UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Manchester Street, P.O. Box 67, Glen Rock, Pennsylvania 17327
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 717-846-1970
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NOT APPLICABLE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50 per share
(Title of class)
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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On February 25, 1997, the aggregate market value of the Registrant's voting
stock held by non-affiliates was approximately, $27,112,000.
As of February 25, 1997, Codorus Valley Bancorp, Inc. had 1,045,296 shares of
common stock outstanding, par value $2.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Document: Parts:
1996 Annual Report to Stockholders I, II and IV
Proxy Statement for the Annual Meeting of
Stockholders to be held May 20, 1997. III and IV
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Codorus Valley Bancorp, Inc.
Form 10-K Index
Part I Page
Item 1 Business............................................ 3
Item 2 Properties.......................................... 6
Item 3 Legal Proceedings................................... 8
Item 4 Submission of Matters to a Vote of Security Holders. 8
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters......................... 8
Item 6 Selected Financial Data............................. 8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
Item 8 Financial Statements and Supplementary Data......... 9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 9
Part III
Item 10 Directors and Executive Officers of the Registrant. 9
Item 11 Executive Compensation............................. 9
Item 12 Security Ownership of Certain Beneficial Owners
and Management..................................... 9
Item 13 Certain Relationships and Related Transactions..... 9
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 10
Signatures......................................... 12
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PART I
Item 1: Business
Codorus Valley Bancorp, Inc. ("Bancorp" or the "Registrant") is a Pennsylvania
business corporation, incorporated on October 7, 1986. On March 2, 1987, Bancorp
became a bank holding company, pursuant to the Bank Holding Company Act of 1956,
as amended. PEOPLESBANK, A Codorus Valley Company ("PEOPLESBANK" or the "Bank")
is its wholly-owned banking subsidiary and SYC Realty Co., Inc. is its
wholly-owned nonbank subsidiary. Since commencing operations, Bancorp's business
has consisted primarily of managing and supervising the Bank, and its principal
source of income has been dividends paid by the Bank. At December 31, 1996,
Bancorp had total consolidated assets of $237.3 million, total deposits and
other liabilities of $214.6 million, and total stockholders' equity of $22.7
million.
Bank Subsidiary
PEOPLESBANK, formerly Peoples Bank of Glen Rock until February 1997, organized
in 1934, is a Pennsylvania chartered bank and is not a member of the Federal
Reserve System. PEOPLESBANK offers a full range of commercial and consumer
banking services through seven full service banking office locations in York
County, Pennsylvania. An eighth full service office, located in East York, is
scheduled to open in April, 1997. PEOPLESBANK also offers trust and investment
services at a separate office located in Pine Grove Commons, York, Pennsylvania.
The deposits of PEOPLES BANK are insured by the Federal Deposit Insurance
Corporation ("FDIC") to the extent provided by law. At December 31, 1996,
PEOPLESBANK had total loans of $166.7 million and total deposits of $209.5
million.
The Bank is not dependent for deposits nor exposed by loan concentration to a
single customer or to a small group of customers. Accordingly, losses from a
single customer, or small customer group, would not have a material adverse
effect on the financial condition of the Bank. At fiscal year end 1996
approximately 15% of total loans were concentrated in the commercial facility
leasing industry and approximately 9% of total loans were concentrated in the
real estate development industry, compared to 7% and 12%, respectively, at year
end 1995.
Nonbank Subsidiary
On June 20, 1991, SYC Realty Company, Inc. ("SYC Realty") was incorporated as a
wholly-owned subsidiary of the Registrant. This nonbank subsidiary was created
primarily for the purpose of disposing of selected properties obtained from the
Bank in satisfaction of debts previously contracted. SYC Realty commenced
business operations in October, 1995. To date, the financial impact of this
subsidiary's operations on the Registrant and the Bank has been immaterial.
3
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Competition
The banking industry in PEOPLESBANK's service area, principally York County,
Pennsylvania, is extremely competitive. The Bank competes with commercial banks
and other financial service providers such as thrifts, credit unions, consumer
finance companies, investment firms, and mortgage companies. Some of the
financial services providers operating in PEOPLESBANK's service area operate on
a regional scale and possess resources greater than those of PEOPLESBANK.
Supervision and Regulation
The Bancorp is subject to regulation by the Pennsylvania Department of Banking,
the Federal Reserve Board ("FRB") and the Securities and Exchange Commission
("SEC"). Bancorp is restricted to activities that are found by the Federal
Reserve Board to be closely related to banking, and which are expected to
produce benefits for the public that will outweigh any potentially adverse
effects.
Provisions of the Bank Holding Company Act of 1956, as amended, ("BHC Act")
require Bancorp to secure the prior approval of the Federal Reserve Board before
it owns or controls, directly or indirectly, more than 5% of the voting shares
or substantially all of the assets of any institution, including another bank.
Bancorp is required to file an annual report with the FRB and any additional
information required pursuant to the BHC Act. The FRB may also make examinations
of Bancorp and each of its subsidiaries. Subsidiary banks of a bank holding
company are subject to certain restrictions imposed by the BHC Act on any
extensions of credit to the bank holding company or any of its subsidiaries,
investments in the stock or securities thereof, and on the taking of such stock
or securities as collateral for loans to any borrower. A bank holding company
and its subsidiaries are also prevented from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
PEOPLESBANK is subject to regulation by the Pennsylvania Department of Banking,
the FDIC and the FRB. Federal and state laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations, and the establishment of branches. The earnings of the Bank are
also affected by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies.
The United States Supreme Court recently rendered a decision in favor of
nationwide insurance sales by banks. The decision also bars states from blocking
insurance sales by national banks in towns with populations of no more than
5,000. Subsequent to the Supreme Court's ruling, the Office of the Comptroller
of the Currency has issued draft guidelines for national banks to sell
insurance. This federal guidance, however, will not necessarily ease
4
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state restrictions which currently hinder bank insurance sales. States that have
traditionally been opposed to bank insurance sales could impose licensing
requirements and other restrictions hampering bank insurance activities. Because
the insurance industry is opposed to banks selling and underwriting insurance,
it is difficult to determine to what extent banks will be allowed to engage in
insurance activities and the regulatory costs that will be attached to such
activities.
Congress is currently considering legislative reform centered on repealing the
Glass-Steagall Act which prohibits commercial banks from engaging in the
securities industry. The major initiative proposed by the House Banking
Committee Chairman, James Leach, was recently defeated. The proposal required a
financial services holding company structure which would be permitted to own a
bank and a separately capitalized securities firm. However, banks would be
prohibited from affiliating with insurance companies or nonfinancial firms. The
holding company structure would be regulated by the Federal Reserve Board, and
its subsidiaries would be supervised by the applicable regulator based on their
respective functions. Alternatively, the proposal also permitted a securities
firm to establish an investment bank holding company to own an uninsured
wholesale financial institution and a securities unit. Although Leach's
proposal, as currently drafted, has been cancelled, he has announced plans to
introduce legislation proposing limited regulatory relief.
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 and the Riegle Community Development and Regulatory Improvement Act may
have a significant impact upon the Registrant. The key provisions pertain to
interstate banking and interstate branching as well as a reduction in the
regulatory burden on the banking industry. During July 1995, Pennsylvania
amended the provisions of its Banking Code to authorize full interstate banking
and branching under Pennsylvania law and to facilitate the operations of
interstate banks in Pennsylvania. As a result of legal and industry changes,
management predicts that consolidation will continue as the financial services
industry strives for greater cost efficiencies and market share.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
also has impact on how the Bank conducts its business. FDICIA's risk-based
assessment system is designed to promote safety and soundness in the banking and
thrift industries by making the deposit insurance system fairer to well-run
institutions and by encouraging weaker institutions to improve their financial
condition. Current information regarding FDIC issues and costs is provided in
the 1996 Annual Report to Shareholders, within the Management's Discussion
section under the subheading non-interest expenses. Information about Bancorp's
capital ratios can be found in the 1996 Annual Report, within the Management's
Discussion section under the subheading stockholder's equity (including Table
10). Bancorp's and the Bank's capital ratios exceed current regulatory
requirements for well capitalized banks. "Truth-in-Savings" a separate subtitle
within FDICIA, called the "Bank Enterprize Act of 1991," requires
truth-in-savings on consumer deposit accounts so that consumers can make
meaningful comparisons between the competing claims of banks with regard to
deposit accounts and products. The Bank has been providing information to
5
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depositors concerning the terms of their deposit accounts, and in particular the
annual percentage yield in compliance with this law.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") reformed supervisory, enforcement and penalty provisions relative to
financial service companies.
Periodically, legislation is enacted which has the effect of increasing the cost
of doing business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial institutions. Proposals to
change the laws and regulations governing the operations and taxation of banks,
bank holding companies, and other financial institutions are frequently made in
Congress, and before various bank regulatory agencies. No predictions can be
made as to the likelihood of any major changes or the impact such changes might
have on the assets, earnings or capital of the Bancorp and the Bank.
Other information
At December 31, 1996, the Bank had one hundred and twenty (120) full-time
employees and twenty-one (21) part-time employees.
The required Statistical Information for Item I can be found in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report.
Item 2: Properties
The Bancorp owns in fee and without liens the following properties.
Trust and Investment Services Office
Located at 120 Pine Grove Commons, Pine Grove Road, York, in York Township,
PA. This office is a 1,575 square foot (approximately) unit of a business
condominium complex known as Pine Grove Commons. This space is leased to
its subsidiary, PEOPLESBANK. The lease, as signed on August 17, 1990, is
for a five year term and is renewable every five years thereafter at the
option of the lessee. The lessee pays annual rent of $18,900 during the
said term in monthly installments of $1,575. The fixed rent may be adjusted
annually in reference to the Consumer Price Index as described in the lease
agreement.
Codorus Valley Corporate Center
Currently under construction at 105 Leader Heights Road, York, in York
Township, PA. This 40,000 square foot (approximately) facility will serve
as a corporate headquarters. It is adjacent to the Bank's Data Operations
Center and Leader Heights banking office. Occupancy is expected during the
third quarter of 1997.
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PEOPLESBANK owns the following properties in fee and without liens.
Glen Rock Office: Currently serves as both a corporate headquarters and
banking office. It is located at 1 Manchester Street in the borough of Glen
Rock, PA. A bank-owned parking lot is located nearby on Hanover Street.
Jacobus Office: Located at 1 North Main Street in the borough of
Jacobus, PA.
Jefferson Office: Located at 6 Baltimore Street in the borough of
Jefferson, PA. A bank-owned parking lot is located nearby at 10
Baltimore Street.
York New Salem Office: Located at 320 North Main Street in the
borough of York New Salem, PA.
Leader Heights Office: Serves as both a banking office and data
operations center. It is located at 109 Leader Heights Road in
York Township, PA.
Cape Horn Office: Located at 2587 Cape Horn Road, Red Lion in the
township of Windsor, PA.
East York Office: In February 1997, the Bank purchased an existing branch
office located at 2701 Eastern Boulevard, York in the township of
Springettsbury, PA. Opening of the full service banking office is scheduled
for April 1997.
Human Resources Office: Located at 7 Manchester Street in the
borough of Glen Rock, PA. This office is a frame dwelling located
next to the Glen Rock banking office.
PEOPLESBANK leases the following property.
Stewartstown Office: Located at 2 Ballast Lane in the borough of
Stewartstown, PA. This office is a 1,278 square foot unit of a business
complex known as Village Square at Stewartstown. The lease, as signed on
November 29, 1993 is for a twenty year term. The minimum annual rent for
years 1 thru 4 is $15,656, payable in monthly installments of $1,305.
Thereafter, the minimum annual rent will increase at four year intervals.
All of the above properties are located in York County, Pennsylvania and are, in
the opinion of management, adequate for the business purposes of the Registrant
and its subsidiaries.
7
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Item 3: 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, and results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for the Corporation's Common Equity and Related
Stockholder Matters
Market and dividend information appearing in the 1996 Annual Report to
Stockholders, under the caption "Stock, Dividend and Broker Information," is
incorporated by reference in response to this item and is included in Exhibit
13.
As of February 27, 1996, the Registrant had approximately one thousand,
twenty-one (1,021) stockholders of record.
Related stockholder information appearing in the 1996 Annual Report to
Stockholders, under the caption "Stockholders' Equity," included in
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations," is incorporated by reference in response to this item
and is included in Exhibit 13.
Item 6: Selected Financial Data
Information appearing in the 1996 Annual Report to Stockholders, under the
caption "Selected Financial Data," is incorporated by reference in response to
this item and is included in Exhibit 13.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The "Management Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" in the 1996 Annual Report to Stockholders is incorporated
by reference in response to this item and is included in Exhibit 13.
8
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Item 8: Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Notes thereto in the 1996
Annual Report to Stockholders, is incorporated by reference in response to this
item and is included in Exhibit 13.
The Registrant does not meet both of the tests under Item 302(a)(5) of
Regulation S-K, and therefore, is not required to provide supplementary
financial data.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Information appearing in the Proxy Statement relating to the Annual Meeting of
Stockholders to be held May 20, 1997 (the "Proxy Statement"), under the caption
"Information as to Nominees, Directors and Executive Officers," is incorporated
by reference in response to this item.
Item 11: Executive Compensation
Information appearing in the Proxy Statement, under the caption "Executive
Compensation," is incorporated by reference in response to this item.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information appearing in the Proxy Statement, under the caption "Section 16(a)
Beneficial Ownership Compliance," is incorporated by reference in response to
this item.
Item 13: Certain Relationships and Related Transactions
Information appearing in the Proxy Statement, under the caption "Certain
Transactions," is incorporated by reference in response to this item.
9
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PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements.
The following consolidated statements of Codorus Valley Bancorp,
Inc. are included by reference in Part II, Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consoldated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in the
respective financial statements or in the notes thereto.
10
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3. Exhibits filed as part of 10-K pursuant to Item 601 of Regulation
S-K.
Exhibit
Number Description of Exhibit
3(i) Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to Current Report on Form 8-K, filed with the
Commission on March 25, 1996.)
3(ii) By-laws (Incorporated by reference to Exhibit 3(ii) to
Current Report on Form 8-K, filed with the Commission on
March 25, 1996.)
4 Rights Agreement Dated as of November 4, 1995 (Incorporated
by reference to Current Report on Form 8-K, filed with the
Commission on December 4, 1995.)
10(a) 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 99 of Registration Statement No. 333-9277 on
Form S-8, filed with the Commission on July 31, 1996.)
10(b) Executive Employment Agreement (Incorporated by reference to
Current Report on Form 8-K, filed with the Commission on
March 25, 1997.)
11 Statement re: Computation of Earnings Per Share
(Incorporated by reference to Exhibit 13 hereof, 1996
Annual Report to Stockholders at Note 1 to the
Consolidated Financial Statements.)
13 Excerpts from the Annual Report to Stockholders for
fiscal year ended December 31, 1996.
