UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-15536
Codorus Valley Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
(State of incorporation) (I.R.S. Employer ID No.)
1 Manchester Street, P.O. Box 67, Glen Rock, PA 17327
(Address of principal executive offices) (Zip Code)
(717) 235-6871 or (717) 846-1970
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
1,045,296 shares of $2.50 (par value) common stock were
outstanding as of 11-06-96 .
<PAGE>
CODORUS VALLEY BANCORP, INC.
10Q INDEX
Page
#
PART I - FINANCIAL INFORMATION:
- Consolidated Statements of Financial Condition... 1
- Consolidated Statements of Income................ 2
- Consolidated Statements of Cash Flows............ 3
- Notes to Consolidated Financial Statements....... 4
- Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 7
PART II - OTHER INFORMATION ............................... 17
Signature Page ............................................ 18
<PAGE>
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
September December September
30, 31, 30,
1996 1995 1995
--------- --------- ---------
Assets (dollars in thousands)
Cash and due from banks:
Interest bearing deposits with banks $ 325 $ 341 $ 330
Non-interest bearing deposits and cash 6,673 5,356 6,036
Federal funds sold 0 3,150 0
Securities available for sale 65,728 61,679 63,184
Loans 157,911 160,008 160,886
Less-allowance for loan losses (2,378) (2,286) (2,150)
-------- -------- --------
Total net loans 155,533 157,722 158,736
Premises and equipment 4,287 3,523 3,567
Interest receivable 1,794 1,703 1,739
Other assets 1,353 1,273 1,151
-------- -------- --------
Total assets............................$235,693 $234,747 $234,743
======== ======== ========
Liabilities
Deposits
Non-interest bearing demand $ 17,158 $ 17,369 $ 17,270
NOW 21,933 20,862 19,448
Insured money fund 25,777 25,902 26,560
Savings 22,036 21,577 21,461
Time CD's less than $100,000 107,395 110,435 111,760
Time CD's $100,000 and above 15,037 16,295 16,075
-------- -------- --------
Total deposits 209,336 212,440 212,574
Federal funds purchased 400 0 375
Short-term borrowings 2,500 0 0
Interest payable 894 865 997
Accrued expenses and other liabilities 494 410 389
-------- -------- --------
Total liabilities....................... 213,624 213,715 214,335
Stockholders' Equity
Series preferred stock, par value $2.50
per share; 1,000,000 shares authorized;
0 shares issued and outstanding 0 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 1,045,168
shares issued at 9/30/96; 995,792 at
12/31/95; and 995,786 at 9/30/95. 2,613 2,490 2,490
Additional paid-in capital 6,552 5,194 5,194
Retained earnings 12,764 12,731 12,218
Net unrealized gains on securities
available for sale, net of taxes 140 617 506
-------- -------- --------
Total stockholders' equity.............. 22,069 21,032 20,408
Total liabilities and stockholders'
equity.................................$235,693 $234,747 $234,743
======== ======== ========
See accompanying notes.
1
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
<TABLE>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
(dollars in thousands, except per share data) ------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees from loans $3,642 $3,661 $10,776 $10,708
Interest from federal funds sold and interest
bearing deposits with banks 14 30 93 145
Interest and dividends from securities:
Taxable interest income 951 880 2,790 2,410
Tax-exempt interest income 60 73 194 220
Dividend income 13 12 38 38
------ ------ ------ ------
Total interest income.............................. 4,680 4,656 13,891 13,521
Interest Expense
NOW 116 124 351 377
Insured money fund 198 201 575 598
Savings 140 142 414 428
Time CD's less than $100,000 1,508 1,590 4,574 4,440
Time CD's $100,000 and above 211 232 654 617
------ ------ ------ ------
Total interest expense on deposits 2,173 2,289 6,568 6,460
Interest expense on short-term borrowings and
federal funds purchased 17 3 25 3
------ ------ ------ ------
Total interest expense............................. 2,190 2,292 6,593 6,463
------ ------ ------ ------
Net interest income................................. 2,490 2,364 7,298 7,058
Provision for Loan Losses 25 0 133 32
------ ------ ------ ------
Net interest income after provision for loan losses 2,465 2,364 7,165 7,026
Non-interest Income
Trust income 86 58 222 188
Service charges on deposit accounts 106 105 311 303
Other service charges and fees 83 55 193 179
Gain on sale of loans 0 0 7 0
Gain (loss) on sales of securities 0 0 2 (62)
------ ------ ------ ------
Total non-interest income 275 218 735 608
Non-interest Expense
Salaries and benefits 901 840 2,651 2,556
Occupancy of premises 108 116 325 329
Furniture and equipment 131 145 376 453
FDIC deposit insurance 1 (11) 2 211
Professional and legal 44 51 145 102
Marketing and advertising 56 43 131 145
Acquired real estate, net 51 21 63 58
Other 393 330 1,123 994
------ ------ ------ ------
Total non-interest expense 1,685 1,535 4,816 4,848
Income before income taxes 1,055 1,047 3,084 2,786
Provision for Income Taxes 334 324 982 854
------ ------ ------ ------
Net income..........................................$ 721 $ 723 $2,102 $1,932
====== ====== ====== ======
Net income per common share..........................$0.69 $0.69 $2.01 $1.86
===== ===== ===== =====
See accompanying notes.
