FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1997
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.
1,097,259 shares of $2.50 (par value) common stock were
outstanding as of 10-28-97 .
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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 ............................... 20
Signature Page ............................................ 21
<PAGE>
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
September December September
30, 31, 30,
1997 1996 1996
--------- --------- ---------
Assets (dollars in thousands)
Cash and due from banks:
Interest bearing deposits with banks $ 140 $ 337 $ 325
Non-interest bearing deposits and cash 7,398 7,012 6,673
Federal funds sold 5,000 300 0
Securities available for sale 42,614 56,859 65,728
Loans 185,022 166,651 157,911
Less-allowance for loan losses (2,072) (2,110) (2,378)
-------- -------- --------
Total net loans 182,950 164,541 155,533
Premises and equipment 9,637 5,025 4,287
Interest receivable 1,494 1,642 1,794
Other assets 1,506 1,613 1,353
-------- -------- --------
Total assets............................$250,739 $237,329 $235,693
======== ======== ========
Liabilities
Deposits
Non-interest bearing demand $ 18,896 $ 19,142 $ 17,158
NOW 21,626 22,237 21,933
Insured money fund 29,796 25,651 25,777
Savings 21,139 20,652 22,036
Time CD's less than $100,000 110,525 106,283 107,395
Time CD's $100,000 and above 20,267 15,495 15,037
-------- -------- --------
Total deposits 222,249 209,460 209,336
Federal funds purchased 0 0 400
Short-term borrowings 0 4,000 2,500
Long-term borrowings 2,857 0 0
Interest payable 893 796 894
Other liabilities 648 367 494
-------- -------- --------
Total liabilities....................... 226,647 214,623 213,624
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; 1,097,259
shares issued and outstanding at 9/30/97
and 1,045,296 at 12/31/96 and 9/30/96. 2,743 2,613 2,613
Additional paid-in capital 8,063 6,556 6,552
Retained earnings 12,847 13,191 12,764
Net unrealized gains on securities
available for sale, net of taxes 439 346 140
-------- -------- --------
Total stockholders' equity.............. 24,092 22,706 22,069
Total liabilities and stockholders'
equity.................................$250,739 $237,329 $235,693
======== ======== ========
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,
(dollars in thousands, except per share data) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees from loans $4,275 $3,642 $12,079 $10,776
Interest from federal funds sold and interest
bearing deposits with banks 73 14 114 93
Interest and dividends from securities:
Taxable interest income 617 951 2,080 2,790
Tax-exempt interest income 50 60 153 194
Dividend income 14 13 43 38
------ ------ ------ ------
Total interest income.............................. 5,029 4,680 14,469 13,891
Interest Expense
NOW 95 116 285 351
Insured money fund 238 198 647 575
Savings 122 140 359 414
Time CD's less than $100,000 1,554 1,508 4,526 4,574
Time CD's $100,000 and above 264 211 708 654
------ ------ ------ ------
Total interest expense on deposits 2,273 2,173 6,525 6,568
Interest expense on short-term borrowings and
federal funds purchased 15 17 69 25
Interest expense on long-term borrowings 50 0 140 0
------ ------ ------ ------
Total interest expense............................. 2,338 2,190 6,734 6,593
------ ------ ------ ------
Net interest income................................. 2,691 2,490 7,735 7,298
Provision for Loan Losses 68 25 202 133
------ ------ ------ ------
Net interest income after provision for loan losses 2,623 2,465 7,533 7,165
Non-interest Income
Trust and investment services fees 108 86 297 222
Service charges on deposit accounts 111 106 314 311
Other service charges and fees 91 83 215 193
Gain on sale of loans 56 0 59 7
(Loss) gain on sales of securities (17) 0 (17) 2
------ ------ ------ ------
Total non-interest income 349 275 868 735
Non-interest Expense
Salaries and benefits 988 901 2,855 2,651
Occupancy of premises 171 108 396 325
Furniture and equipment 217 131 616 376
Postage, stationery and supplies 96 70 315 244
Professional and legal 50 44 173 145
Marketing and advertising 82 56 243 131
Acquired real estate, net 20 51 32 63
Other 316 324 958 881
------ ------ ------ ------
Total non-interest expense 1,940 1,685 5,588 4,816
Income before income taxes 1,032 1,055 2,813 3,084
Provision for Income Taxes 321 334 894 982
------ ------ ------ ------
Net income..........................................$ 711 $ 721 $1,919 $2,102
====== ====== ====== ======
Net income per common share..........................$0.65 $0.66 $1.75 $1.92
===== ===== ===== =====
See accompanying notes.
