncollectible in
51
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 9-Analysis of Allowance for Loan Losses
December 31,
[dollars in thousands] 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Balance - beginning of year $2,023 $1,865 $2,098 $2,110 $2,286
Provision charged to operating expense 119 225 375 275 134
Loans charged off:
Commercial 191 23 610 340 265
Real estate-mortgage 15 0 0 0 27
Consumer 32 63 25 66 95
- -------------------------------------------------------------------------------------------------------------------
Total loans charged off 238 86 635 406 387
Recoveries:
Commercial 27 12 13 112 26
Real estate-mortgage 0 0 0 0 0
Consumer 36 7 14 7 51
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 63 19 27 119 77
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 175 67 608 287 310
Balance - end of year $1,967 $2,023 $1,865 $2,098 $2,110
===================================================================================================================
Ratios:
Net charge-offs to average total loans 0.08% 0.03% 0.32% 0.16% 0.19%
Allowance for loan losses to total loans at year-end 0.90 0.98 0.99 1.10 1.27
Allowance for loan losses to impaired loans and
loans past due 90 days or more 83.6 106.2 108.5 71.1 81.6
- --------------------------------------------------------------------------------------------------------------------
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 in
the current period, 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.
Based on a recent evaluation of potential loan losses in the current portfolio,
management believes that the allowance is adequate to support losses inherent in
the loan portfolio on December 31, 2000. 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 and long-term borrowings. Retained
52
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 10-Allocation of the Allowance for Loan Losses
December 31,
2000 1999 1998 1997 1996
% Total % Total % Total % Total % Total
[dollars in thousands] Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial, industrial,
and agricultural $1,064 64.4 $972 63.4 $1,329 60.4 $1,263 58.1 $1,335 55.0
Real estate construction
and land development 357 8.9 196 10.6 174 10.4 268 11.2 319 9.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total commercial
related loans 1,421 73.3 1,168 74.0 1,503 70.8 1,531 69.3 1,654 64.3
Real estate - residential
mortgages 100 14.2 155 14.4 74 16.7 95 17.8 86 21.3
Installment 71 12.5 50 11.6 73 12.5 54 12.9 79 14.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total consumer related
loans 171 26.7 205 26.0 147 29.2 149 30.7 165 35.7
Unallocated 375 n/a 650 n/a 215 n/a 418 n/a 291 n/a
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,967 100.0 $2,023 100.0 $1,865 100.0 $2,098 100.0 $2,110 100.0
===================================================================================================================================
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 such categories since the total allowance is a general allowance applicable to the entire loan portfolio.
- ------------------------------------------------------------------------------------------------------------------------------------
earnings from profitable operations are another source of liquidity. The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing, and financing activities.
The Corporation manages liquidity through the use of ratios and forecasts of
selected cash flows. At year-end 2000, the loan-to-deposit ratio was 88 percent
compared to 87 percent for year-end 1999. In the period ahead, the
loan-to-deposit ratio could increase due to competitive forces which may
constrain deposit growth. By necessity, short-term and long-term borrowings will
play an increasingly important role in funding as previously described in the
Short-term and Long-term Borrowings section of this report.
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 US Prime interest rate (Prime rate). An
Asset-Liability Committee (committee) comprised of members of senior management
and an outside director manages interest rate risk. 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 the Prime rate 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 loans; repricing characteristics of
nonmaturity deposits; stability of noninterest income and expense; and
reinvestment of repriceable cash flows in the same
53
Management's Discussion of Consolidated
Financial Condition and Results of Operations
Table 11-Summary of Quarterly Financial Data
2000 1999
[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 $5,639 $5,439 $5,404 $5,422 $5,278 $5,124 $5,020 $4,892
Interest expense 2,962 2,794 2,654 2,654 2,551 2,421 2,291 2,271
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,677 2,645 2,750 2,768 2,727 2,703 2,729 2,621
Provision for loan losses 0 50 69 0 25 50 75 75
Noninterest income 579 552 598 594 498 461 489 452
Noninterest expense 2,310 2,249 2,381 2,369 2,240 2,295 2,324 2,195
- ------------------------------------------------------------------------------------------------------------------------------
Net operating income 946 898 898 993 960 819 819 803
Gains from sales of securities 29 0 0 0 80 182 6 37
Gains (losses), other 0 0 3 (6) 14 14 4 0
- ------------------------------------------------------------------------------------------------------------------------------
Pretax income 975 898 901 987 1,054 1,015 829 840
Provision for income taxes 270 251 254 279 312 293 230 239
- ------------------------------------------------------------------------------------------------------------------------------
Net income $705 $647 $647 $ 708 $742 $722 $599 $601
==============================================================================================================================
Net income per share,
basic and diluted* $0.29 $0.27 $0.27 $0.29 $0.30 $0.29 $0.25 $0.25
==============================================================================================================================
* Adjusted for stock dividends through December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------------
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,
2000. The results of that point-in-time analysis revealed that the Corporation's
balance sheet was slightly liability sensitive, i.e., more liabilities should
reprice than assets over the next twelve months. This implies that net income
will decline if market rates rise and increase if rates fall. Model results
projected net income, based on the forecasting service's rate scenarios (as
adjusted), would: decrease 1.7 percent if market rates increase 200 basis points
(high rate scenario); decrease 0.8 percent if market rates decrease 200 basis
points (low rate scenario); and decrease 0.5 percent if market rates decrease
150 basis points (most likely scenario). Since the prior year end, sensitivity
to changes in market interest rates was reduced by extending liabilities,
principally the addition of long-term debt.