21 List of subsidiaries of the Registrant.
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
(B) Reports on Form 8-K.
The Registrant filed no Current Reports on Form 8-K for the quarter
ended December 31, 1996.
11
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 Date: March 25, 1997
-------------------------
Larry J. Miller, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Capacity
/s/ George A. Trout Chairman of the Board of 3/25/97
- ----------------------- Directors and Director
George A. Trout, D.D.S.
/s/ Larry J. Miller President, Chief Executive 3/25/97
- ------------------------ Officer and Director
Larry J. Miller, President
(Principal Executive Officer)
/s/ Barry A. Keller Vice Chairman of the Board of 3/25/97
- ------------------------ Directors and Director
Barry A. Keller
/s/ Dallas S. Smith Secretary and Director 3/25/97
- ------------------------
Dallas S. Smith
/s/ M. Carol Druck Assistant Secretary, 3/25/97
- ------------------------ Assistant Treasurer and Director
M. Carol Druck
/s/ MacGregor S. Jones Assistant Secretary and 3/25/97
- ------------------------ Director
MacGregor S. Jones
/s/ Rodney L. Krebs Treasurer and Director 3/25/97
- ------------------------
Rodney L. Krebs
/s/ Donald H. Warner Vice President and Director 3/25/97
- ------------------------
Donald H. Warner
/s/ D. Reed Anderson, Esq. Director 3/25/97
- --------------------------
D. Reed Anderson, Esq.
/s/ Jann A. Weaver Assistant Treasurer and 3/25/97
- ------------------------ Assistant Secretary
Jann A. Weaver
(Principal Financial and
Principal Accounting Officer)
12
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Page # in
manually signed
Exhibit original
Number Description of Exhibit Form 10-K
<S> <C> <C>
3(i) Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to
Current Report on Form 8-K, filed with the Commission on March 25,
1996.)
3(ii) By-laws (Incorporated by reference to Exhibit 3(ii) to Current Report
on Form 8-K, filed with the Commission on March 25, 1996.)
4 Rights Agreement Dated as of November 4, 1995 (Incorporated by
reference to Current Report on Form 8-K, filed with the Commission on
December 4, 1995.)
10(a) 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 99 of Registration Statement No. 333-9277 on
Form S-8, filed with the Commission on July 31, 1996.)
10(b) Executive Employment Agreement (Incorporated by reference to Current
Report on Form 8-K, filed with the Commission on March 25, 1997.)
11 Statement re: Computation of Earnings Per Share 23
(Incorporated by reference to Exhibit 13 hereof, 1996
Annual Report to Stockholders at Note 1 to the
Consolidated Financial Statements.)
13 Excerpts from the Annual Report to Stockholders for
fiscal year ended December 31, 1996. 14-52
21 List of subsidiaries of the Registrant. 53
23 Consent of Independent Auditors 54
24 Power of Attorney 55
27 Financial Data Schedule 56
</TABLE>
13
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EXHIBIT 13
EXCERPTS FROM:
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Stock, Dividend and Broker Information
- --------------------------------------------------------------------------------
Common stock issued by Codorus Valley Bancorp, Inc. is quoted under the
symbol "CVLY" on the over-the-counter ("OTC") Electronic Bulletin Board, an
automated quotation service, made available through, and governed by, the
National Association of Securities Dealers. The Corporation is in the process of
applying for quotation of its common stock with NASDAQ. At the close of business
on December 31, 1996 there were approximately 1,018 stockholders of record.
Prices presented in the table below are bid prices between broker-dealers
which do not include retail mark-ups or mark-downs or any commission to the
broker-dealer. The published bid prices do not necessarily reflect prices in
actual transactions. Cash dividends paid for the most recent eight quarters are
provided in the table below. Dividends per share are adjusted for stock
dividends.
1996 1995
---- ----
Dividends Dividends
Quarter High Low per share High Low per share
- ------- ---- --- --------- ---- --- ---------
First $29.50 $28.00 $.219 $23.25 $22.00 $.210
Second 29.50 27.50 .162 22.25 21.25 .137
Third 28.75 28.25 .170 24.25 22.25 .143
Fourth 28.75 28.25 .170 28.00 23.50 .143
For further information, we refer you to:
Ryan, Beck & Co. Janney, Montgomery, Scott, Inc.
150 Monument Road, Suite 106 48 E. Market St., P.O. Box 2246
Bala Cynwyd, PA 19004 York, PA 17405-2246
(800)223-8969 (717)845-5611
F. J. Morrissey & Co., Inc. Sandler O'Neil & Partners, L.P.
1700 Market St. Two World Trade Center
Suite 1420 104th Floor
Philadelphia, PA 19103-3913 New York, NY 10048
(800)842-8928 (800)635-6851
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17601
(800)456-9234
<PAGE>
Selected Financial Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5 year
1996 1995 1994 1993 1992 CGR(1)
---- ---- ---- ---- ---- ------
SUMMARY OF OPERATIONS
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total interest income $18,523 $18,346 $16,053 $15,696 $16,705 1.0%
Total interest expense 8,756 8,722 6,940 7,283 8,651 -3.3%
------- ------- ------- ------- -------
Net interest income 9,767 9,624 9,113 8,413 8,054 6.2%
Provision for loan losses 134 228 1,229 441 258 -23.3%
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 9,633 9,396 7,884 7,972 7,796 7.4%
Non-interest income 1,090 912 880 1,348 650 12.0%
Non-interest expense 6,755 6,559 6,322 6,330 5,765 6.5%
------- ------- ------- ------- -------
Income before income taxes 3,968 3,749 2,442 2,990 2,681 10.3%
Provision for income taxes 1,261 1,155 712 713(2) 687 12.4%
------- ------- ------- ------- -------
Net income $ 2,707 $ 2,594 $ 1,730 $ 2,277 $ 1,994 9.4%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
RATIOS
Return on average
stockholders' equity (ROE) 12.4% 13.3% 9.5% 13.5% 13.2%
Return on average assets (ROA) 1.14% 1.14% 0.81% 1.12% 1.02%
Average stockholders' equity
to average assets 9.23% 8.61% 8.51% 8.24% 7.77%
COMMON SHARE DATA(3)
Net income per share $2.59 $2.49 $1.66 $2.18 $1.91
Dividends per share $0.721 $0.633 $0.567 $0.521 $0.434
Book value per share $21.72 $20.12 $17.10 $16.86 $15.20
Dividends $753,700 $659,200 $594,300 $547,800 $456,500
Dividend payout ratio 27.8% 25.4% 34.4% 24.1% 22.9%
Weighted average shares
outstanding 1,045,295 1,041,044 1,045,226 1,045,140 1,045,139
SUMMARY OF FINANCIAL
CONDITION AT YEAR-END
(in thousands)
Total investments(4) $ 56,859 $ 61,679 $ 53,717 $ 55,424 $ 57,247 5.7%
Total loans 166,651 160,008 150,637 140,557 132,453 5.2%
Total assets 237,329 234,747 215,997 211,534 202,174 5.1%
Total deposits 209,460 212,440 196,896 192,725 184,964 4.4%
Total equity(5) 22,706 21,032 17,872 17,616 15,892 9.6%
Trust assets (book value) $ 43,778 $ 36,134 $ 31,276 $ 29,065 $ 23,086 23.4%
Trust income 321 311 291 170 105 18.9%
NON-FINANCIAL DATA
Number of bank offices 7 7 7 6 5
Number of employees
(full-time equivalent) 129 128 121 126 111
</TABLE>
- ------------------------
(1) Compound growth rate (CGR) is the average annual growth over the five year
period which began in 1991.
(2) Amount is comprised of a $883,000 provision for income taxes less a one-time
$170,000 tax benefit caused by the cumulative effect of a change in
accounting principle.
(3) Adjusted for stock dividends.
(4) Investments are reflected at fair value for 1996, 1995 and 1994; and at
amortized cost for prior periods.
(5) Total equity for 1996, 1995 and 1994 includes net unrealized gains or losses
on securities available for sale, net of taxes.
<PAGE>
[Letterhead of Ernst & Young LLP]
Report of Independent Auditors
The Stockholders and Board of Directors
Cororus Valley Bancorp, Inc.
We have audited the consolidated statements of financial condition of Codorus
Valley Bancorp, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audited includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Codorus Valley Bancorp, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Corporation changed its method of accounting for certain investments in debt and
equity securities.
ERNST & YOUNG LLP
January 13, 1997
<PAGE>
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
Codorus Valley Bancorp, Inc.
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
--------- ---------
Assets
Cash and due from banks:
<S> <C> <C>
Interest bearing deposits with banks $ 337 $ 341
Non-interest bearing deposits and cash 7,012 5,356
Federal funds sold 300 3,150
Securities available for sale 56,859 61,679
Loans 166,651 160,008
Less-allowance for loan losses (2,110) (2,286)
--------- ---------
Total net loans 164,541 157,722
Premises and equipment 5,025 3,523
Interest receivable 1,642 1,703
Other assets 1,613 1,273
--------- ---------
Total assets $ 237,329 $ 234,747
--------- ---------
--------- ---------
Liabilities
Deposits:
Non-interest bearing demand $ 19,142 $ 17,369
NOW 22,237 20,862
Insured Money Fund 25,651 25,902
Savings 20,652 21,577
Time CD's less than $100,000 106,283 110,435
Time CD's $100,000 and above 15,495 16,295
--------- ---------
Total deposits 209,460 212,440
Short-term borrowings 4,000 0
Interest payable 796 865
Accrued expenses and other liabilities 367 410
--------- ---------
Total liabilities 214,623 213,715
Stockholders' Equity
Series preferred stock, par value $2.50 per
share; 1,000,000 shares authorized;
0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 1,045,296 shares issued
and outstanding for 1996, and 995,792 for 1995 2,613 2,490
Additional paid-in capital 6,556 5,194
Retained earnings 13,191 12,731
Net unrealized gains on securities available for sale, net of taxes 346 617
--------- ---------
Total stockholders' equity 22,706 21,032
Total liabilities & stockholders' equity $ 237,329 $ 234,747
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Codorus Valley Bancorp, Inc.
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands, except per share data) 1996 1995 1994
-------- -------- --------
Interest Income
<S> <C> <C> <C>
Interest and fees from loans $ 14,447 $ 14,545 $ 12,629
Interest from deposits with banks 21 13 6
Interest from federal funds sold 92 168 96
Interest and dividends from investment securities:
Taxable interest income 3,660 3,278 3,023
Tax-exempt interest income 252 291 254
Dividend income 51 51 45
-------- -------- --------
Total interest income 18,523 18,346 16,053
Interest Expense
Interest on deposits:
NOW 459 504 536
Insured Money Fund 762 800 921
Savings 538 560 606
Time CD's less than $100,000 6,051 6,012 4,404
Time CD's $100,000 and above 859 843 469
-------- -------- --------
Total interest expense on deposits 8,669 8,719 6,936
Interest on federal funds purchased and other short term borrowings 87 3 4
-------- -------- --------
Total interest expense 8,756 8,722 6,940
-------- -------- --------
Net interest income 9,767 9,624 9,113
Provision for Loan Losses 134 228 1,229
-------- -------- --------
Net interest income after provision for loan losses 9,633 9,396 7,884
Non-interest Income
Trust income 321 311 291
Service charges on deposit accounts 410 415 373
Other service charges and fees 250 248 230
Gain on sales of loans 7 0 0
Gain (loss) on sales of securities 102 (62) (14)
-------- -------- --------
Total non-interest income 1,090 912 880
Non-interest Expense
Salaries and benefits 3,669 3,510 3,165
Occupancy of premises 426 428 431
Furniture and equipment 585 588 594
FDIC deposit insurance 2 232 436
Professional and legal 190 185 162
Marketing and advertising 235 206 220
Acquired real estate, net 195 64 145
Other 1,453 1,346 1,169
-------- -------- --------
Total non-interest expense 6,755 6,559 6,322
-------- -------- --------
Income before income taxes 3,968 3,749 2,442
Provision for income taxes 1,261 1,155 712
-------- -------- --------
Net income $ 2,707 $ 2,594 $ 1,730
-------- -------- --------
-------- -------- --------
Net income per common share $ 2.59 $ 2.49 $ 1.66
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Codorus Valley Bancorp, Inc.
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands) 1996 1995 1994
-------- -------- --------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net Income $ 2,707 $ 2,594 $ 1,730
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 431 369 363
Provision for loan losses 134 228 1,229
Provision for losses on assets acquired in foreclosure 129 30 87
Deferred federal income tax expense (benefit) 138 (299) 236
(Gain) loss on sales of securities (102) 62 14
Gain on sales of loans (7) 0 0
Gain on sales of assets acquired in foreclosure (13) (3) (6)
Decrease (increase) in interest receivable 61 (64) (86)
(Increase) decrease in other assets (250) 403 (274)
(Decrease) increase in interest payable (69) 13 (137)
(Decrease) increase in other liabilities (43) 33 173
Other, net (27) 16 88
-------- -------- --------
Net cash provided by operating activities 3,089 3,382 3,417
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 8,481 2,345 2,481
Proceeds from maturities and calls of securities available for sale 18,464 14,392 18,992
Purchase of securities available for sale (22,537) (22,602) (21,325)
Net increase in loans made to customers (15,238) (10,380) (11,727)
Proceeds from loan sales 7,718 626 596
Purchases of premises and equipment (1,933) (591) (455)
Proceeds from sale of assets acquired in foreclosure 500 224 459
-------- -------- --------
Net cash used in investing activities (4,545) (15,986) (10,979)
Cash Flows From Financing Activities:
Net increase (decrease) in demand, NOW,
insured money fund and savings deposits 1,972 (1,686) (1,497)
Net (decrease) increase in time deposits (4,952) 17,230 5,668
Increase in short-term borrowings 4,000 0 0
Dividends paid (754) (659) (594)
Proceeds from issuance of common stock 0 0 4
Cash paid in lieu of fractional shares (8) (6) 0
Payment to repurchase common stock 0 (270) 0
-------- -------- --------
Net cash provided by financing activities 258 14,609 3,581
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,198) 2,005 (3,981)
Cash and cash equivalents at beginning of year 8,847 6,842 10,823
-------- -------- --------
Cash and cash equivalents at end of year $ 7,649 $ 8,847 $ 6,842
-------- -------- --------
-------- -------- --------
Supplemental Disclosures:
Interest payments $ 8,738 $ 8,709 $ 7,073
Income tax payments $ 1,300 $ 1,310 $ 542
See accompanying notes.
</TABLE>
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
Codorus Valley Bancorp, Inc.