</TABLE>
2
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine months ended
September 30,
1997 1996
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 1,919 $ 2,102
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 469 276
Provision for loan losses 202 133
Provision for losses on assets acquired in foreclosure 0 37
Gain on sales of assets acquired in foreclosure (5) (13)
Gain on sales of loans (59) (7)
Loss (gain) on sales of securities 17 (2)
Decrease (increase) in interest receivable 148 (91)
Decrease (increase) in other assets 114 (124)
Increase in interest payable 97 29
Increase in other liabilities 281 84
Other, net (57) (24)
------- -------
Net cash provided by operating activities............. 3,126 2,400
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 5,000 2,382
Proceeds from maturities and calls of securities
available for sale 13,597 14,090
Purchase of securities available for sale (4,252) (21,319)
Net (increase) in loans made to customers (22,990) (5,725)
Proceeds from loan sales 4,388 7,656
Purchases of premises and equipment (5,081) (1,040)
Proceeds from sale of assets acquired in foreclosure 81 500
------- -------
Net cash used in investing activities................ (9,257) (3,456)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 3,775 1,194
Net increase (decrease) in time deposits 9,014 (4,298)
(Decrease) increase in short-term borrowings and
federal funds purchased (4,000) 2,900
Increase in long-term borrowings 2,857 0
Dividends paid (617) (576)
Cash paid in lieu of fractional shares (9) (13)
------- -------
Net cash provided by financing activities............ 11,020 (793)
------- -------
Net increase (decrease) in cash and cash equivalents. 4,889 (1,849)
Cash and cash equivalents at beginning of year....... 7,649 8,847
------- -------
Cash and cash equivalents at September 30............$12,538 $ 6,998
======= =======
Supplemental Disclosures:
Interest payments $6,428 $6,539
Income tax payments $580 $970
See accompanying notes.
3
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited 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 audited
financial statements contained in the 1996 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 57,881 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan, 50,300 shares for the 1996 Stock Incentive Plan, and
those shares reserved for the Shareholders' Rights Plan.
The results of operations for the nine month period ended September 30,
1997 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 1,097,259 for the nine month
periods ended September 30, 1997 and 1996.
Reclassifications - Certain reclassifications have been made to the 1996
consolidated financial statements to conform with the 1997 presentation.
Note 3-Current Accounting Developments
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 issued
4
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 3-Current Accounting Developments, continued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS No. 125," which defers until January 1, 1998, the effective date of
paragraph 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 did not, and is not expected
to have a material impact on the assets, earnings or capital of the
Corporation.
SFAS No. 128 - In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" which supersedes APB
Opinion No. 15. Statement No. 128, effective for financial statements
issued after December 15, 1997, simplifies the computation of earnings
per share (EPS) by replacing the presentation of primary EPS with a
presentation of basic EPS. Under this Statement the dilutive effect of
stock options will be excluded when calculating basic EPS. Statement
No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Adoption of Statement No. 128 is not
expected to have a material impact on the EPS calculations of the
Corporation.
SFAS No. 130 - In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income includes net income
plus all other non-owner changes in equity currently excluded from net
income. These other non-owner changes in equity currently include
transactions specified in SFAS No. 52, "Foreign Currency Translation",
SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 87,
"Employers' Accounting for Pensions", and SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Statement No.
130 is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. Management is currently reviewing
this Statement and the impact it may have on the Corporation.
SFAS No. 131 - In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting of financial information from the
operating segments in annual and interim financial statements. This
Statement requires that financial information be reported on the basis
that it is reported internally for evaluating segment performance and
deciding how to allocate resources to segments. Because this
Statement addresses how supplemental financial information is
disclosed in annual and interim reports, the adoption will have no
material impact on the financial statements. Statement No. 131 is
effective for financial statements for fiscal years beginning after
December 15, 1997 with early adoption encouraged.
5
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Impaired Loans
The Corporation records impaired loans in accordance with 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." 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). Additional
information regarding impaired loans is provided in the schedule that
follows.