</TABLE>
2
<PAGE>
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine months ended
September 30,
1996 1995
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 2,102 $ 1,932
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 276 276
Provision for loan losses 133 32
Provision for losses on assets acquired in foreclosure 37 30
Gain on sales of assets acquired in foreclosure (13) 0
Gain on sales of loans (7) 0
(Gain) loss on sales of securities (2) 62
(Increase) in interest receivable (91) (100)
(Increase) decrease in other assets (124) 182
Increase in interest payable 29 145
Increase (decrease) in other liabilities 84 (10)
Other, net (24) 3
------- -------
Net cash provided by operating activities............. 2,400 2,552
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 2,382 2,345
Proceeds from maturities and calls of securities
available for sale 14,090 8,763
Purchase of securities available for sale (21,319) (18,615)
Net increase in loans made to customers (5,725) (11,033)
Proceeds from loan sales 7,656 531
Purchases of premises and equipment (1,040) (542)
Proceeds from sale of assets acquired in foreclosure 500 256
------- -------
Net cash used in investing activities................ (3,456) (18,295)
Cash Flows From Financing Activities:
Net increase (decrease) in demand and savings deposits 1,194 (2,657)
Net (decrease) increase in time deposits (4,298) 18,335
Increase in short-term borrowings and
federal funds purchased 2,900 375
Dividends paid (576) (510)
Cash paid in lieu of fractional shares (13) (6)
Payment to repurchase common stock 0 (270)
------- -------
Net cash provided by financing activities............ (793) 15,267
------- -------
Net (decrease) in cash and cash equivalents.......... (1,849) (476)
Cash and cash equivalents at beginning of year....... 8,847 6,842
------- -------
Cash and cash equivalents at September 30,...........$ 6,998 $6,366
======= =======
Supplemental Disclosures:
Interest payments $6,539 $6,318
Income tax payments $970 $895
See accompanying notes.
3
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CODORUS VALLEY BANCORP, INC.
Notes to Consolidated Financial Statements
Note 1-General
The interim financial statements are unaudited. However, they reflect
all adjustments which are, in the opinion of management, necessary to
present fairly the financial condition and results of operations for the
reported periods, and are of a normal and recurring nature.
These statements should be read in conjunction with notes to the
financial statements contained in the 1995 Annual Report to
Stockholders.
No shares of common stock are reserved for issuance in the event of
conversions or the exercise of warrants, options or other rights, except
for shares reserved for the Corporation's Dividend Reinvestment and
Stock Purchase Plan, Shareholders' Rights Plan, and 1996 Stock Incentive
Plan.
The results of operations for the nine month period ended September 30,
1996 are not necessarily indicative of the results to be expected for
the full year.
Note 2-Summary of Significant Accounting Policies
Allowance for Loan Losses - Management considers the allowance for loan
losses (reserve) to be adequate at this time.
Held for Sale Loans - Loans held for sale are reported at the lower of
cost or market value. The amount by which cost exceeds market value, if
any, is accounted for as a valuation allowance and is charged to
expense in the period of the change.
Per Share Computations - All per share computations include the
retroactive effect of stock dividends. The weighted average number of
shares of common stock outstanding was 1,045,167 and 1,039,484 for the
nine month periods ended September 30, 1996 and September 30, 1995,
respectively.