<TABLE>
<CAPTION>
Additional Unrealized
Common Paid-in Retained Gains and Treasury Total
(dollars in thousands) Stock Capital Earnings (Losses) Stock Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 2,396 $ 4,424 $ 10,796 $ 17,616
Adjustment to beginning balance for change in accounting
method for net unrealized gain on securities available
for sale, net of $465 income tax 902 902
Net income 1,730 1,730
Cash dividends (594) (594)
Common stock issued under dividend reinvestment plan 4 4
Change in unrealized gains (losses) on securities,
net of $920 income tax benefit (1,786) (1,786)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1994 2,396 4,428 11,932 (884) 17,872
Net income 2,594 2,594
Cash dividends (659) (659)
Acquisition of treasury stock (270) (270)
5% stock dividend - 47,161 shares at fair value
(includes 9,994 shares from treasury stock) 94 766 (1,136) 270 (6)
Change in unrealized gains (losses) on securities,
net of $773 income tax 1,501 1,501
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 2,490 5,194 12,731 617 0 21,032
Net income 2,707 2,707
Cash dividends (754) (754)
5% stock dividend - 49,503 shares at fair value 123 1,362 (1,493) (8)
Change in unrealized gains (losses) on securities,
net of $140 income tax benefit (271) (271)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 $ 2,613 $ 6,556 $ 13,191 $ 346 $ 0 $ 22,706
-------- -------- -------- -------- -------- --------
</TABLE>
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31, 1996
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accounting and reporting policies of Codorus Valley Bancorp, Inc. and
subsidiaries (the "Corporation") conform with generally accepted accounting
principles (GAAP) and prevailing practices of the banking industry.
Principles of Consolidation
The consolidated financial statements include the accounts of Codorus Valley
Bancorp, Inc. and its wholly owned bank subsidiary, PEOPLESBANK, and its wholly
owned nonbank subsidiary, SYC Realty Company, Inc. All significant intercompany
account balances and transactions have been eliminated in consolidation.
Securities Available for Sale
Effective January 1, 1994, the total investment securities portfolio, with a
carrying value of $55,424,000 was classified as available for sale in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This Statement requires that
securities available for sale be recorded at fair value, and any unrealized
gains and losses, net of taxes, be reflected as a separate line item in the
stockholders' equity section of the balance sheet. As a result of the
classification to available for sale, an after-tax gain of $902,000 was carried
as a component of stockholders' equity, representing the unrealized gain in
securities available for sale at adoption. During 1994, the fair value of these
securities declined, resulting in an after-tax unrealized loss of $884,000 at
December 31, 1994. During 1995 and 1996, the Corporation recorded an after-tax
unrealized gain (loss) of $1,501,000 and ($271,000), respectively. The net
after-tax unrealized gain recorded as a component of stockholders' equity since
the adoption of Statement No. 115 was $346,000 as of December 31, 1996.
Realized gains and losses from the sale of securities are computed on the
basis of specific identification of the adjusted cost of each security, and
shown net as a separate line item in the statement of income.
Loans
Interest on loans is credited to income based upon the principal amount
outstanding. Loan fees are generally considered to be adjustments of interest
rate yields and are amortized to interest income over the terms of the related
loans. The accrual of interest income is discontinued, and unpaid interest on a
loan is reversed and charged against current income, when circumstances indicate
that collection is doubtful. Loans are returned to accrual status when
management determines that circumstances have improved to the extent that both
principal and interest are deemed collectible. In those cases where collection
of principal is in doubt, additions are made to the allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management, based on information currently available, to absorb potential losses
in the loan portfolio. Recognized loan losses are charged, and recoveries
credited, to the allowance. The Corporation's loan loss provision, charged to
operating income, is determined by management based on such factors as changes
in local economic conditions, prior loss experience, adequacy of collateral, and
risk characteristics of the loan portfolio.
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 loans be measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. If the measure of the
impaired loan is less than its recorded investment, the Corporation recognizes
an impairment by adjusting a valuation allowance. Statement No. 114 does not
apply to large groups of homogeneous loans such as consumer installment, and
bank credit card loans, which are collectively evaluated for impairment. Smaller
balance commercial loans are also excluded from the application of the
Statement. At December 31, 1996 and 1995, impaired loans consisted solely of
non-accrual, collateral dependent loans.
Loans are charged-off when there is permanent impairment of the related
recorded investment. The cash method of recognizing interest income was used for
impaired loans for all reported periods as is consistent with the Corporation's
non-accrual policy.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation expense is calculated principally on the straight-line method. The
depreciation methods are designed to allocate the cost of the assets over their
estimated useful lives. Estimated useful lives are ten to forty years for
buildings and improvements, and three to ten years for furniture and equipment.
Maintenance and repairs are charged to expense as incurred. The cost of
significant improvements to existing assets is capitalized. When facilities are
retired or otherwise disposed of, the cost is removed from the asset accounts
and any gain or loss is reflected in the statement of income.
Assets Acquired in Foreclosure
Foreclosed assets, included in other assets, are comprised of property
acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure. Foreclosed assets initially are recorded at fair value at the date
of foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the asset is carried at the lower of
(1) cost or (2) fair value minus estimated costs to sell. If the fair value of
the asset minus the estimated costs to sell the asset is less than the cost of
the asset, the deficiency is immediately recognized as a valuation allowance.
If, however, the fair value minus the costs to sell the asset subsequently
increases above the asset's cost, the valuation allowance is reduced, but not
below zero. Costs related to the improvement of acquired real estate assets are
capitalized until the real estate reaches a saleable condition. Revenue and
expenses from operations and changes in the valuation allowance are included in
acquired real estate expense.
Trust Assets and Income
Assets held by the Bank in a fiduciary or agency capacity for its customers
are not included in the consolidated financial statements since such items are
not assets of the Bank. Trust income is reported on a cash basis, which is not
materially different from the accrual basis.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return. Consolidated income tax expense is allocated based on their respective
earnings to total earnings.
The Corporation accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
Statement No. 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities. These differences are then subject to the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Statement No. 109 requires the recognition of future tax benefits, measured
by enacted tax rates, attributable to deductible temporary differences between
the financial statement and income tax basis of assets and liabilities. In order
to realize the deferred tax asset, the Corporation considered a number of
factors, including its recent earnings history and its expectation of future
earnings. Based on these factors the Corporation has concluded that it is more
likely than not the deferred tax asset will be realized. Accordingly, a deferred
tax asset valuation allowance was not established as of December 31, 1996. On a
quarterly basis, the Corporation will assess whether a valuation allowance for
the deferred tax asset account will be required.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Net Income and Dividends Per Common Share
Net income and dividends per common share are computed by dividing net income
and dividends by the weighted average number of shares of common stock
outstanding, adjusted for stock dividends. The weighted average number of shares
of common stock outstanding was 1,045,295 for 1996, 1,041,044 for 1995, and
1,045,226 for 1994.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include: cash
and due from banks, and federal funds sold. Non-cash financing transactions for
the years ended December 31, 1996, 1995 and 1994 consisted of certificates of
deposit which matured and were renewed for new terms. These transactions
amounted to approximately $27,487,000 for 1996, $40,132,000 for 1995 and
$21,470,000 for 1994. Non-cash investing transactions for the years ended
December 31, 1996, 1995 and 1994 consisted of the transfer of loans to assets
acquired in satisfaction of debt. These transfers amounted to approximately
$705,000 for 1996, $291,000 for 1995 and $189,000 for 1994.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures (see Note 17) for financial instruments.
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximates their fair
value at the reporting date.
Investment securities (including mortgage-backed securities): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans receivable: For variable-rate and adjustable-rate loans that reprice
frequently and show no significant change in credit risk, fair values are
based on carrying values. For fixed-rate loans, fair values are estimated
using quoted market prices.
Demand and Savings deposits: The fair value of demand and savings deposits
is the amount payable on demand at the reporting date.
Time deposits: The carrying value of time certificates of deposit (CD's)
less than $100,000 with an original term of six months or less and variable
rate CD's of less than $100,000 is assumed to approximate market value. The
fair value of all other CD's is estimated by discounting the future cash
flows, using rates offered for deposits of similar remaining maturities at
the reporting date.
Short-term borrowings: The carrying amount reported in the balance sheet
approximates their fair value at the reporting date due to the short
duration of these instruments.
Off-balance sheet instruments: The fair value of off-balance sheet
instruments, such as commitments to extend credit and standby letters of
credit, are based on fees currently charged to enter into similar
agreements. Generally, fees charged on standby letters of credit and
selected commitments to extend credit, principally for commercial loans,
outstanding at December 31, 1996 are not considered material.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 2-CURRENT ACCOUNTING DEVELOPMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options, restricted stock, and stock appreciation
rights. The new rule is based on a fair value accounting method which measures
compensation cost at the grant date and recognizes it over the service period,
which is usually the vesting period. The Statement also allows companies to
continue to measure compensation costs using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The new rule requires certain disclosures regardless of which method
companies use to account for stock-based employee compensation arrangements.
Statement No. 123 is effective for fiscal years beginning after December 15,
1995. The Corporation has elected to follow Accounting Principles Board Bulletin
No. 25 and related interpretations in accounting for its employee stock options.
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Statement No. 121 addresses
the accounting for the impairment (i.e., the carrying amount of the assets might
not be recoverable) of long-lived assets, such as property, plant and equipment,
identifiable intangibles including patents and trademarks, and goodwill related
to those assets. It specifies 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. The Statement also
requires that long-lived assets and identifiable intangibles (except for assets
of a discontinued operation) held for disposal be accounted for at the lower of
cost or fair value less cost to sell. Adoption of this Statement did not affect
the assets, earnings or capital of the Corporation.
Effective January 1, 1996, the Corporation also adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights an amendment of FASB Statement No. 65." Statement No. 122 requires that
mortgage banking enterprises recognize a separate asset for mortgage servicing
rights, regardless of how they were acquired. If the mortgage banking enterprise
sells or securitizes mortgage loans and retains the mortgage servicing rights,
the total cost of the mortgage loans is to be allocated to the loan and the
servicing rights based on their relative fair values if it is practical to
estimate those values. The Statement 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.
On June 30, 1996, the FASB issued 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
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 Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS
No. 125," which defers until January 1, 1998, the effective date of paragraphs
9-12 of Statement No. 125 for repurchase agreements, securities lending, dollar
roll and similar transactions and the effective date of 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.
NOTE 3-RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash balances reserved to meet regulatory requirements of the Federal Reserve
Board and balances maintained at other banks for compensating balance
requirements amounted to $1,308,000 at December 31, 1996 and $1,196,000 at
December 31, 1995.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 4-SECURITIES
The amortized cost and estimated market values of investments in debt and equity
securities, classified as available for sale, as of December 31, 1996 and 1995
follows:
Gross Gross
(dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
1996
Debt Securities
U.S. Treasuries $22,076 $ 99 $ (46) $22,129
U.S. Agencies 22,030 281 (48) 22,263
States and political subdivisions 4,225 136 (1) 4,360
Mortgage-backed securities 6,927 75 (11) 6,991
------- ------- ------- -------
Total debt securities 55,258 591 (106) 55,743
Equity Securities 1,075 41 0 1,116
------- ------- ------- -------
Total securities $56,333 $ 632 $ (106) $56,859
------- ------- ------- -------
------- ------- ------- -------
1995
Debt Securities
U.S. Treasuries $22,599 $ 249 $ (64) $22,784
U.S. Agencies 23,078 443 (30) 23,491
States and political subdivisions 5,159 169 (4) 5,324
Mortgage-backed securities 9,071 152 (9) 9,214
------- ------- ------- -------
Total debt securities 59,907 1,013 (107) 60,813
Equity Securities 838 28 0 866
------- ------- ------- -------
Total securities $60,745 $ 1,041 $ (107) $61,679
------- ------- ------- -------
------- ------- ------- -------
The amortized cost and estimated fair value of debt securities as of December
31, 1996, by contractual maturity, are shown below. Mortgage-backed securities
are included in the maturity categories based on average expected life. Actual
maturities may differ from contractual maturities if put/call options on
selected debt issues are exercised in the future.
December 31, 1996
-----------------
Amortized Fair
(dollars in thousands) Cost Value
--------- -------
Due in one year or less $16,806 $16,794
Due after one year through five years 34,239 34,479
Due after five years through ten years 4,213 4,470
Due after ten years 0 0
------- -------
Total debt securities $55,258 $55,743
------- -------
------- -------
Securities with an amortized cost of $18,624,000 on December 31, 1996 and
$16,284,000 on December 31, 1995 were pledged to secure public deposits and for
other purposes.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 5-LOANS
The composition of the loan portfolio at December 31, is as follows:
(dollars in thousands) 1996 1995
--------- ---------
Commercial, industrial and agricultural $ 91,744 $ 81,119
Real estate-- construction and land development 15,449 19,817
--------- ---------
Total commercial related loans 107,193 100,936
Real estate-- residential mortgages 35,444 36,286
Installment 24,014 22,786
--------- ---------
Total consumer related loans 59,458 59,072
--------- ---------
Total loans $166,651 $160,008
--------- ---------
--------- ---------
Concentrations of credit risk arise when a number of customers are engaged
in similar business activities in the same geographic region, or have similar
economic features that could cause their ability to meet contractual obligations
to be similarly affected by changes in economic conditions. Most of the
Corporation's business is with customers in southern York County, Pennsylvania.
Although this may pose a concentration risk geographically, it is believed the
diverse local economy and detailed knowledge about the customer base minimizes
this risk. At year end 1996, approximately $25.2 million or 15% of total loans
were concentrated in the commercial facility leasing industry, and approximately
$15.4 million or 9% of total loans were concentrated in the real estate
development industry. Loans to borrowers within these industries are usually
collateralized by real estate.
The aggregate amount of loans to directors, executive officers, principal
shareholders and any associates of such persons was $3,197,000 and $3,351,000
for the years ended 1996 and 1995, respectively. During 1996, total new loan
additions amounted to $1,070,000 and total payments collected amounted to
$1,224,000. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collection. As of year end 1996, all loans to this group were
current and performing in accordance with original contractual terms.
The Corporation originates and classifies loans as long term investments;
accordingly, the cost method of accounting is used. Periodically, a portion of
fixed rate residential mortgage loans are sold, without recourse, as a means of
managing interest rate risk. A determination is made as to whether any loans are
held-for-sale at reporting periods. Generally, the Corporation retains servicing
rights, which currently are immaterial, on the loans it sells. The volume of
loans serviced by the Corporation for others was $15,721,000 at December 31,
1996; $10,850,000 at December 31, 1995 and $12,444,000 at December 31, 1994.