September December September
30, 31, 30,
(dollars in thousands) 1997 1996 1996
------ ------ ------
Impaired loans $2,829 $2,063 $2,870
Amount of impaired loans that
have a related allowance $2,829 $2,063 $2,870
Amount of impaired loans with
no related allowance $0 $0 $0
Allowance for impaired loans $472 $371 $578
For the nine month period ended
September 30,
1997 1996
------ ------
Average investment in impaired loans $2,057 $3,490
Interest income recognized on
impaired loans (all cash-basis method) $77 $13
Note 5-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) 1997 1996
------ ------
Balance-January 1, $2,110 $2,286
Provision charged to operating expense 202 133
Loans charged off (351) (98)
Recoveries 111 57
------ ------
Balance-September 30, 1997 $2,072 $2,378
====== ======
6
<PAGE>
CODORUS VALLEY BANCORP, INC.
Management's Discussion and Analysis 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, PeoplesBank, A Codorus Valley Company (the Bank),
formerly Peoples of Glen Rock until February 1997. 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 1996 Annual Report.
Current performance does not guarantee, assure, or may not 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 Consolidated 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, 1997
compared to three months ended September 30, 1996
RESULTS OF OPERATIONS
Net income for the current three month period was $711,000, or $.65 per
share, compared to $721,000 or $.66 per share, for the same period in 1996.
Per share amounts for both periods were adjusted to reflect a five percent
stock dividend declared April 8, 1997, payable June 12, 1997, to shareholders
of record April 22, 1997. Net income was down from 1996 due to an increase in
noninterest expense which more than offset an increase in net interest
income. The increase in noninterest expense was due primarily to increased
investment in facilities, systems and new technology in accordance with the
Corporation's strategic plan. Staffing and marketing expenses also
contributed to the increase in noninterest expense. During August 1997,
approximately forty-five PeoplesBank employees, hundreds of files, and
equipment were relocated to the recently completed Codorus Valley Corporate
Center. The following divisions now reside in the new facility: corporate,
7
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CODORUS VALLEY BANCORP, INC.
credit services, trust and investment services, and administrative support
functions including marketing and human resources.
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 three month period was $5,029,000, up
$349,000 or 7.5 percent above the $4,680,000 earned in the same period of
1996. The $349,000 increase in interest income was due to a larger volume of
loans, principally commercial loans. The average volume of total loans for
the current quarter was approximately $183 million, up $27 million or 17
percent above the third quarter in 1996. Conversely, the quarterly average
volume of total investment securities declined approximately $24 million from
1996 as proceeds from sales and maturities were used to partially fund loan
demand. In July 1997, a $3.7 million portfolio of fixed rate residential
mortgage loans, classified as held-for-sale, were sold at a pretax gain of
$54,000.
Total interest expense for the current three month period was $2,338,000, up
$148,000 or 6.8 percent above the $2,190,000 incurred for the same period in
1996. The $148,000 increase in interest expense reflected a larger volume of
interest bearing deposits and borrowed funds. The average volume of total
interest bearing deposits for the current quarter was approximately $204
million, up $8 million or 4 percent above the third quarter of 1996. The
average volume of total borrowed funds was $3.9 million, up $2.7 million or
214 percent above the third quarter of 1996.
Net interest income for the current three month period was $2,691,000, up
$201,000 or 8 percent above the $2,490,000 earned in the third quarter of
1996. The increase in net interest income for the current period was achieved
primarily from a larger volume of loans.
The provision expense for possible loan losses was $68,000 for the current
three month period compared to $25,000 for the third quarter of 1996. The
increase in the current period provision was necessary to support loan
growth.
Total noninterest income for the current three month period was $349,000, up
$74,000 or 27% above the third quarter of 1996. Most of the increase in
noninterest income was attributable to a $54,000 pretax gain from the
periodic sale of held-for-sale fixed rate residential mortgage loans.
Total noninterest expense for the current three month peoriod was $1,940,000,
up $255,000 or 15% above the $1,685,000 incurred for the third quarter of
1996. The $255,000 increase in non-interest expense was due primarily to
increased investment in facilities, systems and new technology in accordance
with the Corporation's strategic plan. Staffing and marketing expenses also
contributed to the increase in noninterest expenses. In August 1997,
construction of the Codorus Valley Corporate Center was completed and
8
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CODORUS VALLEY BANCORP, INC.
approximately forty-five PeoplesBank employees, hundreds of files, and
equipment were relocated to this new facility located in York, Pennsylvania.
Also in August, the Bank completed the implementation of a platform
automation system designed to increase deposit processing efficiency and
improve deposit-related sales and service. A more detailed explanation of
increases in specific noninterest expense components is provided in the year-
to-date section of this report.