Reclassifications - Certain reclassifications have been made to the 1995
consolidated financial statements to conform with the 1996 presentation.
SFAS No. 121 - Effective January 1, 1996 the Corporation adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The new rule specifies, among other things, when assets should be
reviewed for impairment, how to determine if an asset is impaired, how
to measure an impairment loss, and what disclosures are necessary in the
financial statements. Adoption of Statement No. 121 did not materially
affect the assets, earnings or capital of the Corporation.
4
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CODORUS VALLEY BANCORP, INC.
Notes to Consolidated Financial Statements, continued
Note 2-Summary of Significant Accounting Policies, continued
SFAS No. 122 - Effective January 1, 1996, the Corporation adopted
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights." The new rule requires that management
recognize as separate assets, rights to service mortgage loans for
others, regardless of how they were acquired. Management should
allocate the total cost of mortgage loans, either purchased or
originated, to the loans and the servicing rights based on their
relative fair value. Statement No. 122 also specifies how mortgage
servicing rights and excess servicing rights should be evaluated for
impairment. In June 1996, Statement No. 122 was superseded by SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" as described more fully below. Adoption
of Statement No. 122 did not materially affect the assets, earnings or
capital of the Corporation.
SFAS No. 125 - On June 30, 1996, the FASB issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" which supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights," and amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." This
Statement provides accounting and reporting guidance for transfers and
servicing of financial assets and extinguishments of liabilities based
on the application of a "financial-components approach" that focuses on
control. Under this approach, when an entity transfers financial
assets, it recognizes the financial and servicing asset it controls
and the liabilities it has incurred, and derecognizes liabilities when
extinguished. The Statement is effective for specified transactions
occurring after December 31, 1996. On October 31, 1996, the FASB agreed
to defer for one year paragraphs 9-12 for the following specific
transactions: securities lending, repurchase agreements, dollar rolls,
and other similar secured transactions. Additionally, the FASB agreed
to defer for one year paragraph 15 for all transactions. Statement No.
125 must be applied prospectively. Adoption of this Statement is not
expected to have a material impact on the assets, earnings or capital of
the Corporation.
Note 3-Impaired Loans
On January 1, 1995, the Corporation adopted 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 impaired 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 a creditor must
recognize an impairment by creating, or adjusting, a valuation allowance
with a corresponding charge to loan loss expense. The Corporation
5
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CODORUS VALLEY BANCORP, INC.
Notes to Consolidated Financial Statements, continued
Note 3-Impaired Loans, continued
uses the cash basis method to recognize interest income on loans that
are impaired. For all reportable periods, impaired loans were, for
practical purposes, comprised of collateral dependent commercial loans
and residential mortgage loans classified as nonaccrual(cash basis).
The nonaccrual classification was based on actual or perceived
deterioration in the financial condition of the borrower and/or other
criteria as defined by the FDIC. Consumer loans such as installment
loans and credit card loans are generally not classified as impaired
because they are usually written-off as a loss when they become 90 days
past due and are deemed uncollectible. Additional information regarding
impaired loans is provided in the schedule that follows.
September December September
30, 31, 30,
(dollars in thousands) 1996 1995 1995
------ ------ ------
Impaired loans $2,870 $3,583 $4,137
Amount of impaired loans that
have a related allowance $2,870 $3,583 $4,137
Amount of impaired loans with
no related allowance $0 $0 $0
Allowance for impaired loans $578 $485 $570
For the nine month period ended
September 30,
1996 1995
------ ------
Average investment in impaired loans $3,490 $2,300
Interest income recognized on
impaired loans (all cash-basis method) $13 $35
Note 4-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the nine month period
ended September 30, were as follows:
(dollars in thousands) 1996 1995
------ ------
Balance-January 1, $2,286 $2,249
Provision charged to operating expense 133 32
Loans charged off (98) (260)
Recoveries 57 129
------ ------
Balance-September 30, $2,378 $2,150
====== ======
6
<PAGE>
CODORUS VALLEY BANCORP, INC.