NOTE 6-IMPAIRED AND PAST DUE LOANS
Impaired and past due loans as of December 31, were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Impaired loans $2,063 $3,583 $1,766
Loans past due 90 days or more and still accruing interest 524 1,755 522
Amount of impaired loans that have a related allowance $2,063 $3,583 $1,766
Amount of impaired loans with no related allowance 0 0 0
Allowance for impaired loans 371 485 299
Average investment in impaired loans $3,259 $2,730 $ 983
Interest income recognized on impaired loans (all cash-basis method) 18 120 23
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7-ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the three years ended
December 31, were as follows:
(dollars in thousands) 1996 1995 1994
------ ------ ------
Balance-- beginning of year $2,286 $2,249 $2,000
Provision charged to operating expense 134 228 1,229
Loans charged off (387) (342) (1,279)
Recoveries 77 151 299
------ ------ ------
Balance-- end of year $2,110 $2,286 $2,249
------ ------ ------
------ ------ ------
NOTE 8-ASSETS ACQUIRED IN FORECLOSURE
Foreclosed assets, net of reserve, amounted to $780,000, $695,000, and $670,000
at December 31, 1996, 1995 and 1994, respectively. The net expenses associated
with these assets were approximately $195,000 for 1996; $64,000 for 1995; and
$145,000 for 1994.
Changes in the allowance for assets acquired in foreclosure, for each of the
three years ended December 31, were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Balance-- beginning of year $ 23 $ 10 $ 0
Provision charged to operating expense 129 30 87
Write-downs to fair value and losses incurred on sales (44) (27) (77)
Recoveries 0 10 0
----- ----- -----
Balance-- end of year $ 108 $ 23 $ 10
----- ----- -----
----- ----- -----
</TABLE>
NOTE 9-PREMISES AND EQUIPMENT
The following is a summary of the premises and equipment accounts at
December 31,
(dollars in thousands) 1996 1995
------- ------
Land $ 724 $ 715
Buildings and improvements 4,216 3,341
Equipment 3,500 2,473
------- ------
8,440 6,529
Less-accumulated depreciation (3,415) (3,006)
------- ------
Net premises and equipment $5,025 $3,523
------- ------
------- ------
At December 31, 1996, the Corporation was committed to complete the Codorus
Valley Corporate Center Project and the East York Banking Office Project. The
estimated remaining capital expenditures, under contract and planned, for these
projects was approximately $4,147,000 and $783,000, respectively.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 10-EMPLOYEE BENEFITS PLANS
Defined Benefit Plan:
The Corporation has a noncontributory defined benefit plan covering
substantially all of its employees. Benefits under the plan are based on years
of service, age at retirement and the employees' average annual compensation
over the most recent ten years. The Corporation's funding policy is to annually
contribute amounts not to exceed the maximum amount deductible for federal
income tax purposes, to an irrevocable trust. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated financial statements at December 31,
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,018 in 1996 and $959 in 1995 $1,109 $ 1,018
------ -------
------ -------
Projected benefit obligation for service rendered to date (1,852) (1,660)
Plan assets at fair value 2,395 2,165
------ -------
Plan assets in excess of projected benefit obligation 543 505
Prior service cost 3 3
Unrecognized net gain from past experience different
from that assumed (380) (265)
Unrecognized net transition asset (219) (236)
------ -------
(Accrued) prepaid pension cost included in other (liabilities) assets $ (53) $ 7
------ -------
------ -------
</TABLE>
Net periodic pension cost for years ended December 31, included the following
components:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Service cost benefits earned during the period $ 131 $ 86 $ 111
Interest cost on projected benefit obligation 120 97 96
Actual return on plan assets (291) (463) 63
Net amortization and deferral 100 279 (237)
------ ----- -----
Net periodic pension cost (income) $ 60 $ (1) $ 33
------ ----- -----
------ ----- -----
</TABLE>
In determining the projected benefit obligation, the weighted average assumed
discount rate used was 7.25 percent at December 31, 1996 and 7 percent at
December 31, 1995, while the rate of increase in future salary levels was 5
percent at December 31, 1996 and 1995. The expected long-term rate of return on
assets, used in determining net periodic pension cost, was 9 percent for 1996,
1995 and 1994.
Plan assets consist primarily of investments in the Lexicon Funds managed by
First Union National Bank. During 1996, plan assets were equally divided between
a capital appreciation equity fund and a fixed income fund.
On January 20, 1997, the Board of Directors announced that all plan benefit
accruals will be suspended as of February 28, 1997, and that the plan will be
terminated effective April 30, 1997. This action is being taken because it was
determined that the costs associated with the plan exceed the eventual benefit
to employees, and that there are more beneficial plan alternatives available.
Upon plan termination excess assets will be distributed to employees in the form
of cash or deposited to another retirement plan. Retirees will receive an
irrevocable annuity. The plan administrator believes that assets of the plan
will be adequate to fund all benefit liabilities. Management currently believes
that the impact of the pension curtailment and subsequent termination will not
have a material impact on the Corporation during 1997.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 10-EMPLOYEE BENEFIT PLANS (CONTINUED)
Defined Contribution Plan:
The Corporation maintains an employee 401(k) savings and investment plan,
covering substantially all employees. Under the plan, employees can contribute a
percentage of their gross salary. The Corporation matches a percentage of the
employee contributions. In 1996 and 1995 the Corporation matched 50% of the
first 6% of the employee's contribution. The Corporation's expense for the
401(k) deferred contribution plan was $44,000 for 1996, $44,000 for 1995, and
$42,000 for 1994.
NOTE 11-SHORT-TERM BORROWINGS
The schedule below provides a three year summary of short-term borrowings
comprised of federal funds purchased and other borrowings. Federal funds
purchased from correspondent banks usually mature in one business day. Other
short-term borrowings consist of credit available through Federal Home Loan Bank
of Pittsburgh ("FHLBP"). At December 31, 1996, total credit available from the
FHLBP, for both short and long term credit needs, was approximately $64 million,
which is based on, and collateralized by, the Bank's investment securities
portfolio. Interest is calculated daily based on the federal funds rate or the
open repo market depending on the borrowing program. At December 31, 1996, total
unused credit with the FHLBP was approximately $60 million.
A summary of aggregate short-term borrowings is as follows for the three years
ended December 31,
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Amount outstanding at end of year $4,000 $0 $0
Weighted average interest rate at end of year 6.75% 0.00% 0.00%
Maximum amount outstanding at any month-end $5,500 $500 $900
Daily average amount outstanding $1,540 $65 $85
Approximate weighted average interest rate for the year 5.61% 5.71% 4.76%
</TABLE>
NOTE 12-RESTRICTIONS OF PAYMENT OF DIVIDENDS
Payment of dividends to the Corporation by the Bank is subject to
restrictions set forth in the Pennsylvania Banking Code of 1965, as amended.
Accordingly, the Bank's Additional Paid-In Capital (Surplus) account balance of
$4,424,000, was restricted as of December 31, 1996.
NOTE 13-STOCKHOLDERS' EQUITY
The Corporation declared a five percent stock dividend in April 1996 which
was paid on June 13, 1996. The stock dividend resulted in the issuance of 49,503
common shares. In January of 1995, the Corporation acquired 10,000 shares of its
common stock which was subsequently reissued as part of a five percent stock
dividend declared in April 1995. The five percent stock dividend declared in
April 1995 was paid on June 8, 1995 and resulted in the issuance of 47,161
common shares. All per share amounts were retroactively adjusted for stock
dividends.
The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan
("Plan"). Shareholders of common stock may participate in the Plan, which
provides that additional shares of common stock may be purchased with reinvested
dividends at prevailing market prices. To the extent that shares are not
available in the open market, the Corporation has reserved 55,125 shares of
common stock to be issued under the Plan. The number of shares available for
issuance under the Plan are adjusted for stock dividends and stock splits. Open
market purchases are usually made by an independent purchasing agent retained to
act as agent for Plan participants, and the purchase price to participants will
be the actual price paid, excluding brokerage commissions and other expenses
which will be paid by the Corporation. The Plan permits participants to make
additional voluntary cash payments toward the purchase of shares of the
Corporation's common stock.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 13-STOCKHOLDERS' EQUITY (CONTINUED)
A 1996 Stock Incentive Plan, administered by an independent committee of the
Corporation's Board of Directors, was approved by the shareholders at the annual
meeting held on May 21, 1996. Under the plan, 50,000 shares of common stock are
reserved for possible issuance, subject to future adjustment in the event of
specified changes in the Corporation's capital structure. In accordance with the
terms of the plan, the option exercise price for Qualified Options cannot be
less than the fair market value of the stock on the date granted. For
Non-Qualified Options, the option exercise price shall be determined by the
Committee and cannot be less than the par value of the stock on the date
granted. Options granted cannot be exercised before six months and expire in ten
years. As of December 31, 1996, 6,000 qualified stock options were granted, as
depicted in the schedule below. None of the stock options were exercisable at
year end 1996. The effect of applying Statement No. 123's fair value method to
the Corporation's stock-based awards results in proforma net income and earnings
per share that are not materially different from amounts reported.
Shares Option Price
Under Option Range per share
------------ ---------------
Balance, May 21, 1996 0 0
Granted 6,000 $28.50 - $29.125
Exercised 0 0
------------ ---------------
Balance, December 31, 1996 6,000 $28.50 - $29.125
Stockholders' equity, or capital, is evaluated in relation to total assets
and the risk associated with those assets. There are currently three federal
regulatory definitions of capital adequacy that take the form of minimum ratios.
As of December 31, 1996, the Corporation is in compliance with all capital
adequacy requirements. The following table discloses capital adequacy
requirements and the Corporation's corresponding ratios as of December 31, 1996
and 1995.
(dollars in thousands) 1996 1995
------- -------
Tier I risk-based capital $22,354 $20,415
Tier II risk-based capital 2,053 1,911
------- -------
Total risk-based capital $24,407 $22,326
------- -------
------- -------
Ratios:
Tier I risk-based capital 13.61% 13.35%
Federal minimum required 4.00 4.00
Total risk-based capital ratio 14.86% 14.60%
Federal minimum required 8.00 8.00
Leverage ratio 9.45% 8.98%
Federal minimum required 4.00 4.00
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 14-INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities as of December 31, 1996
and December 31, 1995 are as follows:
(dollars in thousands) 1996 1995
---- ----
Deferred tax assets
Loan loss $559 $618
Deferred loan fees 105 210
---- ----
Total deferred tax assets 664 828
---- ----
Deferred tax liabilities
Depreciation 188 182
Net unrealized losses on loans 38 19
Net unrealized gains on securities
available for sale 178 318
Other 39 88
---- ----
Total deferred tax liabilities 443 607
---- ----
Net deferred tax assets $221 $221
---- ----
---- ----
Analysis of federal income taxes reflected in the income statements is as
follows:
(dollars in thousands) 1996 1995 1994
------ ------ ----
Current tax provision $1,123 $1,454 $476
Deferred tax provision 138 (299) 236
------ ------ ----
Total tax provision $1,261 $1,155 $712
------ ------ ----
------ ------ ----
The reasons for the difference between the provision for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before income taxes are as follows:
(dollars in thousands) 1996 1995 1994
------ ------ ------
Income before income taxes $3,968 $3,749 $2,442
------ ------ ------
------ ------ ------
Computed tax at 34% $1,349 $1,275 $ 830
Increase (reduction) in taxes resulting from:
Tax exempt interest income (106) (141) (132)
Interest expense disallowance 13 18 14
Other -- net 5 3 0
------ ------ ------
Provision for income taxes $1,261 $1,155 $ 712
------ ------ ------
------ ------ ------
The provision for income taxes includes $35,000, ($21,000), and ($5,000) in
1996, 1995, and 1994 of applicable income tax expense (benefit) related to
investment security gains (losses) of $102,000, ($62,000), and ($14,000),
respectively.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 15-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business the Corporation's banking subsidiary is a
party to various financial transactions that are not funded as of the balance
sheet date. Off-balance sheet financial instruments, which enable bank customers
to meet their financing needs, are comprised mainly of commitments to extend
credit and letters of credit.
To varying degrees, these instruments contain elements of credit and market
risk similar to those on-balance sheet financial instruments. To manage these
risks the Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Normally,
off-balance sheet instruments have fixed expiration dates or termination
clauses, at specific rates and for specific purposes. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Off-balance sheet instruments do not represent unusual risks for the Corporation
and management does not anticipate any significant losses as a result of these
transactions. As of December 31, 1996, outstanding commitments to extend credit
were comprised of approximately $14,202,000 in variable rate instruments, and
$10,626,000 of fixed rate instruments with rates varying from 7.00% to 10.50%.
Standby letters of credit were comprised of approximately $2,501,000 in variable
rate instruments, and $876,000 of fixed rate instruments with rates ranging from
7.75% to 9.00%.
The following is a summary of significant commitments:
December 31,
(dollars in thousands) 1996 1995
------- -------
Commitments to extend credit $24,827 $28,152
Standby letters of credit 3,337 1,608
NOTE 16-CONTINGENT LIABILITIES
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 will not have a
material impact on the Corporation's liquidity, capital resources, and results
of operations.
NOTE 17-FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures About Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized on the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
An analysis of financial instruments is as follows:
December 31, 1996 December 31, 1995
--------------------- --------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value Amount Value
--------- -------- --------- ---------
Financial assets:
Cash and due from banks $ 7,349 $ 7,349 $ 5,697 $ 5,697
Federal funds sold 300 300 3,150 3,150
Securities 56,859 56,859 61,679 61,679
Loans 166,651 163,456 160,008 160,039
Less: allowance for loan losses (2,110) (2,110) (2,286) (2,286)
Interest receivable 1,642 1,642 1,703 1,703
-------- -------- -------- --------
Total financial assets $230,691 $227,496 $229,951 $229,982
-------- -------- -------- --------
-------- -------- -------- --------
Financial liabilities:
Demand and savings deposits $ 87,682 $ 87,682 $ 85,710 $ 85,710
Time deposits 121,778 122,328 126,730 127,836
Short-term borrowings 4,000 4,000 0 0
Interest payable 796 796 865 865
-------- -------- -------- --------
Total financial liabilities $214,256 $214,806 $213,305 $214,411
-------- -------- -------- --------
-------- -------- -------- --------
The methods and assumptions used to estimate fair value can be found in the
"Fair Value of Financial Instruments" section of Note 1 to the Financial
Statements.
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 18-CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
Codorus Valley Bancorp, Inc.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1996 1995
------- -------
Assets
Cash and due from banks $ 127 $ 130
Investment in subsidiaries:
Peoples Bank of Glen Rock 21,037 20,274
SYC Realty Company 33 33
Premises and equipment 1,410 513
Other assets 108 84
------- -------
Total assets $22,715 $21,034
------- -------
------- -------
Liabilities -- Miscellaneous $ 9 $ 2
Stockholders' Equity
Series preferred stock 0 0
Common stock 2,613 2,490
Additional paid-in capital 6,556 5,194
Retained earnings 13,191 12,731
Net unrealized gains on securities available
for sale, net of taxes 346 617
------- -------
Total stockholders' equity 22,706 21,032
Total liabilities & stockholders' equity $22,715 $21,034
------- -------
------- -------
Codorus Valley Bancorp, Inc.