The provision expense for federal income taxes declined $13,000 in the
current period due to a reduction in income before income taxes.
Nine months ended September 30, 1997
compared to nine months ended September 30, 1996
RESULTS OF OPERATIONS
Net income for the current nine month period was $1,919,000, or $1.75 per
share, compared to $2,102,000, or $1.92 per share, for the same period in
1996. Per share amounts were adjusted to reflect the five percent stock
dividend described earlier. Net income for the first nine months of 1997 was
down from 1996, as anticipated, due primarily to an increase in noninterest
expense which more than offset the increase in net interest income. The
increase in noninterest expense was driven in part by capital investments in
facilities, systems and technology in accordance with the Corporation's
strategic plan. In August 1997, approximately forty-five PeoplesBank
employees, hundreds of files and equipment were relocated to the recently
completed Codorus Valley Corporate Center. In April 1997, the Bank opened its
eighth full service banking office. The increase in salaries and benefits
expense was largely attributable to staffing the newest branch office
addition. Marketing expenditures also contributed to the increase in
noninterest expense as the Bank aggressively promoted brand image, products
and new facilities. For the first nine months of 1997, the annualized return
on average assets (ROA) was approximately 1.05 percent compared to 1.18
percent for the same period in 1996. The annualized return on average equity
(ROE) for the current period was approximately 10.8 percent compared to 12.9
percent for 1996.
At September 30, 1997, total assets were approximately $251 million, up $15
million or 6 percent above September 30, 1996. Book value per share, as
adjusted for stock dividends, was $21.96 on September 30, 1997, compared to
$20.11 on September 30, 1996. The Corporation's capital remained sound as
evidenced by a Tier I Risked-Based Capital Ratio of 12.6 percent and a Total
Risk-Based Capital Ratio of 13.7 percent on September 30, 1997.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
9
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CODORUS VALLEY BANCORP, INC.
Total interest income for the current nine month period was $14,469,000, up
$578,000 or 4.2 percent above the $13,891,000 earned in the same period of
1996. The $578,000 increase in total interest income was due primarily to a
larger volume of earning assets, principally commercial loans. The average
volume of total performing loans for the current nine month period (including
held-for-sale loans) was approximately $175 million, up $20 million or 13%
above the average loan balance for the same period in 1996. The yield on
total loans, annualized and on a taxable equivalent basis, for the current
period was 9.05 percent compared to 9.11 percent for 1996. In July 1997, the
Bank sold a $3.7 million portfolio of held-for-sale residential mortgage
loans which generated a pretax gain of $54,000. In contrast to loan growth,
the average volume of securities available-for-sale for the current period
was approximately $49 million, down $17 million or 25% below the average
balance for the same period in 1996. Proceeds from the maturity, sale, or
call of investment securities were used to partially fund loan demand. For
the fourth quarter of 1997 interest earning assets are expected to grow at a
slower pace than the third quarter due to seasonal factors and reduced loan
demand.
Total interest expense for the current nine month period was $6,734,000, up
$141,000 or 2% above the comparable period in 1996. The increase in interest
expense was due primarily to an increase in the average volume of borrowing
and interest bearing deposits. The nine month average balance of total
interest bearing deposits was approximately $198 million for 1997 compared to
$197 million for 1996. The average annualized rate paid on interest bearing
deposits for period ended September 30, 1997, was approximately 4.40 percent,
compared to 4.45 percent for period ended September 30, 1996. During the
current period the Bank supplemented deposit growth by borrowing from the
Federal Home Loan Bank of Pittsburgh (FHLBP) to help fund loan growth. For
1997, the nine month average balance of borrowed funds was approximately $4.3
million, compared to $.6 million for 1996. The average rate on borrowed funds
was 6.34 percent for 1997 compared to 5.59 percent for 1996. Deposit growth
will continue to challenge PeoplesBank as well as the commercial banking
industry due to competitive pressures, and increased investment by households
and businesses in the stock and mutual fund markets. Deposits are expected to
grow moderately during the fourth quarter due to normal business growth and
recent stock market volatility.
Net interest income for the current nine month period was $7,735,000, up
$437,000 or 6% above the same period in 1996. The increase in net interest
income for the current period was a result of a larger volume of earning
assets, principally commercial loans. The net yield on average earning
assets, annualized and on a taxable equivalent basis, was approximately 4.61
percent for the current nine month period compared to 4.45 percent for the
same period in 1996. The increase in the net yield was attributable to a
change in the mix of earning assets. The volume of higher yielding loans
increased while the volume of lower yielding investment securities declined.