Management's Discussion of Consolidated Financial Condition and
Results of Operations
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity
presented in its accompanying consolidated financial statements for Codorus
Valley Bancorp, Inc., a bank holding company (the Corporation), and its
wholly-owned subsidiary, Peoples Bank of Glen Rock (the Bank). The
Corporation's consolidated financial condition and results of operations
consist almost entirely of the Bank's financial condition and results of
operations. This discussion should be read in conjunction with the 1995
Annual Report. Current performance does not guarantee, assure, or be
indicative of similar performance in the future.
In addition to historical information, this 10-Q Report contains forward-
looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Important factors that might cause
such a difference include, but are not limited to, those discussed in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Corporation undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Corporation files
periodically with the Securities and Exchange Commission.
Three months ended September 30, 1996
compared to three months ended September 30, 1995
RESULTS OF OPERATIONS
Net income for the current three month period was $721,000, which
approximated the financial results for the third quarter of 1995. Current
period net interest income increased above the prior year due to a larger
volume of earning assets, principally investment securities. Noninterest
income, principally trust fees and other service charges and fees, also
increased above the prior period due to normal business growth. An increase
in noninterest expenses, primarily salary and benefits, and other expenses;
and a provision expense for possible loan losses, largely offset increases in
net interest income and noninterest income in the current period. Net income
per share, as adjusted for stock dividends, was $.69 for the third quarter of
1996 and 1995.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
7
<PAGE>
CODORUS VALLEY BANCORP, INC.
Total interest income for the current three month period was $4,680,000, up
$24,000 or 0.5% above the $4,656,000 earned in the same period of 1995. The
$24,000 increase in interest income was due primarily to a larger volume of
earning assets, principally investment securities. The average volume of
securities available-for-sale was approximately $4.6 million higher in the
current quarter than in the same quarter of 1995. Conversely, the average
volume of total loans declined approximately $1 million during the current
period due primarily to a $7 million sale, of held-for-sale residential
mortgage loans, in April 1996. In addition to the loan sale, modest loan
demand, competitive pressures, and the level of nonperforming assets also
constrained income from loans during the current period.
Total interest expense for the current three month period was $2,190,000,
down $102,000 or 4.5% below the $2,292,000 incurred for the same period in
1995. The $102,000 decrease in interest expense was due primarily to lower
rates paid on interest bearing deposits. While the average volume of total
interest bearing deposits approximated $196 million for both periods, the
deposit mix changed. The current period reflected a higher level of average
balances in less costly interest bearing demand and savings deposits and a
lower level of more expensive time deposits.
Net interest income for the current three month period was $2,490,000, up
$126,000 or 5.3% above the $2,364,000 earned in the same period of 1995. The
increase in current period net interest income was achieved primarily from
lower funding costs and secondarily from a larger average volume of earning
assets.
The provision (expense) for possible loan losses was $25,000 for the current
three month period. Comparatively, no provision was taken for the same period
in 1995 due to a $270,000 loan loss recovery in December 1994 which reduced
the need to fund the allowance for loan losses (reserve) in 1995.
Total noninterest income for the current three month period was $275,000, up
$57,000 or 26% above the same quarter in 1995. The $57,000 increase resulted
from increased trust fees and other service charges and fees. Increases
within these two fee income categories were attributable to normal business
growth.
Total noninterest expense for the current three month period was $1,685,000,
up $150,000 or 9.8% above the $1,535,000 incurred for the third quarter of
1995. The $150,000 increase in non-interest expense was primarily the result
of a $61,000 or 7.3% increase in salary and benefits expense, and a $63,000
or 19.1% increase in other expense. The increase in salary and benefits
expense was primarily attributable to planned staff additions deemed
necessary to support business growth. The overall increase in other expenses
was primarily attributable to a $38,000 increase in problem loan carrying
costs which were incurred to effect collection and protect collateral. The
remaining $25,000 increase in other expenses resulted from relatively small
increases among numerous expense accounts due to normal business growth.
8
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CODORUS VALLEY BANCORP, INC.
The reduction in FDIC deposit insurance expenses in the third quarter of 1995
was attributable to the recognition of an industry-wide refund from the FDIC.
In September 1995, the Bank recognized a $126,000 refund (including interest)
from the FDIC for the four month period June through September of that year.
Recent legislation relative to future FDIC related costs and commercial banks
is provided in the year-to-date section of this report (see page 11).
The provision for income taxes in the current quarter increased $10,000 or 3%
due to a higher level of pretax earnings.