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Years ended December 31,
(dollars in thousands) 1996 1995 1994
------ ------ ------
Income
Dividends from Peoples Bank of Glen Rock $1,746 $1,431 $ 594
Miscellaneous income 28 32 22
------ ------ ------
Total income 1,774 1,463 616
Expenses -- Other operating expenses 136 84 67
------ ------ ------
Income before applicable income tax
benefit and undistributed earnings of
subsidiaries 1,638 1,379 549
Applicable income tax benefit 36 17 15
------ ------ ------
Income before undistributed earnings of
subsidiaries 1,674 1,396 564
Undistributed earnings of subsidiaries:
Peoples Bank of Glen Rock 1,033 1,198 1,166
SYC Realty Company 0 0 0
------ ------ ------
Net income $2,707 $2,594 $1,730
------ ------ ------
------ ------ ------
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 18-CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY (CONTINUED)
Codorus Valley Bancorp, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
(dollars in thousands) 1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $2,707 $2,594 $1,730
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 9 9 9
Undistributed earnings of subsidiaries (1,033) (1,198) (1,166)
Other, net (13) (50) (10)
------ ------ ------
Net cash provided by operating activities 1,670 1,355 563
Cash Flows From Investing Activities:
Purchase of available for sale securities (5) (1) 0
Payments for investment in subsidiary 0 (33) 0
Purchases of premises and equipment (906) (344) 0
------ ------ ------
Net cash used for investing activities (911) (378) 0
Cash Flows Used For Financing Activities:
Dividends paid (754) (659) (594)
Cash in lieu of fractional shares (8) (6) 0
Payment to repurchase common stock 0 (270) 0
Proceeds from issuance of common stock 0 0 4
------ ------ ------
Net cash used for financing activities (762) (935) (590)
------ ------ ------
Net (decrease) increase in cash and cash equivalents (3) 42 (27)
Cash and cash equivalents at beginning of year 130 88 115
------ ------ ------
Cash and cash equivalents at end of year $ 127 $ 130 $ 88
------ ------ ------
------ ------ ------
</TABLE>
<PAGE>
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
Bank of Glen Rock. The Corporation's consolidated financial condition and
results of operations consist almost entirely of the Bank's financial condition
and results of operations. Current performance does not guarantee, assure, or
may not be indicative of similar performance in the future.
In addition to historical information, this Annual Report to Shareholders
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.
OVERVIEW
- --------------------------------------------------------------------------------
The national economy continued to expand in 1996 for the sixth consecutive
year, one of the longest expansions on record. In 1996, the stock market was
propelled to record heights by the same factors as in 1995: low inflation, low
interest rates, strong corporate profits and a continuous flow of money into
stock market mutual funds. While most economic news was positive, national
concern increased over a rising level of consumer debt.
Market interest rates, based on the U.S. treasury yield curve, fluctuated
throughout 1996 in response to published economic statistics. Both ends of the
yield curve moved in tandem and ended the year higher than where they began. In
the fourth quarter of 1996 rates began to decline moderately in response to
favorable inflation reports. The 30 year treasury bond was less than 7%
throughout most of the year and the NY Prime Rate was 8.25% since February 1996.
Comparatively, market interest rates peaked in January 1995 and began a steady
descent throughout the remainder of that year. This was in sharp contrast to the
rapid rise in rates which characterized 1994.
Based on information provided by the FDIC for the first three quarters of
1996, the commercial banking industry appears to be headed toward achieving
record profits for the fifth consecutive year. The growth in commercial bank
earnings is attributable to several factors, such as: greater loan volumes,
lower FDIC deposit insurance costs, higher noninterest income, and improved
asset quality, with the notable exception of credit card loans. It is
anticipated that improved earnings and asset quality will raise the level of
industry capital to a record high for 1996. Mergers and acquisitions within the
industry continue to be a primary strategy for many institutions to improve
profitability and increase market share.
In 1996, the Board of Directors began implementing a series of initiatives,
in accordance with the Corporation's long-range Strategic Plan, designed to
position the Corporation for the twenty-first century. Construction is well
underway on the new corporate headquarters, to be known as Codorus Valley
Corporate Center. Occupancy is scheduled in the third quarter of 1997. The
Corporation has applied for quotation of its common stock with the NASDAQ
national market system in an effort to improve liquidity and stockholder value.
During 1996, PEOPLESBANK installed state-of-the-art computer systems, both in
the Bank and for the Trust and Investment Services Division, to provide the
capacity and flexibility needed to better support present and future clients.
Recently, the Bank announced the acquisition of its eighth location, an existing
banking office located in East York, PA. Finally, to reflect the diverse
communities served and to support continued expansion, the Bank recently changed
its name from Peoples Bank of Glen Rock to PEOPLESBANK, A Codorus Valley
Company. The many strategic initiatives that began in 1996 reflect a temporary,
inward focus on enhancing the corporate infrastructure. This is deemed necessary
to improve the organization's ability to compete and create value for its
clients. The reader should be mindful of the aforementioned strategic
initiatives, and future strategies, relative to their impact on the financial
results of the Corporation for 1996 and beyond.
The Corporation earned $2,707,000 or $2.59 per share for 1996, compared to
$2,594,000 or $2.49 per share for 1995, and $1,730,000 or $1.66 per share for
1994. Earnings per share amounts were retroactively adjusted for stock
dividends. The $113,000 or 4.4% increase in net income for 1996 vs. 1995 was due
primarily to a larger volume of average earning assets, a reduction in FDIC
deposit insurance expense, and gains from the sale of investment securities. The
$864,000 or 50% increase in net income for 1995 vs. 1994 was due to a smaller
loan loss provision, improved yields on a larger volume of earning assets, and a
reduction in FDIC deposit insurance expense. The higher than normal loan loss
provision in 1994 reflected $1.1 million of loan charge-offs directly
attributable to a former Bank officer. The former officer was recently convicted
of fraud and sentenced to prison by federal authorities.
Annual cash dividends per share were $.721, $.633 and $.567 for 1996, 1995
and 1994, respectively. Additionally, a 5% stock dividend was paid in 1996 and
1995. Book value per common share was $21.72, $20.12 and $17.10 for years ended
1996, 1995 and 1994, respectively. Per share amounts were retroactively adjusted
for stock dividends.
Net income as a percentage of average stockholders' equity, or return on
equity (ROE), was 12.4% for 1996, compared to 13.3% for 1995, and 9.5% for 1994.
Net income as a percentage of total
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
average assets, or return on assets (ROA), was 1.14% for 1996 and 1995, and
0.81% for 1994. Reductions in ROE and ROA for 1994 reflected the impact of an
unusually large loan loss in the second quarter of that year.
At December 31, 1996, nonperforming assets as a percentage of total loans and
net assets acquired in foreclosure was approximately 1.70%, compared to 2.66%
and 1.61% for years ended 1995 and 1994, respectively. Information regarding
nonperforming assets is provided in the Credit Risk and Loan Quality Section of
this Report, including Table 7.
Throughout 1996, a capital level well above regulatory requirements was
maintained. Currently there are three federal regulatory definitions of capital
that take the form of minimum ratios. Table 10 depicts that the Corporation
exceeds all current federal minimum regulatory standards.
The allowance (reserve) for possible loan losses as a percentage of total
loans was 1.27% at December 31, 1996, compared to 1.43% at December 31, 1995,
and 1.49% at December 31, 1994. Based on a recent evaluation of potential loan
losses and the current loan portfolio, management believes that the allowance is
adequate to support any reasonably foreseeable level of losses that may arise.
In the period ahead, minimal inflation and declining federal government
budget deficits seem to indicate further declines in U.S. interest rates. This
presumption has positive lending, but negative funding implications for the
financial services industry. In addition to locating cost effective funding
sources, the industry will be challenged by how to satisfy changing customer
preferences and lifestyles through advances in communication and computer
technologies. To successfully meet these challenges, the collective focus of the
Board of Directors and management will continue to be on customer needs and
preferences, service quality and convenience, asset quality, and capital
adequacy. We believe this focus will help to increase the long term value of the
Corporation.
A more detailed analysis of the factors and trends affecting Corporate
earnings follows.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income is the Corporation's principal source of revenue,
representing the difference between interest income earned on loans and
investment securities, and interest expense incurred on deposits. The change in
net interest income from year to year is caused by changes in interest rates,
changes in volume, and changes in the composition or mix of interest sensitive
assets and liabilities.
For analytical purposes, Table 1-Net Interest Income, Table 2-Rate/Volume
Analysis of Changes in Net Interest Income, and Table 3-Average Balances and
Interest Rates, are all presented on a taxable equivalent basis and are used in
the analysis of net interest income. Income from tax-exempt assets, primarily
loans to or securities issued by state and local governments, is increased by an
amount equivalent to the federal income taxes which would have been incurred if
the income was taxable at the statutory rate of 34%. Such an adjustment
facilitates comparison between taxable and tax exempt assets.
Net interest income increased $90,000 or 0.9%, on a taxable equivalent basis,
in 1996 vs. 1995 due primarily to a larger volume of average earning assets,
principally investment securities. Comparatively, net interest income increased
$519,000 or 5.6%, on a taxable equivalent basis, in 1995 vs. 1994 due primarily
to improved yields on a larger average volume of earning assets, principally
loans.
The interest rate spread was 3.91%, 4.02%, and 4.13% for the years ended
1996, 1995, and 1994, respectively. The net yield on average earning assets,
e.g., net interest margin, was 4.44%, 4.54%,
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Table 1-Net Interest Income (taxable equivalent basis)
<TABLE>
<CAPTION>
5-yr
December 31, 1996 1995 1994 1993 1992 CGR
-------- -------- -------- -------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total interest income $ 18,523 $ 18,346 $ 16,053 $ 15,696 $ 16,705 1.0%
Tax equivalent adjustment 144 197 189 233 285 n/a
-------- -------- -------- -------- -------- ----
Adjusted total interest income 18,667 18,543 16,242 15,929 16,990 0.8%
Total interest expense 8,756 8,722 6,940 7,283 8,651 -3.3%
-------- -------- -------- -------- -------- ----
Net interest income (taxable equivalent basis) $ 9,911 $ 9,821 $ 9,302 $ 8,646 $ 8,339 5.6%
-------- -------- -------- -------- -------- ----
-------- -------- -------- -------- -------- ----
Average earning assets $223,203 $216,429 $203,399 $193,972 $184,319 5.3%
Average interest bearing liabilities 196,860 191,701 179,756 173,727 167,308 4.5%
Yield on earning assets 8.36% 8.57% 7.99% 8.21% 9.22%
Rate on interest bearing liabilities 4.45% 4.55% 3.86% 4.19% 5.17%
----- ----- ----- ----- -----
Interest rate spread 3.91% 4.02% 4.13% 4.02% 4.05%
Net yield on average earning assets 4.44% 4.54% 4.57% 4.46% 4.52%
</TABLE>
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Table 2-Rate/Volume Analysis of Changes in Net Interest Income
(taxable equivalent basis)
<TABLE>
<CAPTION>
1996 vs. 1995
Year ended -----------------------------
December 31, Increase Change due to
1996 1995 (Decrease) Volume Rates
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest Income
Interest bearing deposits with banks $ 21 $ 13 $ 8 $ 6 $ 2
Federal funds sold 92 168 (76) (69) (7)
Securities, taxable 3,711 3,329 382 450 (68)
Securities, tax-exempt 382 441 (59) (52) (7)
Loans, taxable (1) 14,421 14,453 (32) 215 (247)
Loans, tax-exempt 40 139 (99) (102) 3
------- ------- ------- ------- -------
Total interest income 18,667 18,543 124 448 (324)
Interest Expense
Deposits:
Interest bearing demand 1,221 1,304 (83) 32 (115)
Savings 538 560 (22) 3 (25)
Time deposits under $100,000 6,051 6,012 39 74 (35)
Time deposits $100,000 and above 859 843 16 62 (46)
Federal funds purchased and other short
term borrowings 87 3 84 68 16
------- ------- ------- ------- -------
Total interest expense 8,756 8,722 34 239 (205)
Net interest income $ 9,911 $ 9,821 $ 90 $ 209 $ (119)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
1995 vs. 1994
Year ended -----------------------------
December 31, Increase Change due to
1995 1994 (Decrease) Volume Rates
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest Income
Interest bearing deposits
with banks $ 13 $ 6 $ 7 $ 3 $ 4
Federal funds sold 168 96 72 19 53
Securities, taxable 3,329 3,068 261 116 145
Securities, tax-exempt 441 385 56 57 (1)
Loans, taxable (1) 14,453 12,516 1,937 900 1,037
Loans, tax-exempt 139 171 (32) (41) 9
------- ------- ------- ------- -------
Total interest income 18,543 16,242 2,301 1,054 1,247
Interest Expense
Deposits:
Interest bearing demand 1,304 1,457 (153) (148) (5)
Savings 560 606 (46) (37) (9)
Time deposits under $100,000 6,012 4,404 1,608 704 904
Time deposits $100,000 and above 843 469 374 160 214
Federal funds purchased and other
short term borrowings 3 4 (1) (1) 0
------- ------- ------- ------- -------
Total interest expense 8,722 6,940 1,782 678 1,104
Net interest income $ 9,821 $ 9,302 $ 519 $ 376 $ 143
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(1) Includes loan fees of $307,000 in 1996, $324,000 in 1995 and $412,000 in
1994.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Table 3-Average Balances and Interest Rates (taxable equivalent basis)
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ---------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with banks $ 346 $ 21 6.07% $ 236 $ 13 5.51% $158 $ 6 3.80%
Federal funds sold 1,675 92 5.49 2,856 168 5.88 2,392 96 4.01
Investment securities:
Taxable 60,632 3,711 6.12 53,406 3,329 6.23 51,454 3,068 5.96
Tax-exempt 4,689 382 8.15 5,322 441 8.29 4,634 385 8.31
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total investment securities 65,321 4,093 6.27 58,728 3,770 6.42 56,088 3,453 6.16
Loans:
Taxable (1) 155,492 14,421 9.27 153,218 14,453 9.43 142,938 12,516 8.76
Tax-exempt 369 40 10.84 1,391 139 9.99 1,823 171 9.38
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total loans 155,861 14,461 9.28 154,609 14,592 9.44 144,761 12,687 8.76
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total earning assets 223,203 18,667 8.36 216,429 18,543 8.57 203,399 16,242 7.99
Other assets (2) 13,258 10,838 9,704
Total assets $236,461 $227,267 $213,103
-------- ------- --------
-------- ------- --------
Liabilities and Stockholders' Equity
Interest bearing deposits:
Interest bearing demand $48,005 1,221 2.54 $46,850 1,304 2.78 $ 52,155 1,457 2.79
Savings 21,854 538 2.46 21,742 560 2.58 23,169 606 2.62
Time deposits under $100,000 109,438 6,051 5.53 108,116 6,012 5.56 93,222 4,404 4.72
Time deposits $100,000 and above 16,023 859 5.36 14,928 843 5.65 11,125 469 4.22
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total interest bearing deposits 195,320 8,669 4.44 191,636 8,719 4.55 179,671 6,936 3.86
Federal funds purchased and other
short term borrowings 1,540 87 5.65 65 3 4.62 85 4 4.71
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total interest bearing liabilities 196,860 8,756 4.45 191,701 8,722 4.55 179,756 6,940 3.86
Non-interest bearing deposits 16,504 14,871 14,162
Other liabilities 1,276 1,126 1,050
Stockholders' equity 21,821 19,569 18,135
Total liabilities and
stockholders' equity $236,461 $227,267 $213,103
-------- -------- --------
-------- -------- --------
Net interest income $ 9,911 $9,821 $9,302
------- ------ ------
------- ------ ------
Interest rate spread 3.91% 4.02% 4.13%
---- ---- ----
---- ---- ----
Net yield on earning assets 4.44% 4.54% 4.57%
---- ---- ----
---- ---- ----
</TABLE>
(1) Includes loan fees of $307,000 in 1996, $324,000 in 1995, and $412,000 in
1994.