10
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CODORUS VALLEY BANCORP, INC.
The provision expense for possible loan losses was $202,000 for the current
nine month period compared to $133,000 for the same period in 1996. The
provision for both periods was necessary to support loan growth.
Total noninterest income for the current nine month period was $868,000, up
$133,000 or 18% above the same period in 1996. The $133,000 increase in
noninterest income was due primarily to an increase in trust and investment
services fees attributable to business growth and asset appreciation. A
$54,000 pretax gain from the sale of $3.7 million portfolio of held-for-sale
mortgage loans also contributed to the increase. 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 $5,588,000,
up $772,000 or 16% above the same period in 1996. The $772,000 increase in
noninterest expense reflects strategic initiatives in 1997 and 1996 to
expand, staff, and equip the organization to enhance its competitiveness and
increase its service capabilities. Implementation of strategic initiatives
resulted in increases within the following expense categories: salaries and
benefits, up $204,000; occupancy, up $71,000; furniture and equipment, up
$240,000; and marketing and advertising, up $112,000. The increase in
salaries and benefits was primarily attributable to planned staff additions
necessary to support business growth. This includes staffing the eighth full
service community banking office which opened in April 1997. The increase in
occupancy expense reflects increased depreciation, maintenance and property
tax expenses associated with the newest branch office addition and the
Codorus Valley Corporate Center ("Corporate Center") which was operational in
August 1997. As previously disclosed, total investment in the Corporate
Center was approximately $5.5 million, which includes land, construction and
furnishing costs. The building will be depreciated over a forty year
estimated useful life for financial reporting purposes. Seventy-five percent
of the space will be leased to the Bank, the remaining twenty-five percent of
the space will be available for lease to nonaffiliated parties. To date,
approximately one fourth of the space available for lease to nonaffiliated
parties has been leased. The increase in furniture and equipment expense
reflects increased depreciation and maintenance costs from increased
investment in computer equipment and systems that were purchased in the
latter half of 1996 and in 1997. Current period furniture depreciation
expense increased as a result of furnishing the Corporate Center.
Comparatively, depreciation expense from furniture and equipment for the
first nine months of 1996 was low because the Bank's previous host computer
system was fully depreciated in 1995 and was not replaced until 1996. The
increase in marketing and advertising expense was primarily attributable to
a brand image campaign associated with the new name of the Corporation's
financial services subsidiary PeoplesBank, A Codorus Valley Company (formerly
Peoples Bank of Glen Rock). Promotion of the Corporate Center, new branch
office, and increased product promotions also contributed to the increase in
marketing and advertising expense. Noninterest expense is expected to
increase in the period ahead due to past and planned strategic initiatives,
and normal business growth.
11
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CODORUS VALLEY BANCORP, INC.
The provision for federal income taxes declined $88,000 in the current period
due to a reduction in income before income taxes.
CREDIT RISK AND LOAN QUALITY
A summary of nonperforming assets and past due loans, and related ratios, is
provided in Table 1 incorporated herein. An explanation of changes within
each classification for September 30, 1997, compared to September 30, 1996,
is provided below.
The major component of nonperforming assets is impaired loans. For all
reporting periods, impaired loans were principally comprised of collateral
dependent commercial loans and residential mortgage loans classified as
nonaccrual. Accordingly, the Corporation uses the cash basis method to
recognize interest income on loans that are impaired. On September 30, 1997,
the impaired loan portfolio was $2,829,000, approximately the same size as
one year ago. Although the size of the portfolio was approximately the same
for both periods, it was dynamic and reflected loan additions and loan
reductions. For example, loans returned to accrual status, paid down or paid
off, or reclassified to assets acquired served to reduce the impaired loan
portfolio. Impaired loan additions, however, offset these reductions. In
connection with the quarterly analysis of loans and reserve adequacy a
$1,043,000 commercial loan was classified to impaired status in September,
1997. This single loan, which management believes is well collateralized by
real estate, accounts for 37 percent of the impaired loan portfolio. At
September 30, 1997, the impaired loan portfolio was comprised of eighteen
unrelated relationships, primarily commercial loan relationships, ranging in
size from approximately $2,700 to $1,043,000. These loan relationships vary
by industry and are generally collateralized with real estate assets. A loss
reserve, 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.