Nine months ended September 30, 1996
compared to nine months ended September 30, 1995
Net income for the first nine months of 1996 was $2,102,000, up $170,000 or
8.8% above the $1,932,000 earned for the same period of 1995. The increase in
net income was due primarily to an increase in net interest income, as a
result of a larger volume of earning assets, and a reduction in deposit
insurance expense due to an industry-wide reduction in premiums of the FDIC.
Earnings per share, as adjusted for stock dividends, was $2.01 on September
30, 1996, compared to $1.86 on September 30, 1995. For the nine month period
(annualized) of 1996, the return on average assets (ROA) and return on
average equity (ROE) were approximately 1.18% and 12.9%, respectively,
compared to 1.14% and 13.5%, respectively, for 1995.
At September 30, 1996, total assets were approximately $236 million,
reflecting a 0.4% increase above September 30, 1995. Book value per share, as
adjusted for stock dividends, was $21.12 on September 30, 1996, compared to
$19.53 on September 30, 1995. The Corporation's capital remained sound as
evidenced by a Tier I Risked-Based Capital Ratio of 14.3% and a Total Risk-
Based Capital Ratio of 15.5% on September 30, 1996.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
Total interest income for the current nine month period was $13,891,000, up
$370,000 or 2.7% above the $13,521,000 earned in the same period of 1995. The
$370,000 increase in total interest income was due primarily to a larger
volume of earning assets, principally investment securities. In spite of
slightly lower yields, income from investment securities increased $354,000
or 13.3% in the current period due to a $8.7 million or 15% increase in
average volume. The average volume and yield on total loans during the
current period approximated 1995 which accounts for the small 0.6% increase
in income. Income from loans during the current period was constrained by the
April 1996 sale of $7 million of fixed rate held-for-sale residential
mortgage loans. The purpose of the loan sale, as previously disclosed in the
Form 10-Q for period ended June 30, 1996, was to manage interest rate risk.
9
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CODORUS VALLEY BANCORP, INC.
Other factors which served to constrain loan growth in the current period
were modest loan demand and competitive pressures. Income from loans was
further constrained by the level of nonperforming assets. It is noteworthy
that the level of nonperforming assets at September 30, 1996, principally
impaired loans, declined since December 31, 1995 and September 30, 1995, as
depicted in Table 1.
Total interest expense for the current nine month period was $6,593,000, up
$130,000 or 2% above the $6,463,000 incurred for the same period in 1995. The
$130,000 increase in total interest expense was due primarily to a larger
volume of interest bearing deposits, principally time deposits. The year to
date average volume of interest bearing deposits increased approximately $6.8
million or 3.6% above the same period in 1995. Deposit growth is expected to
be slow to moderate in the period ahead based on competitive pressures,
particularly competition from stock and bond mutual funds. Obtaining funding,
at reasonable costs, will continue to challenge the commercial banking
industry.
Net interest income was $7,298,000 for the current period, up $240,000 or
3.4% above the first nine months in 1995 as income from a larger volume of
investment securities outpaced funding costs. The net yield on average
earning assets (taxable equivalent basis) was approximately 4.45% for the
current nine month period compared to 4.50% for the same period in 1995.
The provision (expense) for loan losses was $133,000 for the current period
which reflected an increase of $101,000 above the same period in 1995. The
current period provision primarily supported growth in the commercial loan
portfolio. The provision for 1995 was lower due to a $270,000 loan loss
recovery in December 1994 which reduced the need to fund the allowance for
loan losses (reserve) in 1995.
Total noninterest income for the current nine month period was $735,000, up
$127,000 or 21% above the same period in 1995. To achieve comparability in
non-interest income from normal operations, infrequent gains and losses from
the sale of assets should be excluded. On an adjusted basis, total non-
interest income for the current period increased $56,000 or 8% above the
prior period due to normal business growth. The recent historical growth rate
for noninterest income is expected to be sustained in the period ahead based
on normal business growth.