(2) Includes average nonaccrual loans of $3,259,000 in 1996, $2,730,000 in 1995,
and $983,000 in 1994.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
and 4.57% for the years ended 1996, 1995, and 1994. For 1996, margin compression
reflects competitive pressures as asset yields declined to a greater degree than
the costs of liabilities that funded them.
For 1996, total interest income, on a taxable equivalent basis, was
$18,667,000, up $124,000 or 0.7% above the $18,543,000 earned in 1995. This
increase was due primarily to a larger average volume of earning assets,
principally investment securities. In 1996, total earning assets averaged
$223.2 million to yield 8.36%, compared to $216.4 and 8.57%, respectively, for
1995. In April 1996 the Bank sold a $7 million portfolio of held-for-sale, fixed
rate mortgage loans in an effort to manage interest rate risk. A small gain was
realized on the sale and servicing rights were retained by the Bank. In light of
modest loan demand and competitive pressures, the proceeds from the loan sale
were invested primarily in investment securities. Income from loans was further
constrained by the level of nonperforming assets (NPA's), although NPA's
declined in 1996 vs. 1995 as depicted in Table 7. In December 1996, the Bank
sold $6 million of available-for-sale investment securities, at a gain, to
generate liquidity and enhance net income. Comparatively, for 1995, total
interest income, on a taxable equivalent basis, was $18,543,000, up $2,301,000
or 14.2% above the $16,242,000 earned in 1994. This increase was due primarily
to higher yields on a larger average volume of loans. In 1995, total loans
averaged $154.6 million to yield 9.44%, compared to $144.8 million and 8.76%,
respectively, for 1994. During 1995, growth was achieved in all major loan
portfolios, with consumer loans outpacing commercial loans.
For 1996, total interest expense was $8,756,000, up $34,000 or 0.4% above the
$8,722,000 incurred in 1995. This increase was due primarily to a larger average
volume of interest bearing liabilities. Total average interest bearing deposits
grew 1.9% in 1996 which was small by historical standards. In light of modest
loan demand in the local marketplace, the Bank did not aggressively price
deposits during 1996. Deposit growth was also constrained in the current period
by competitive forces, most notably the stock market. Funding was achieved in
part, particularly during the second half of 1996, through short term advances
from the Federal Home Loan Bank of Pittsburgh (FHLB) described in more detail
later in this Report. Comparatively, for 1995, total interest expense was
$8,722,000, up $1,782,000 or 25.7% above the $6,940,000 incurred in 1994. This
increase was due to higher rates paid on a larger average volume of deposits,
principally Certificates of Deposit ("CD's"). A significant portion of the
Bank's CD portfolio matured in the period September 1994 through June 1995, and
renewed at competitive prices which were relatively high at the time. Generally,
higher CD rates in the first half of 1995 stimulated investment in CD's, and
resulted in disintermediation from interest bearing demand and savings accounts.
Based on the results of a recent point-in-time analysis of interest rate risk
(one year horizon), the repricing characteristics of the Corporation's assets
and liabilities appear to be reasonably matched. Periodically, the Balance Sheet
is reevaluated in an effort to manage interest rate risk within prudent policy
parameters. The average balances of variable and adjustable rate loans as a
percentage of total average loans were 46.9%, 50.6% and 49.4% for 1996, 1995 and
1994, respectively.
Provision for Loan Losses
The provision for possible loan losses is an estimated expense charged to
earnings in anticipation of losses attributable to uncollectible loans. The
provision reflects management's judgement of an appropriate level for the
allowance (reserve) for loan losses.
The provision expense was $134,000 for 1996 and $228,000 for 1995. The
provision for both periods was necessary to support loan growth. Comparatively,
the provision expense for 1994 was $1,229,000 due mainly to loan charge-offs
totalling $1,087,000 which were attributable to a former Bank officer.
Non-Interest Income
Total non-interest income for 1996 was $1,090,000, up $178,000 or 19.5% above
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 1996 was $981,000 representing a
slight increase above the prior year. In December 1996 the Bank sold $6 million
in available-for-sale investment securities at a gain of $102,000. The
investment securities were sold to provide liquidity and enhance net income.
Comparatively, total non-interest income for 1995 was $912,000, up $32,000 or
3.6% above 1994. In 1995 a $62,000 loss resulted from the sale of approximately
$2.4 million in low yielding securities which were exchanged for higher yielding
securities to improve overall portfolio yield. The income produced from the
higher yielding securities more than offset the loss in 1995. On an adjusted
basis, total non-interest income for 1995 increased $80,000 or 8.9% above 1994.
The increase in 1995 was generally attributable to normal business growth.
Non-interest income from normal operations for 1997, is currently projected
to exceed the 1996 level due primarily to planned business growth.
Non-Interest Expenses
Total non-interest expenses for 1996 were $6,755,000, up $196,000 or 3% above
the $6,559,000 incurred for 1995. The overall increase was due primarily to
increases within the salaries and benefits, acquired real estate and other
expense categories. Salaries and benefits expense increased $159,000 or 4.5% due
to normal merit raises and planned staff additions deemed necessary to support
business growth. Acquired real estate expenses increased $131,000 or 205% in the
current period due to greater carrying costs and deterioration in value on a
larger portfolio of acquired assets. Other expenses, an aggregate of many
individual expenditures, increased $107,000 or 7.9% due primarily to system
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
enhancements and normal business growth. The overall increase in non-interest
expense for 1996 was lessened by a significant $230,000 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
($500 per quarter) by the FDIC. An FDIC update is provided later within this
section of the Report. A final comment about 1996 expenditures pertains to
furniture and equipment expense. The Bank's host computer system became fully
depreciated in 1995 which reduced depreciation expense from equipment for most
of 1996. However, in September 1996, the Bank purchased a new host computer
system and sixty personal computers which totalled approximately $750,000. This
technological upgrade was in accordance with a Strategic Plan. The projected
annual depreciation expense for the new host system and personal computers will
approximate $175,000.
Comparatively, total non-interest expenses for 1995 were $6,559,000, up
$237,000 or 3.7% above the $6,322,000 incurred for 1994. The overall increase
was due to increases within the salaries and benefits, and other expense
categories. Salaries and benefits expense increased $345,000 due to staff
additions, normal merit raises, and higher replacement costs attributable to
normal business growth, improved controls, and branch office expansion. Other
expenses increased $177,000, of which approximately $79,000 was attributable to
problem loan carrying costs. Increased problem loan costs reflected a larger
portfolio of nonperforming loans and increased loan collection efforts during
1995. The remaining increase in other expenses was due to the combined effect of
small increases from many individual expenses attributable to normal business
growth. The overall increase in non-interest expense for 1995 was lessened by a
significant $204,000 reduction in FDIC deposit insurance premium expense. In
September 1995, the FDIC lowered its deposit insurance rate for Bank Insurance
Fund ("BIF") insured commercial banks. Generally, the FDIC rate for well
capitalized and well managed commercial banks was reduced from $.23 per $100 of
deposits to $.04 per $100 of deposits, effective June 1, 1995. A refund to
commercial banks, pursuant to the rate reduction, was made by the FDIC because
the BIF achieved its required reserve level of $1.25 per $100 deposits in May
1995.
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 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 projection of
the 1997 FICO assessment for the Bank is approximately $25,000 based on a 1.29
cents rate per $100 of insured deposits.
In the period ahead, non-interest expenses will increase primarily as a
result of capital investments in systems and facilities, including branch
offices, and normal business growth.
Income Taxes
The provision for federal income taxes was $1,261,000 for 1996 compared to
$1,155,000 for 1995 and $712,000 for 1994. Generally, the increase in the
provision for all periods is due to an increase in operating income.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Investment Securities
The investment securities portfolio is an interest earning asset, second only
in size to the loan portfolio. Investment securities serve as an important
source of revenue, a primary source of liquidity, and as collateral for public
deposits. The total investment securities portfolio is classified as
available-for-sale in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Investment is limited to high quality debt instruments. Direct obligations of
the U.S. Government are full faith and credit obligations of the federal
government. Issues of federal agencies are also directly guaranteed, indirectly
guaranteed, or sponsored, by the federal government. Obligations of states and
political subdivisions, known as "municipals", are also maintained in the
portfolio. In accordance with investment policy, municipal securities are
limited to not more than $1 million per issuer.
Maturities for individual issues range from less than one year to
approximately ten years. The average expected life is used in lieu of final
maturity for mortgage-backed securities because of their tendency to prepay. The
weighted average maturity of the investment security portfolio at year end 1996
was approximately 2.1 years compared to approximately 2.2 years at year end
1995. A maturity distribution by security type, and weighted average yields are
presented in Table 4.
At year end 1996 the total investment securities portfolio had an amortized
cost of $56,333,000 and a fair value of approximately $56,859,000, representing
appreciation of $526,000 or 0.9%. Appreciation at year end 1996 declined from
the prior year end due to actual realization of a $102,000 gain from a $6
million sale in December 1996, and rising market interest rates. Comparatively,
at
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Table 4-Analysis of Investment Securities
<TABLE>
<CAPTION>
Weighted
U.S. U.S. State & Average
Treasury Agency(1) Municipal Stock Total Yield(2)
-------- --------- --------- ----- ----- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Maturity
Within one year $ 9,530 $ 6,392 $ 884 $ $16,806 5.50%
One to five years 12,546 20,115 1,578 34,239 6.33
Five to ten years 2,450 1,763 4,213 8.26
Over ten years 0
No set maturity 1,075 1,075
------- ------- ------- ------- -------
Amortized cost $22,076 $28,957 $ 4,225 $ 1,075 $56,333 6.22
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average maturity 2.1 years
December 31, 1995
Maturity
Within one year $ 7,499 $ 8,477 $ 374 $ $16,350 6.42%
One to five years 15,100 22,214 2,442 39,756 6.11
Five to ten years 1,458 2,343 3,801 8.73
Over ten years 0
No set maturity 838 838
------- ------- ------- ------- -------
Amortized cost $22,599 $32,149 $ 5,159 $ 838 $60,745 6.36
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average maturity 2.2 years
December 31, 1994
Maturity
Within one year $ 5,008 $ 3,062 $ 1,168 $ $ 9,238 6.05%
One to five years 18,195 18,637 1,601 38,433 6.14
Five to ten years 494 3,459 2,367 6,320 8.51
Over ten years 250 250 9.09
No set maturity 815 815
------- ------- ------- ------- -------
Amortized cost $23,697 $25,158 $ 5,386 $ 815 $55,056 6.41
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average maturity 2.8 years
</TABLE>
(1) Collateralized-mortgage obligations (CMO's) and mortgage-backed securities
(MBS's) are included in the maturity categories based on average expected
life.
(2) Yields on tax-exempt obligations were computed on a taxable equivalent basis
using a 34% tax rate.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
year end 1995 the total investment securities portfolio had an amortized cost
of $60,745,000 and a fair value of approximately $61,679,000, representing
appreciation of $934,000 or 1.5%, which was driven primarily by declining market
interest rates. Unrealized holding gains and losses, net of applicable taxes,
are recorded in accordance with Statement No. 115.
Loans
Total investment in loans at year end 1996 was $166.7 million representing a
$6.6 million or 4.2% increase above year end 1995. A growing local economy, and
relatively low market interest rates and unemployment, were factors which
contributed to loan demand. During the current period, the investment in loans
was decreased by the sale of $7 million in held-for-sale, fixed rate mortgage
loans in April 1996.
Comparatively, the total investment in loans at year end 1995 was $160
million representing a $9.4 million or 6.2% increase above year end 1994. The
increase was due to the same factors as in 1996. During 1995, growth was
achieved in all major loan portfolios, with consumer loans outpacing commercial
loans.
Table 5 presents the composition of total loans on a comparative basis for a
five year period. The table depicts a relatively stable mix of commercial and
consumer related loans over the past five years.
Table 6 reveals that the commercial loan portfolio was comprised of $62.8
million or 58.6% in fixed rate loans and $44.3 million or 41.4% in variable or
adjustable rate loans at year end 1996. This compares to $49.3 million or 48.8%
in fixed rate loans and $51.6 million or 51.2% in variable or adjustable rate
loans at year end 1995. Both the volume and percentage of fixed rate commercial
loans increased in 1996 due to a relatively low interest rate environment,
particularly in the last half of the year. Low interest rates induced some
customers to refinance from variable rate loans to fixed rate loans.
At year end 1996 the volume of adjustable rate residential mortgage loans,
including home equity loans, was approximately $23.6 million representing 67.8%
of the total residential mortgage loan and home equity loan portfolios. This
compares to $22.6 million and 62%, respectively, for year end 1995.
Table 5-Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31, 1996 1995 1994 1993 1992
---------------- ------------------ -------------- --------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, industrial and
agricultural $ 91,744 55.0% $ 81,119 50.7% $ 77,984 51.8% $ 78,383 55.8% $ 70,831 53.5%
Real estate -- construction and
land development 15,449 9.3 19,817 12.4 19,501 12.9 16,811 11.9 18,061 13.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total commercial related loans 107,193 64.3 100,936 63.1 97,485 64.7 95,194 67.7 88,892 67.1
Real estate -- residential mortgages 35,444 21.3 36,286 22.7 32,240 21.4 26,866 19.1 25,954 19.6
Installment 24,014 14.4 22,786 14.2 20,912 13.9 18,497 13.2 17,607 13.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer related loans 59,458 35.7 59,072 36.9 53,152 35.3 45,363 32.3 43,561 32.9
Total loans (1) $166,651 100.0% $160,008 100.0% $150,637 100.0% $140,557 100.0% $132,453 100.0%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
</TABLE>
(1) The Corporation's total loan portfolio is solely domestic.