The other component of nonperforming assets, assets acquired in foreclosure
(net of a related reserve) increased $426,000 or 106 percent since September
30, 1996, to a level of $829,000. The increase in assets acquired, reflected
loan collateral taken in satisfaction of debt. At September 30, 1997, the
assets acquired portfolio consisted 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. A loss reserve, which is evaluated quarterly, has been established for
assets whose estimated market value, less selling expenses, is below their
financial carrying costs. At September 30, 1997, the reserve for assets
acquired in foreclosure was deemed adequate. For the first nine months of
1997 no loss provision expenses were recorded due to the adequacy of the
12
<PAGE>
CODORUS VALLEY BANCORP, INC.
reserve. Comparatively, in 1996 a $37,000 loss provision expense was recorded
to strengthen the reserve against possible losses. Efforts to liquidate
assets acquired are proceeding as quickly as potential buyers can be located
and legal constraints permit.
At September 30, 1997, loans past due 90 days or more and still accruing
interest totalled $391,000, a decline of $397,000 or 50 percent from
September 30, 1996. 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, 1997, there were no potential problem loans, as defined by
the Securities and Exchange Commission, identified by management. However,
management was monitoring loans of approximately $5.6 million for which the
ability of the borrower to comply with present repayment terms was uncertain.
These loans were not included in the Table 1 disclosure. They are monitored
closely, and management presently believes that the allowance for loan losses
is adequate to cover anticipated losses that may be attributable to these
loans. Comparatively, management was monitoring loans of approximately $9.3
million on September 30, 1996.
Table 2, Analysis of Allowance for Loan Losses, incorporated herein, depicts
a $2,072,000 allowance (reserve) at September 30, 1997. The reserve as a
percentage of total loans was 1.12 percent at September 30, 1997, compared to
1.51 percent at September 30, 1996. The decrease in the reserve ratio for the
current period was primarily attributable to improvement in the quality of
individual loans within the impaired loan portfolio. The provision expense
was $202,000 for the current period which primarily supported loan growth,
principally commercial loans. Of the total $351,000 charged-off in the
current period, $172,000 was attributable to one commercial loan borrower
whose accounts were deemed uncollectible. 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
During the current period the need for funds increased as a result of
increased loan demand, principally commercial loans, and planned capital
expenditures. Primary funding sources included matured investment securities,
deposit growth, and borrowed funds from the Federal Home Loan Bank of
Pittsburgh (FHLBP).
The loan-to-deposit ratio was approximately 83 percent at September 30, 1997,
compared to 75 percent at September 30, 1996. The increase in this ratio
13
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CODORUS VALLEY BANCORP, INC.
reflected a decline in liquidity, as loan growth outpaced deposit growth in
the current period.
During the current period, the Bank routinely used its line of credit with
the FHLBP as a short term funding strategy. The rate is established daily by
the FHLBP based on prevailing market prices for overnight funds.
The Bank's maximum borrowing capacity, as established quarterly by the FHLBP,
was approximately $71 million, as of June 30, 1997, the most recent available
date. At September 30, 1997, the Bank had $2.9 million outstanding on its
account with the FHLBP.
In January, 1997, the Bank borrowed $3 million from the FHLBP under a ten
year, 6.82% fixed rate note arrangement to help fund its residential mortgage
loan program.
In light of competitive pressures and the public allure with the stock and
mutual funds markets, traditional deposit funding, by necessity, will
continue to be supplemented with borrowed funds for the foreseeable future.
STOCKHOLDERS' EQUITY (CAPITAL)
Total stockholders' equity, or capital, was $24,092,000 at September 30,
1997, compared to $22,069,000 at September 30, 1996. Growth in equity during
the current period was due primarily to earnings retention from profitable
operations. Book value per share, adjusted for both periods for the 5 percent
stock dividend paid in June 1997, was $21.96 on September 30, 1997, compared
to $20.11 on September 30, 1996.
On October 14, 1997, the Board of Directors declared a regular quarterly cash
dividend of $.20 per share, payable on or before November 10, 1997, to
shareholders of record October 28, 1997. This brings total cash dividends for
1997 to $.78 per share, representing a $.04 or 5.4 percent increase above
1996. Additionally, a five percent stock dividend was paid in June 1997 and
in June 1996.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends, was 1,097,259 for the nine month periods ended September
30, 1997 and 1996.