Total noninterest expense for the current nine month period was $4,816,000,
down $32,000 or 0.7% below the $4,848,000 incurred for the same period in
1995. The decrease in total noninterest expense was primarily the result of
a $221,000 reduction in FDIC deposit insurance premium expense. During the
current period, well capitalized and well managed commercial bank members
were charged a minimum membership fee by the FDIC. Other noninterest expense
categories varied as follows. Salaries and benefits expense increased $95,000
or 3.7% due to normal merit raises and planned staff additions deemed
necessary to support business growth. Furniture and equipment expense
10
<PAGE>
CODORUS VALLEY BANCORP, INC.
declined $77,000 or 17% due primarily to a temporary reduction in
depreciation expense related to computer hardware and software as a result of
the Bank's mainframe computer system being fully depreciated in the latter
part of 1995. In September 1996, the Bank completed installation of a new
mainframe computer system. In addition, approximately sixty personal
computers were purchased and installed as part of that technology improvement
project. The projected annual expense for the mainframe computer system and
the personal computers will approximate $215,000. Professional and legal
expense increased $43,000 or 42% in the current period. Prior period
professional and legal expenses were unusually low due to a partial insurance
reimbursement associated with a large loan loss recorded in 1994. The "other"
expense category, an aggregate of many individual expenditures, increased
$129,000 or 13% due to normal business growth and increased problem loan
carrying costs. In the period ahead, it is probable noninterest expenses will
increase due to planned expansion, staff additions, and automation.
On September 30, 1996, the President signed into law the Deposit
Insurance Fund Act of 1996 (the Act) to recapitalize the Savings Association
Insurance Fund (SAIF) administered by the Federal Deposit Insurance
Corporation (FDIC) and to provide for repayment of the Financial Institution
Collateral Obligation Bonds (FICO) issued by the Treasury Department. Under
the Act, SAIF members, e.g., thrifts, will pay a one-time special assessment
in 1996 estimated at 65.7 cents per $100 of insured deposits to capitalize
the SAIF. For 1997 through 1999, thrifts and commercial banks will each pay
a portion of the interest on FICO bonds estimated at 6.44 cents and 1.29
cents, respectively, per $100 of insured deposits. Beginning in the year
2000, and continuing until the FICO bonds are retired in 2018-2019, thrifts
and commercial banks will pay the same FICO assessment rate. As always, the
FDIC will be able to raise the assessments as necessary to maintain the funds
at their target capital ratios provided by law. On January 1, 1999, the SAIF
and the Bank Insurance Fund (BIF) will merge to form the Deposit Insurance
Fund (DIF) if certain stipulations are met. The Act also provided regulatory
relief to the financial services industry relative to environmental risks,
frequency of examinations, and the simplification of forms and disclosures.
A recent estimate of the 1997 FICO assessment for the Bank was $29,000, based
on a 1.29 cents rate per $100 of insured deposits, measured at September 30,
1996.
The provision for income taxes was $982,000 for the current period, up
$128,000 above the same period in 1995 due to a higher level of pretax
earnings.
CREDIT RISK AND LOAN QUALITY
A summary of nonperforming assets and past due loans, and related ratios, is
provided in Table 1. An explanation of changes within each classification for
September 30, 1996, compared to September 30, 1995, is provided below.
11
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CODORUS VALLEY BANCORP, INC.
Impaired loans, the major component of total nonperforming assets, declined
$1,267,000 or 31% since September 30, 1995 to a current level of $2,870,000.
The decline was the result of contract renegotiations, based on prevailing
market conditions for selected accounts, and recoveries due to aggressive
collection efforts. At September 30, 1996, total impaired loans were
comprised of eighteen unrelated relationships, primarily commercial loan
relationships, ranging in size from approximately $25,000 to $593,000. The
Corporation uses the cash basis method to recognize interest income on loans
that are impaired. For all reportable periods, impaired loans were, for
practical purposes, comprised of collateral dependent commercial loans and
residential mortgage loans classified as nonaccrual. The adequacy of an
allowance (reserve) for loan losses, which supports possible collateral
deficiencies, is formally evaluated on a quarterly basis. Efforts to modify
contractual terms for individual accounts or liquidate collateral assets are
proceeding as quickly as potential buyers can be located and legal
constraints permit.