Comparatively, a simulation on the balance sheet at December 31, 1999, projected
that net income would: decrease 11.6 percent if market rates increase 300 basis
points (high rate scenario); increase 6.9 percent if market rates decreased 175
basis points (low rate scenario); and decrease 2.8 percent if market rates
increase 50 basis points (most likely 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.
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 may differ from simulated results due to many factors
including: timing of cashflows; magnitude and frequency of interest rate
changes; customer behavior; changes in market conditions; and management
strategies.
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.
54
Management's Discussion of Consolidated
Financial Condition and Results of Operations
December). The change in the CPI for 2000 was 3.4 percent, compared to 2.7
percent for 1999 and 1.6 percent for 1998. The increase in the CPI for 2000 and
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.
In November 1999, the Gramm-Leach-Bliley Act of 1999, which is also known as the
Financial Services Modernization Act, became law. The law repeals Depression-era
banking laws and permits banks, insurance companies, and securities firms to
engage in each others' businesses after complying with certain conditions and
regulations. The law grants to community banks the power to enter new financial
markets as a matter of right that larger institutions have managed to do on an
ad hoc basis. At this time, the Corporation has no plans to pursue these
additional possibilities. Management does not believe that the Financial
Services Modernization Act will have a material effect on Codorus Valley's
operations. However, the law may result in increased competition from larger
financial service companies, many of which have substantially more financial
resources than Codorus Valley, and now may offer banking services in addition to
insurance and brokerage services.
The Financial Services Modernization Act also modifies current law related to
financial privacy and community reinvestment. The new privacy provisions will
generally prohibit financial institutions, including Codorus Valley and
PeoplesBank, from disclosing nonpublic personal financial information to
nonaffiliated third parties unless customers have the opportunity to "opt out"
of the disclosure.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation which, if they were implemented,
would have a material adverse effect upon the liquidity, capital resources, or
results of operations. Although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future may
have, a negative impact on Codorus Valley's results of operations.
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Corporate Information
A 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 nine full service office locations in York
County, Pennsylvania. PeoplesBank also offers trust and investment services at
the Codorus Valley Corporate Center. The deposits of PeoplesBank are fully
insured by the Federal Deposit Insurance Corporation (FDIC) to the maximum
extent provided by law. 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
subsidiary, to facilitate the sale of alternative investment products through a
third-party marketing arrangement.
HEADQUARTERS
Codorus Valley Bancorp, Inc., Codorus Valley Corporate Center, 105 Leader
Heights Road, York, PA 17403-5137
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. At December 31, 2000, there
were approximately 992 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.
2000 1999
Dividends Dividends
Quarter High Low per share High Low per share
- --------------------------------------------------------------------------------
First $16.90 $11.67 $0.11 $17.69 $15.42 $0.10
Second 12.75 11.13 0.11 18.03 16.19 0.10
Third 12.06 11.00 0.12 18.45 16.90 0.11
Fourth 15.88 11.00 0.12 18.45 16.31 0.11
For further information, we refer you to the following market makers in our
common stock:
Ryan, Beck, LLC Janney Montgomery Scott, LLC Tucker Anthony MidAtlantic
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 15, 2001, at
9:00 a.m. eastern day-light saving time, at the Codorus Valley Corporate Center,
105 Leader Heights Road, York, Pennsylvania.
TRANSFER AGENT
Wells Fargo 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: Wells Fargo 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
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