The Corporation's capital level, on a consolidated basis, remained sound for
the current period as evidenced by a tier 1 risk-based capital ratio of 12.6
percent on September 30, 1997, compared to 14.3 percent on September 30,
1996. The total risk-based capital ratio was 13.7 percent on September 30,
1997, compared to 15.5 percent on September 30, 1996. The decline in the
capital ratios reflected a change in the mix of assets. The level of
commercial loans and fixed assets, which are assigned a 100 percent weighting
for risk, increased relative to lower risk-weighted investment securities.
14
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CODORUS VALLEY BANCORP, INC.
The Bank's tier 1 risk-based capital ratio was 10.2 percent and its total
risk-based capital ratio was 11.3 percent on September 30, 1997. The Bank's
capital ratios exceeded the minimum federal regulatory requirements for well
capitalized banks of 6 percent and 10 percent, respectively.
As previously disclosed in the 1996 Annual Report to Shareholders and other
Securities and Exchange Commission filings, the Board of Directors began
implementing a series of initiatives, in accordance with the Corporation's
long-range strategic plan. These initiatives are designed to strengthen the
position of the Corporation as a financial services provider for the twenty-
first century. One such initiative was the construction of a new corporate
headquarters, known as Codorus Valley Corporate Center, at a cost of
approximately $5.5 million, which includes land, construction and furnishing
costs. Occupancy of the new facility was accomplished in August 1997, at
which time the Corporation leased seventy-five percent of the space to the
Bank. The remaining space is available for lease to nonaffiliated parties.
Another initiative involved branch office expansion. On April 22, 1997, the
Bank opened it's eighth full service community banking office, located in
East York, Pennsylvania. The approximate cost of this project was $825,000
which included purchase price, renovations, and furniture and equipment. Both
capital projects are being funded with cash generated from current Bank
operations. On April 25, 1997, another strategic initiative was accomplished
when the Corporation's common stock began quotation on the Nasdaq National
Stock Market System under the symbol "CVLY."
In June 1997, the Bank introduced a twenty-four hour telephone banking
service called PhoneconnecT. This system, which cost approximately $41,000,
enables clients to obtain information about their accounts, transfer funds,
and make loan payments by using a touch-tone telephone. In August 1997, the
Bank completed implementation of a platform automation system which cost
approximately $56,000. This system is designed to increase deposit processing
efficiency and improve deposit-related sales and service.
Capital investments made in 1996 and 1997 to date, and additional planned
investment, relative to physical expansion and cost effective technological
system solutions, will reduce Corporate net income and capital growth in the
period ahead. However, these expenditures are necessary to grow market share
and net income over the long term, and are important components of the
overall strategy to achieve the goal of enhancing long term shareholder
value.
OTHER MATTERS
The Year 2000 poses a significant business risk to the financial services
industry. In fact, it poses risk for all businesses, households and
governments. The risk is that on January 1, 2000, date-sensitive systems
using two digits to represent the year may not be able to distinguish between
the Year 2000 and the Year 1900; causing the systems to malfunction or shut-
15
<PAGE>
CODORUS VALLEY BANCORP, INC.
down. The problem has broad implications far beyond familiar computer systems
and could adversely impact security systems, telephone systems, climate
control systems, elevators, automobiles, etc. Any entity that provides goods
and services to the Corporation could create problems if that entity is not
Year 2000 compliant, including public utilities. Likewise, commercial
borrowers pose a credit risk to the Bank if they are not Year 2000 compliant
and their businesses are disrupted. Unfortunately, there is no universal
software fix for this problem and solutions can be labor-intensive and
expensive. Preparing for the Year 2000 challenge is one of the Corporation's
highest priorities. Presently, a compliance team is assembled and a plan is
being developed to address this issue. One of the first tasks of the
compliance team will be to identify and inventory all internal and external
systems and entities that might pose Year 2000 risk. Then an evaluation of
each system and entity will be performed, to include written assurances and
testing, to determine the extent of noncompliance. Noncomplying systems and
entities will be brought into compliance or replaced. In accordance with
regulatory mandate, the Corporate goal is to be substantially Year 2000
compliant by December 31, 1998. The financial impact of Year 2000 compliance
on the Corporation's assets, earnings and liquidity cannot be determined at
this time.
Recently, Pennsylvania enacted a law to permit State chartered banking
institutions to sell insurance. This follows the U.S.Supreme Court decision
in favor of nationwide insurance sales by banks and barring states from
blocking insurance sales by national banks in towns with populations of no
more than 5,000. The Bank is currently evaluating its options regarding the
sale of insurance.