- -------------------------------------------------------------------------------
Table 6 - Selected Loan Maturities and Interest Rate Sensitivity
<TABLE>
<CAPTION>
December 31, 1996
Years to Maturity
----------------------------
1 or less 1 to 5 over 5 Total
--------- ------ ------- --------
<S> <C> <C> <C> <C>
(dollars in thousands)
Commercial, industrial and agricultural $11,143 $20,799 $59,802 $ 91,744
Real estate -- construction and land development 9,836 3,160 2,453 15,449
------- ------- ------- --------
Total commercial related loans $20,979 $23,959 $62,255 $107,193
------- ------- ------- --------
------- ------- ------- --------
Fixed interest rates $ 5,551 $17,534 $39,774 $ 62,859
Floating or adjustable interest rates 15,428 6,425 22,481 44,334
------- ------- ------- --------
Total commercial related loans $20,979 $23,959 $62,255 $107,193
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Variable rate loans reprice periodically with changes in the Bank's Base
rate, or the Prime rate as reported in the Wall Street Journal. Adjustable rate
loans reprice at annual intervals based on the U.S. treasury yield curve.
Marketing emphasis is placed on variable and adjustable rate loans since they
reprice in response to changes in market interest rates.
The Bank serviced loans for others in the amount of $15,721,000 at year end
1996 compared to $10,850,000 at year end 1995, and $12,444,000 at year end 1994.
Servicing rights were retained from mortgage loan sales to provide a source of
income and a basis for cross-selling additional financial services.
The relatively low level of market interest rates and the prospect for future
declines due to low inflation and a declining federal deficit, in conjunction
with low unemployment, create a favorable climate for credit services in the
period ahead. Constraining factors include competitive pressures and a rising
level of consumer debt.
Credit Risk and Loan Quality
The Corporation emphasizes the minimization of credit risk. To support this
objective a sound lending policy framework has been established. Within this
framework are six basic policies which guide the lending process and minimize
risk. First, the Corporation follows detailed written lending policies and
procedures. Second, loan approval authority is granted commensurate with dollar
amount, loan type, level of risk, and the experience of the loan officer. Third,
loan review committees function at both the senior lending officer level and the
Board of Directors level to review and authorize loans that exceed
preestablished dollar thresholds and/or meet other criteria. Fourth, the
Corporation adheres to making most of its loans within its primary geographical
market area, York County, Pennsylvania. Although this may pose a geographical
concentration risk, the diverse local economy and knowledge of customers
minimizes this risk. Fifth, the loan portfolio is diversified to prevent
dependency upon a single customer or small group of related customers. And
sixth, the Corporation does not make loans to foreign countries or persons
residing therein.
In addition to a comprehensive lending policy, numerous internal reviews and
audits of the loan portfolio occur throughout the year. An important on-going
review mechanism is the lender initiated risk rating system, ("LIRRS"). The
LIRRS requires personnel with lending authority to systematically evaluate and
rate loans based upon preestablished risk criteria. All potential problem loans
and assets acquired in foreclosure are reviewed quarterly, or more frequently if
circumstances dictate, by a Special Asset Committee comprised of selected
members of senior management. For each loan under review the Special Asset
Committee has the responsibility of establishing a final risk rating, an action
plan for reducing risk, and a loss reserve. In addition to internal controls,
the loan portfolio is reviewed annually by independent auditors in connection
with their audit of the financial statements; and is examined periodically by
bank regulators.
A primary measure of loan quality is the percentage of loans that move from
an earnings category to a nonperforming category. Table 7-Nonperforming Assets
and Past Due Loans, depicts asset categories posing the greatest risk of loss. A
loan is considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due. Internal loan
classifications such as nonaccrual, and troubled debt restructurings, are
examples of impaired loans. It is the Bank's policy to reclassify loans to an
impaired status when either principal or interest payments become 90 days past
due, unless the value of the supporting collateral is adequate and the loan is
in the process of collection. An impaired classification may be made prior to 90
days past due if management believes that the collection of interest or
principal is doubtful. Assets acquired in foreclosure are primarily real estate
assets, e.g., collateral that supported loans, taken in satisfaction of debt
pursuant to foreclosure. The final category, loans past due 90 days or more and
still accruing interest, are contractually past due but, are well collateralized
and in the process of collection.
Table 7 depicts that total nonperforming assets were $2,843,000 or 1.7% of
total loans and net assets acquired in foreclosure at December 31, 1996.
Comparatively, nonperforming assets were $4,278,000 and 2.66%, respectively, at
December 31, 1995. The $1,435,000 or 33.5% decrease in nonperforming assets at
year end 1996 primarily reflected the $1,520,000 decrease in the impaired loans
category. The decline in impaired loans resulted from recoveries attributable to
successful collection efforts, and contract renegotiations based on prevailing
market conditions, for selected accounts.
At December 31, 1996 the impaired loan portfolio was comprised of fifteen
relationships, principally commercial loan relationships, which ranged in size
from $4,500 to $374,500. These loan relationships vary by industry, and are
generally collaterized 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 or liquidate collateral assets are proceeding as quickly as potential
buyers can be located and legal constraints permit.
Assets acquired in foreclosure, net of reserve, were $780,000 for year end
1996, up $85,000 above year end 1995. During 1996, this portfolio was reduced by
approximately $487,000 from sale proceeds; $4,000 from miscellaneous receipts;
and $44,000 from asset write-downs due to declines in market value, and losses
incurred on sales. Asset additions in 1996, principally one account that
totalled $337,500, exceeded total reductions for the year. At year end 1996,
assets acquired consisted primarily of improved real estate from six separate
commercial loan relationships in unrelated businesses and two mortgage loans.
The loss provision for assets acquired, due to estimated declines in fair market
value, was $129,000 in 1996 compared to $30,000 in 1995 and $87,000 in 1994.
Efforts to liquidate the portfolio of assets acquired are proceeding as quickly
as potential buyers can be located and legal constraints permit.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
At December 31, 1995, loans past due 90 days or more and still accruing
interest were $524,000, which represented a $1,231,000 decrease below year end
1995. Generally, loans in the past due category are well collaterized 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 December 31, 1996, there were no potential problem loans, as defined by
the Securities and Exchange Commission, identified by management. However,
management was monitoring approximately $7 million of loans for which the
ability of the borrower to comply with present repayment terms was uncertain.
These loans were not included in Table 7. 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.
At year end 1996 approximately $25.2 million or 15.1% of total loans were
concentrated in the commercial facility leasing industry, and approximately
$15.4 million or 9.3% of total loans were concentrated in the real estate
development industry. Real estate development is broadly defined to include
loans to builders, land developers, building sub-contractors, and building
suppliers. Comparatively, at year end 1995 approximately $10.8 million or 6.7%
of total loans were concentrated in the commercial facility leasing industry,
and approximately $19.8 million or 12.4% of total loans were concentrated in the
real estate development industry. Loans to borrowers within these industries are
usually collateralized by real estate.
Although the Corporation maintains sound credit policies, certain loans
deteriorate and are charged off as losses. The allowance (reserve) for loan
losses is maintained to absorb these potential losses. The allowance is
increased by provisions charged
Table 7-Nonperforming Assets and Past Due Loans
<TABLE>
<CAPTION>
December 31, 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Impaired loans (1) $2,063 $3,583 $1,766 $ 223 $2,652
Assets acquired in foreclosure, net of reserve 780 695 670 1,050 1,198
------ ------ ------ ------ ------
Total nonperforming assets $2,843 $4,278 $2,436 $1,273 $3,850
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Loans past due 90 days or more
and still accruing interest $ 524 $1,755 $ 522 $ 734 $ 284
Ratios:
Impaired loans as a % of
total year-end loans 1.24% 2.24% 1.17% 0.16% 2.00%
Nonperforming assets as a % of
total year-end loans and net
assets acquired in foreclosure 1.70% 2.66% 1.61% 0.90% 2.88%
Nonperforming assets as a % of
total year-end stockholders' equity 12.52% 20.34% 13.63% 7.23% 24.23%
Allowance for loan losses as a
multiple of impaired loans 1.0x .6x 1.3x 9.0x 0.7x
Interest not recognized on impaired loans
at period-end (2)
Contractual interest due $ 246 $ 306 $ 125 $ 24 $ 260
Interest revenue recognized 18 120 23 2 36
------ ------ ------ ------ ------
Interest not recognized in operations $ 228 $ 186 $ 102 $ 22 $ 224
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
(1) Comprised solely of non-accrual loans.
(2) This table includes interest not recognized on loans which were classified
as impaired at year end. While every effort is being made to collect this
interest revenue, it is probable a portion will never be recovered.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
to expense and is reduced by loan charge-offs, net of recoveries. In analyzing
the adequacy of the allowance, also known as reserve, management considers the
results of internal and external credit reviews, past loss experience, changes
in the size and character of the loan portfolio, adequacy of collateral, general
economic conditions and the local business outlook.
Table 8 presents an analysis of the activity in the allowance for loan losses
over a five year period.
For 1996, the allowance was $2,110,000, reflecting a decrease of $176,000
from year end 1995 due to a lower level of nonperforming assets. The reduction
in the allowance lowered the unallocated reserve component, depicted in Table 9,
which was deemed sufficient at year end 1996. The provision expense was $134,000
in the current period which primarily supported loan growth, principally
commercial loans. Of the total $387,000 charged-off for the year, $251,000 was
attributable to one commercial loan borrower whose accounts were deemed
uncollectible.
For 1995, the allowance was $2,286,000, slightly above the level for year end
1994. The increase was due to a higher level of nonperforming assets and to
support a larger volume of loans. The provision expense was $228,000 in 1995
which primarily supported loan growth and losses due to charge-offs. Of the
total $342,000 charged-off for the year, $141,000 was attributable to one
commercial loan borrower whose accounts were deemed uncollectible.
For 1994, the allowance was $2,249,000, up slightly from year end 1993 to
support a larger volume of loans. The significant increase in total loan
charge-offs was caused by one event. As previously disclosed, on May 5, 1994,
management of the Bank discovered violations of credit policy, internal controls
and loan authorizations in connection with the commercial loan portfolio of a
former Bank officer. Subsequently, the loan officer resigned and the Bank
completed an internal review for the purpose of identifying all unauthorized
loans and evaluating them for collectibility and collateral adequacy. Effective
June 30, 1994, the Bank recorded a $1,005,000 loan loss provision expense, and
on July 12, 1994 charged-off $1,087,000 as loan losses. In December 1994, the
Bank received $270,000 in net insurance proceeds as a partial recovery for the
losses. The former officer was recently convicted of fraud and sentenced to
prison by federal authorities.
For 1993, the allowance was $2,000,000, reflecting an increase of $200,000
above year end 1992 due to an increase in the provision expense. The provision
expense was increased above the prior year to support a larger volume of loans,
cover 1993 charge-offs, and bolster the reserve for concerns relative to
economic weakness within the local market area. Of the total $261,000 charged
off in 1993, $183,000 was attributable to two commercial loan accounts. Both
were written-down to fair value less estimated costs to sell and reclassified to
assets acquired, where collateral for one account was ultimately sold.
For 1992, the allowance was $1,800,000, slightly below the level at the end
of 1991. The provision expense of $258,000 supported a larger volume of loans
and partially restored the allowance for charge-offs in that period. Of the
total $334,000 charged off in 1992, $233,000 was attributable to four commercial
loan accounts which were written-down to fair value less estimated costs to sell
and reclassified to assets acquired.
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
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.
Table 9 presents an allocation of the allowance for potential loan losses by
major loan category.
Deposits
Deposits are the primary source of funding for loans and investment
securities. Total average deposits for 1996 were $211,824,000, up $5,317,000 or
2.6% above 1995. The rate of growth in average deposits for the current period
was below historical growth rates. In light of modest loan demand in the local
marketplace, the Bank did not aggressively price deposits. Deposit growth was
also constrained in the current period by competitive forces, most notably the
stock market. Average deposit growth in the current period was evenly
distributed between interest-bearing and non-interest bearing demand deposits in
total, and Certificates of Deposit ("CD's").
Comparatively, for 1995 total deposits averaged $206,507,000, up $12,674,000
or 6.5% above 1994. Most of the deposit growth, almost solely within the CD
category, was achieved in the first two quarters of 1995. Based on declining
market interest rates, and the perception of continued decline, customers
purchased CD's at favorable yields; sometimes with funds from their interest
bearing demand and savings accounts. Certificates of Deposit $100,000 and above
("Large CD's"), the most volatile deposit type, increased in 1995 due primarily
to competitive rates. Generally, these funds were from local investors.
At 1996 year end, total Certificates of Deposit were $121,778,000 and are
scheduled to mature in the following years: $72,928,000 in 1997; $18,208,000 in
1998; $11,498,000 in 1999; $16,648,000 in 2000; and $2,496,000 in 2001. At 1996
year end, the balance of certificates $100,000 and above was $15,495,000. Of
this total: $6,239,000 mature within three months; $3,736,000 mature after three
months but within six months; $2,667,000 mature after six months but within
twelve months; and the remaining $2,853,000 mature beyond twelve months.
In the period ahead, deposit growth is projected to increase at a level above
1996. This is based on the presumption that the Bank will price deposits more
competitively to meet budgeted loan growth. Additionally, in April 1997 the Bank
plans to open its eighth full service branch office which should help generate
new deposits. However, competitive forces, particularly the stock market, may
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Table 8-Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance-- beginning of year $2,286 $2,249 $2,000 $1,800 $1,861
Provision charged to operating expense 134 228 1,229 441 258
Loans charged off:
Commercial 265 276 1,255 223 250
Real estate -- mortgage 27 0 0 9 23
Consumer 95 66 24 29 61
------ ------ ------ ------ ------
Total loans charged off 387 342 1,279 261 334
Recoveries:
Commercial 26 134 298 0 7
Real estate -- mortgage 0 0 0 0 0
Consumer 51 17 1 20 8
------ ------ ------ ------ ------
Total recoveries 77 151 299 20 15
------ ------ ------ ------ ------
Net charge-offs 310 191 980 241 319
Balance -- end of year $2,110 $2,286 $2,249 $2,000 $1,800
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratios:
Net charge-offs to average total loans 0.19% 0.12% 0.68% 0.18% 0.25%
Allowance for loan losses to total loans
at year-end 1.27% 1.43% 1.49% 1.42% 1.36%
Allowance for loan losses to impaired
loans and loans past due 90 days or more 81.6% 42.8% 98.3% 209.0% 61.3%
</TABLE>
Table 9-Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- --------------- --------------- ---------------- ------------------
%Total %Total %Total %Total %Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, industrial and
agricultural $1,335 55.0% $1,233 50.7% $1,198 51.8% $1,165 55.8% $993 53.5%
Real estate -- construction
and land development 319 9.3 268 12.4 171 12.9 147 11.9 298 13.6
------ ------ ------ ----- ------ ------ ------ ----- ------ -----
Total commercial related
loans 1,654 64.3 1,501 63.1 1,369 64.7 1,312 67.7 1,291 67.1
Real estate -- residential
mortgages 86 21.3 94 22.7 51 21.4 73 19.1 90 19.6
Installment 79 14.4 8 14.2 17 13.9 7 13.2 12 13.3
------ ------ ------ ----- ------ ------ ------ ----- ------ ------
Total consumer related loans 165 35.7 102 36.9 68 35.3 80 32.3 102 32.9
Unallocated 291 n/a 683 n/a 812 n/a 608 n/a 407 n/a
------ ------ ------ ----- ------ ------ ------ ----- ------ ------
Total $2,110 100.0% $2,286 100.0% $2,249 100.0% $2,000 100.0% $1,800 100.0%
------ ------ ------ ----- ------ ------ ------ ----- ------ ------
------ ------ ------ ----- ------ ------ ------ ----- ------ ------
</TABLE>
Note: The specific allocation for any particular loan category may be
reallocated in the future as risk perceptions change. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories since the total allowance is a
general allowance applicable to the entire loan portfolio.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
continue to constrain deposit growth for commercial banks in the period ahead.