The other component of nonperforming assets, assets acquired in foreclosure
(net of a related reserve) declined $169,000 or 30% since September 30, 1995
to a level of $403,000. The reduction in assets acquired was due primarily to
liquidations. Assets acquired (also known as OREO) consist primarily of
improved real estate from six unrelated accounts. Generally Accepted
Accounting Principles require that assets taken in satisfaction of debt be
accounted for on an individual asset basis, at the lower of (a) fair value
minus estimated costs to sell or (b) cost. The Corporation recorded loss
provisions of $37,000 and $30,000 for the first nine months of 1996 and 1995,
respectively. The losses for both periods reflected declines in the estimated
fair value of assets acquired. Efforts to liquidate assets acquired are
proceeding as quickly as potential buyers can be located and legal
constraints permit.
At September 30, 1996, loans past due 90 days or more and still accruing
interest totalled $788,000. Generally, loans in the past due category are
well collateralized and in the process of collection. The current level of
past due loans is closely monitored and believed to be within a manageable
range.
At September 30, 1996, there were no potential problem loans, as defined by
the Securities and Exchange Commission, identified by management. However,
management was monitoring approximately $9,281,000 of loans for which the
ability of the borrower to comply with present repayment terms was uncertain.
These loans were not included in the above 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.
Table 2, Analysis of Allowance for Loan Losses, depicts a $2,378,000
allowance (reserve) at September 30, 1996. The reserve as a percentage of
total loans was 1.51% at September 30, 1996, compared to 1.34% at September
12
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CODORUS VALLEY BANCORP, INC.
30, 1995. The increase in the reserve ratio during the current period was
attributable to a larger loss provision, smaller net charge-offs, and a
reduction in outstanding loan balances due to a $7 million sale of held-for-
sale mortgage loans. The loan loss provision for 1995 was low relative to
1996 due to a $270,000 recovery in December 1994 which reduced the need to
fund the allowance for loan losses in 1995. Based on a recent evaluation of
potential loan losses, management believes that the allowance is adequate to
support any reasonably foreseeable level of losses that may arise.
Ultimately, however, the adequacy of the allowance is largely dependent upon
future economic factors beyond the Corporation's control. With this in mind,
additions to the allowance for loan losses may be required in future periods.
LIQUIDITY
The loan-to-deposit ratio was 75.4% at September 30, 1996, compared to 75.7%
at September 30, 1995. The ratio for both periods was within the 70-80% range
that the Corporation uses for liquidity policy purposes. During the current
period, the Bank routinely used its line of credit with the Federal Home Loan
Bank of Pittsburgh (FHLBP) as a planned short term funding strategy.
Outstanding advances on the line of credit, limited to ten percent of total
assets, are collateralized by pledged investment securities. At September 30,
1996, the unused line of credit with the FHLBP was approximately $23.5
million less a $2.5 million draw.
STOCKHOLDERS' EQUITY (CAPITAL)
Total stockholders' equity, or capital, was $22,069,000 at September 30,
1996, compared to $20,408,000 at September 30, 1995. Growth in equity during
the current period was due primarily to earnings retention from profitable
operations. Book value per share was $21.12 on September 30, 1996, compared
to $19.53, as adjusted for stock dividends, on September 30, 1995.
On October 8, 1996, the Board of Directors declared a regular quarterly cash
dividend of $.17 per share, payable on or before November 12, 1996, to
stockholders of record October 22, 1996. Payment of this dividend will bring
cash dividends for the full year 1996 to $.74 per share, up $.06 or 8.8%
above the $.68 paid for the full year 1995. Additionally, a 5% stock dividend
was paid on June 13, 1996, as previously disclosed in the Form 10-Q for the
period ended March 31, 1996. The stock dividend is another method of
enhancing the value of our shareholders investment.
The weighted average number of shares of common stock outstanding was
1,045,167 and 1,039,484 for the nine month periods ended September 30, 1996
and September 30, 1995, respectively.
At September 30, 1996, the Corporation's Tier I Risk-Based Capital Ratio was
14.3% and its Total Risk-Based Capital Ratio was 15.5%. Both capital ratios
13
<PAGE>
CODORUS VALLEY BANCORP, INC.
exceeded the minimum federal regulatory requirements for well capitalized
banks of 6% and 10%, respectively.
A 1996 Stock Incentive Plan was approved by the shareholders at the annual
meeting held on May 21, 1996. Under the Plan, 50,000 common shares are
reserved for possible issuance.