On January 14, 1997, the Board of Directors of Peoples Bank of Glen Rock
announced that all Defined Benefit Plan ("Plan") benefit accruals be
suspended as of March 1, 1997, and the Plan terminated as of April 30, 1997.
The settlement of the accumulated benefit obligation by purchase of annuity
contracts for, lump sum payments to, or rollover to a qualified IRA plan for
each covered employee, is expected to be completed during 1997. Approval by
the Internal Revenue Service for the termination of the Plan is pending.
Management currently believes that Plan termination will not have a material
impact on the Corporation during 1997.
On January 1, 1997, the SEC issued new disclosure rules related to
derivatives and exposures to market risk (e.g., interest rate risk, foreign
currency exchange risk, commodity price risk, equity price risk) from
derivative instruments, other financial instruments and certain derivative
commodity instruments. The new disclosure rules have two parts: market risk
disclosures (both quantitative and qualitative) outside the financial
statements, and accounting policy disclosures about derivatives in the notes
to the financial statements. Market risk disclosures must be included in
financial statements for years ending after June 15, 1997, for registrants
with market capitalization in excess of $2.5 billion. Other registrants are
required to provide the new market risk disclosures in their annual report to
16
<PAGE>
CODORUS VALLEY BANCORP, INC.
shareholders and their Form 10-K for fiscal years ending after June 15, 1998.
Accounting policy disclosures for derivative financial instruments are
effective for all registrants beginning with financial statements for periods
ending after June 15, 1997. Management is currently reviewing the SEC's new
rules and the impact they may have on the Corporation.
Periodically, various types of federal and state legislation is proposed that
could result in additional regulation of, or restrictions on, the business of
the Corporation and the Bank. It cannot be predicted whether such legislation
will be adopted or, if adopted, how such legislation would affect the
business of the Corporation and the Bank.
Further, the business of the Corporation is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives to increase profits and market share. Management also expects
increased diversification of financial products and services offered by the
Corporation or subsidiary thereof, and its competitors. Management believes
that such consolidations and mergers, and diversification of products and
services may enhance its competitive position as a community bank.
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.
17
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
September 30, December 31, September 30,
(dollars in thousands) 1997 1996 1996
------ ------ ------
Impaired loans (1) $2,829 $2,063 $2,870
Assets acquired in foreclosure (2) 829 780 403
------ ------ ------
Total nonperforming assets $3,658 $2,843 $3,273
====== ====== ======
Loans past due 90 days or more
and still accruing interest $391 $524 $788
Ratios:
Impaired loans as a % of
total period-end loans 1.53% 1.24% 1.82%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 1.97% 1.70% 2.07%
Nonperforming assets as a % of
total period-end stockholders'
equity 15.18% 12.52% 14.83%
Allowance for loan losses as a
multiple of impaired loans .7x 1.0x .8x
Interest not recognized on impaired
loans at period-end: (3)
Contractual interest due $294 $246 $263
Interest revenue recognized 77 18 13
---- ---- ----
Interest not recognized in operations $217 $228 $250
==== ==== ====
(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.
18
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 1997 1996
------ ------
Balance-January 1, $2,110 $2,286
Provision charged to operating expense 202 133
Loans charged off:
Commercial 289 14
Real estate-mortgage 0 2
Consumer 62 82
------ ------
Total loans charged off 351 98
Recoveries:
Commercial 42 19
Real estate-mortgage 65 0
Consumer 4 38
------ ------
Total recoveries 111 57
------ ------
Net charge-offs 240 41
Balance-September 30 $2,072 $2,378
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans 0.18% 0.03%
Allowance for loan losses to total loans
at period-end 1.12% 1.51%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 64.3% 65.0%
19
<PAGE>
CODORUS VALLEY BANCORP, INC.
PART II - Other Information:
Item 1. Legal proceedings
Various legal actions or proceedings, arising in the ordinary course of
business, are pending involving the Corporation or its subsidiaries. In the
opinion of management, these matters are without merit or, if determined
adversely to the Registrant, will not have a material impact on the
Corporation's liquidity, capital resources, or results of operations.
Item 2. Changes in the rights of the company's security holders - nothing to
report.
Item 3. Defaults by the company on its 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.
20
<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)
November 10, 1997 By /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
November 10, 1997 By /s/ Larry J. Miller
Date Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
21
<PAGE>
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