As previously disclosed in the Form 10-K for the period ended December 31,
1995, the Corporation is progressing with its plans to replace and relocate
its headquarters facility. A local contractor was recently awarded the
contract for construction of the new Codorus Valley Corporate Center, at 105
Leader Heights Road, York, Pennsylvania. A recent estimate of total project
costs, including land and furnishings, range from $5.3 to $5.5 million. It is
probable that the Corporation will fund the project internally with retained
earnings. The Bank is projected to use 75% of the new facility and the
remaining 25% will be leased out as a source of revenue. Also, as previously
disclosed, the Bank completed the implementation of a new mainframe computer
system in September 1996. As part of that technology project, approximately
sixty personal computers were purchased and installed. Estimated hardware and
software costs for the mainframe computer system and the personal computers
will approximate $750,000 and be financed with retained earnings. The new
system will provide the power, speed and increased capabilities needed to
stay competitive in a rapidly changing financial services industry.
Additionally, the Bank continues to seek ways to expand its branch office
network. Planned capital investments relative to physical expansion and
automated systems could reduce Corporate net income and capital growth in the
short term; however, these expenditures are deemed necessary to grow market
share and net income over the long term. We believe that these investments
are an important part of the overall strategy to achieve the goal of
enhancing long term shareholder value.
Except as disclosed herein, the Corporation is not currently aware of any
other trends, events or uncertainties which may materially and adversely
effect capital, results of operations or liquidity.
14
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
September 30, December 31, September 30,
(dollars in thousands) 1996 1995 1995
------ ------ ------
Impaired loans (1) $2,870 $3,583 $4,137
Assets acquired in foreclosure (2) 403 695 572
------ ------ ------
Total nonperforming assets $3,273 $4,278 $4,709
====== ====== ======
Loans past due 90 days or more
and still accruing interest $788 $1,755 $326
Ratios:
Impaired loans as a % of
total period-end loans 1.82% 2.24% 2.57%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 2.07% 2.66% 2.92%
Nonperforming assets as a % of
total period-end stockholders'
equity 14.83% 20.34% 23.07%
Allowance for loan losses as a
multiple of impaired loans .8x .6x .5x
Interest not recognized on impaired
loans at period-end: (3)
Contractual interest due $263 $306 $278
Interest revenue recognized 13 120 35
---- ---- ----
Interest not recognized in operations $250 $186 $243
==== ==== ====
(1) Comprised solely of nonaccrual loans.
(2) Net of related allowance(reserve).
(3) This table includes interest not recognized on loans which were
classified as impaired at period-end. While every effort is being
made to collect this interest revenue, it is probable a portion will
never be recovered.
15
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 1996 1995
------ ------
Balance-January 1, $2,286 $2,249
Provision charged to operating expense 133 32
Loans charged off:
Commercial 14 228
Real estate-mortgage 2 0
Consumer 82 32
------ ------
Total loans charged off 98 260
Recoveries:
Commercial 19 115
Real estate-mortgage 0 0
Consumer 38 14
------ ------
Total recoveries 57 129
------ ------
Net charge-offs 41 131
Balance-September 30, $2,378 $2,150
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans 0.03% 0.11%
Allowance for loan losses to total loans
at period-end 1.51% 1.34%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 65.0% 48.2%
16
<PAGE>
CODORUS VALLEY BANCORP, INC.
PART II - Other Information:
Item 1. Legal proceedings
Except as previously reported, in the opinion of the management of the
Corporation and the Bank, there are no proceedings pending to which the
Corporation and the Bank is a party or to which their property is subject,
which, if determined adversely to the Corporation and the Bank, would be
material in relation to the Corporation's and the Bank's undivided profits or
financial condition. Except as previously reported, there are no proceedings
pending other than ordinary routine litigation incident to the business of
the Corporation and the Bank. In addition, no material proceedings are
pending or are known to be threatened or contemplated against the Corporation
and the Bank by government authorities.
Item 2. Changes in the rights of the Company's security holders -
nothing to report.
Item 3. Defaults by the Company on its senior securities - nothing to report.
Item 4. Results of votes of security holders - nothing to report.
Item 5. Other information - nothing to report.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K - none.
17
<PAGE>
CODORUS VALLEY BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Codorus Valley Bancorp, Inc.
(Registrant)
By /s/ Larry J. Miller
Larry J. Miller,
President & CEO
(principal executive officer)
November 8, 1996
By /s/ Jann A. Weaver
Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
November 8, 1996
18
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
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