Stockholders' Equity
Stockholders' equity, or capital, is evaluated in relation to total assets
and the risk associated with those assets. The greater the capital resources,
the more likely a corporation is to meet its cash obligations and absorb
unforeseen losses. For these reasons capital adequacy has been, and will
continue to be, of paramount importance.
There are currently three federal regulatory definitions of capital adequacy
that take the form of minimum ratios. Table 10 depicts that the Corporation
exceeds all federal minimum regulatory standards.
Effective January 1, 1994, the Corporation adopted Accounting Statement No.
115. Under Statement No. 115 the Corporation reclassified the total investment
securities portfolio as available-for-sale and reported unrealized holding gains
and losses, net of taxes, as a separate component of stockholders' equity.
For the year ended 1996 total stockholders' equity increased $1,674,000 or 8%
above 1995 due to earnings retention from profitable operations. Comparatively,
for the year ended 1995, total stockholders' equity increased $3,160,000 or
17.7% above 1994. The increase was due to earnings retention from profitable
operations, and unrealized holding gains, net of taxes, from securities
available for sale. Equity growth in 1994 was constrained by low earnings due to
an unusually large loan loss provision, and increased costs relative to branch
office expansion.
The Corporation generally pays cash dividends on a quarterly basis. The
dividend rate is determined by the Board of Directors after considering the
Corporation's capital requirements, current and projected net income, and other
factors. The total cash dividend payment in 1996 was $753,700, compared to
$659,200 in 1995 and $594,300 in 1994. Total cash dividends were increased in
all three periods based on earnings capacity and a sound capital level. Annual
cash dividends on a per common share basis were $.721, $.633, and $.567 for
1996, 1995, and 1994, respectively. Book value per share was $21.72, $20.12, and
$17.10 for 1996, 1995, and 1994, respectively. All per share amounts were
retroactively adjusted for stock dividends. The weighted average number of
shares of common stock outstanding was 1,045,295 for 1996, 1,041,044 for 1995,
and 1,045,226 for 1994.
The dividend payout ratio, which represents the percentage of annual net
income returned to the stockholders in the form of cash dividends, was 27.8% for
1996, compared to 25.4% for 1995 and 34.4% for 1994. The Corporation's normal
dividend payout allows
Table 10-Capital Ratios
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tier I Capital -- Total stockholders' equity, as
adjusted (1) $ 22,354 $ 20,415 $ 18,756
Tier II Capital -- Allowance for loan losses (2) 2,053 1,911 1,794
--------- --------- ---------
Total risk-based capital $ 24,407 $ 22,326 $ 20,550
Risk-adjusted on-balance sheet assets (1) $ 158,701 $ 149,763 $ 139,862
Risk-adjusted off-balance sheet exposure (3) 5,491 3,150 3,684
--------- --------- ---------
Total risk-adjusted assets including off-balance
sheet exposure $ 164,192 $ 152,913 $ 143,546
Ratios:
Tier I risk-based capital ratio 13.61% 13.35% 13.07%
Federal minimum required 4.00 4.00 4.00
Total risk-based capital ratio 14.86% 14.60% 14.32%
Federal minimum required 8.00 8.00 8.00
Leverage ratio (4) 9.45% 8.98% 8.80%
Federal minimum required 4.00 4.00 4.00
</TABLE>
(1) Net unrealized gains and losses on securities available for sale, net of
taxes, are disregarded for capital ratio computation purposes. Their effect
is eliminated from stockholders' equity and asset totals in accordance with
federal regulatory banking guidelines.
(2) Allowance for loan losses is limited to 1.25% of total risk-adjusted
assets.
(3) Off-balance sheet exposure is caused primarily by standby letters of credit
and loan commitments with a remaining maturity exceeding one year. These
obligations have been converted to on-balance sheet credit equivalent
amounts and adjusted for risk.
(4) Tier I capital divided by average total assets.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
for quarterly cash returns to its stockholders and provides earnings retention
at a level sufficient to finance future corporate growth.
In furtherance of its commitment to enhance long term stockholder value, the
Corporation paid a five percent stock dividend in June 1996 and June 1995. The
five percent stock dividends resulted in the issuance of 49,503 common shares in
1996 and 47,161 common shares in 1995. In January 1995, the Corporation acquired
10,000 shares of its common stock utilizing $270,000 of capital. The shares
reacquired were subsequently reissued as part of that year's stock dividend.
In accordance with a Strategic Plan for the Corporation and the Bank, the
Board of Directors began to execute plans during 1996 relative to expansion and
automation projects. These capital projects, deemed necessary to position the
Corporation for future growth, are described below.
As previously disclosed to stockholders, the Corporation is presently
constructing a new corporate headquarters facility, to be known as the Codorus
Valley Corporate Center. The total estimated cost of this project, including
land, building and furnishings is approximately $5.4 million. Completion is
scheduled for September 1997, at which time the Corporation will lease
approximately seventy-five percent of the space to the Bank and the remainder to
outside parties. During 1996, the Bank replaced its host computer system and
purchased sixty personal computers, which together approximated $750,000.
Recently, the Bank announced the acquisition of an existing banking office, a
former Meridian Bank branch, located in East York, Pennsylvania. The purchase
price, renovations, and furnishings for this project will approximate $810,000.
It is anticipated that this full service banking office will open in April 1997.
All three capital projects are being funded with cash generated from current
Bank operations. In addition, capital expenditures of a smaller magnitude,
principally automated system enhancements, are planned for 1997. Capital
investments made in the recent past, and in the future, relative to expansion
and automation will reduce Corporate net income and capital growth in the period
ahead. However, these expenditures are deemed necessary to grow market share and
net income over the long term, and are an important part of the overall strategy
to achieve the goal of enhancing long term shareholder value.
Another strategy in the Corporation's long range plan, which is currently in
process, is to have its common stock quoted on the NASDAQ national market
system.
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, subject to future adjustment in the event of specified
changes in the Corporation's capital structure. As of December 31, 1996, 6,000
stock options were granted under the Plan, none of which were exercised. More
information about the 1996 Stock Incentive Plan is provided in Note 13 to the
financial statements.
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 and the Riegle Community Development and Regulatory Improvement Act
may have a significant impact upon the Corporation. The key provisions pertain
to interstate banking and interstate branching as well as a reduction in the
regulatory burden on the banking industry. During July 1995, Pennsylvania
amended the provisions of its Banking Code to authorize full interstate banking
and branching under Pennsylvania law and to facilitate the operations of
interstate banks in Pennsylvania. As a result of legal and industry changes,
management predicts that consolidation will continue as the financial services
industry strives for greater cost efficiencies and market share. Management
believes that such consolidation may enhance its competitive position as a
community bank. There are numerous other proposals before Congress and the
regulators to change the way commercial banks conduct business. However, the
effect of these proposals on liquidity, capital, and results of operations
cannot be determined until they are enacted into law.
During November 1995, the Board of Directors adopted a Shareholder Rights
Plan ("SRP") as previously disclosed in a Form 8-K filed on December 4, 1995.
Each Right entitles the registered holder to purchase from the Corporation one
share of common stock at a price of $100.00 per share, subject to adjustment.
Rights are triggered by certain events defined in the SRP, including the
acquisition of a specified percentage of the Corporation's shares. Rights are
not exercisable until the occurrence of such certain specified triggering events
and expire on November 4, 2005, unless earlier redeemed by the Corporation.
Rights of shareholders are specifically enumerated within the SRP.
The Corporation provides a Dividend Reinvestment and Stock Purchase Plan
("Plan") for shareholders. To the extent that shares are not available in the
open market, the Corporation has reserved 55,125 shares of common stock to be
issued under the Plan. Any shares issued from authorized but unissued status
will increase the capital of the Corporation. However, this also has the
potential to dilute earnings per share unless accompanied by growth in net
income.
The Corporation is subject to restrictions on the payment of dividends to its
shareholders pursuant to the Pennsylvania Business Corporation Law of 1988, as
amended ("BCL"). The BCL operates generally to preclude dividend payments if the
effect thereof would render the Corporation insolvent and result in negative net
worth, as defined. As a practical matter, the Corporation's payment of dividends
is contingent upon its ability to obtain funding in the form of dividends from
the Bank. Payment of dividends to the Corporation by the Bank is subject to
restrictions set forth in the Pennsylvania Banking Code of 1965, as amended.
Accordingly, the Bank's Additional Paid-In Capital (Surplus) account balance of
$4,424,000 at December 31, 1996, was restricted.
In January 1997, Federal Deposit Insurance Corporation ("FDIC") examiners
completed a routine examination of the Bank based on a September 30, 1996,
examination date. Based on information given to management, no significant
exceptions were noted.
Except as disclosed herein, the Corporation is not currently
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
aware of any other trends, events or uncertainties which may materially and
adversely effect capital, results of operations or liquidity.
Liquidity and Interest Rate Sensitivity
Fundamental objectives of the asset-liability management process of the
Corporation are to maximize net interest income within acceptable levels of
liquidity and interest rate risk and within capital adequacy constraints. An
Asset-Liability Committee ("ALCO") is responsible for managing the Bank's
asset-liability process. The ALCO, which meets on a regular basis, is comprised
of senior management and an outside director.
Maintaining adequate liquidity provides the Corporation with the ability to
meet financial obligations to its depositors, loan customers, employees, and
stockholders on a timely and cost efficient basis. Additionally, it provides
funds for normal operating expenditures and business opportunities as they
arise. The objective of interest rate sensitivity management is to increase net
interest income by managing interest rate sensitive assets and liabilities in
such a way that they can be repriced in response to changes in market interest
rates.
Liquidity is generated from transactions relating to both the Corporation's
assets and liabilities. The primary sources of liquidity are: scheduled
investment security maturities and cash in-flows; a line of credit with the
Federal Home Loan Bank of Pittsburgh ("FHLBP"); short term borrowing in the form
of federal funds purchased from correspondent banks; and deposit growth. Loan
receipts from customer loan payments represent another important source of
liquidity. The sale of assets, such as investment securities and loans, are a
secondary source of liquidity.
At December 31, 1996, the Corporation had $4 million outstanding on its line
of credit with the FHLBP. In the last quarter of 1996 the Bank frequently
utilized its line of credit with the FHLBP to supplement deposits as a source of
short term funding. At December 31, 1996, total credit available from the FHLBP,
for both short and long term borrowing needs, was approximately $64 million. In
January 1997, the Bank borrowed $3 million from the FHLBP under a ten year,
fixed rate note arrangement to help fund its residential mortgage loan program.
The total loan-to-deposit ratio at year end 1996 was 79.6%, compared to 75.3%
at year end 1995. The ratio for both years was within the 70-80% range which the
Corporation uses for liquidity policy purposes. In the period ahead the
loan-to-deposit ratio could increase above the 80% level due to competitive
forces which may constrain deposit growth.
Interest rate sensitivity, closely related to liquidity management, is a
function of the repricing characteristics of the Corporation's portfolio of
assets and liabilities. Asset-liability management strives to match maturities,
or repriceable cash flows if more relevant, and interest rates between loan and
investment security assets with the deposit liabilities that fund them.
Successful asset-liability management results in a balance sheet structure which
can cope effectively with market rate fluctuations.
The Corporation utilizes two financial techniques for quantifying interest
rate risk. The primary means is a computer simulation model. This model provides
a dynamic view of the effects of the changes in rates, spreads, and yield curve
shifts on net interest income. These changes are modeled periodically under
various interest rate scenarios. A secondary means is the weighted static "gap",
which is a refinement of the traditional (unweighted) static gap.
Measurement of interest rate risk requires many assumptions, and is as much
art as it is science. One of the key assumptions pertains to the amount and
timing of repriceable cash flows from interest sensitive assets and liabilities.
The Corporation uses the following assumptions relative to cash flows from
interest sensitive assets. The total portfolio balance of variable rate
instruments can reprice daily. Adjustable rate instruments reprice at the
interest maturity date, usually annually. Fixed rate investment securities
reprice at their scheduled maturity date, or call date if more appropriate. For
fixed rate loans, the average historical cash flow for the preceding twelve
months is used in lieu of scheduled maturities because it includes prepayments
and early payoffs. Generally, interest sensitive liabilities, principally
deposits, reprice similarly to interest sensitive assets with the exception of
NOW and Savings deposits which do not have scheduled maturities. Technically,
NOW and Savings deposits can be repriced at any time. Historically, however, NOW
and Savings balances have been relatively stable in spite of changes in market
interest rates. This stability assumption was made in the current measurement
process. When NOW and Savings rates are adjusted they tend to lag behind the
market, particularly during a period of rising interest rates.
A schedule which depicts Balance Sheet repricing characteristics and an
estimate of gap at December 31, 1996, is provided as Table 11. The gap technique
begins by segmenting both assets and liabilities into future time periods,
(usually 12 months, or less) based on when repricing can be effected, rather
than actual contractual maturities. Repriceable liabilities are subtracted from
repriceable assets, for a specific time period, to determine a difference, or
gap. Once known, the gap is managed based on predictions of future market
interest rates. Intentional mismatching, or gapping, can enhance net interest
income if market rates move as predicted. However, if market rates behave in a
manner contrary to predictions net interest income will suffer. Gaps, therefore,
contain an element of risk and must be prudently managed. When the gap is
negative, with interest-bearing liabilities in excess of interest-earning
assets, net interest income generally improves if interest rates fall. The
opposite occurs in the case of a positive gap.
Table 11 shows an approximation of the Corporation's interest sensitivity
based on a static gap presentation. This means that volumes are held constant,
or static, at December 31, 1996, so the effects of changes in market interest
rates on net interest income can be isolated. The table depicts both the
traditional (unweighted) and "weighted" gaps at December 31, 1996. The weighted
gap is a more realistic approach and will be stressed here because it reflects
adjustments to the repriceable cash flows based on correlation
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 11-Interest Rate Sensitivity
<TABLE>
<CAPTION>
at December 31, 1996
After After
0-30 31-90 91-180 181-365 1 year to 2 years to
(dollars in thousands) Days Days Days Days 2 years 5 years
--------- --------- --------- --------- --------- ---------
Assets
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 300 $ 0 $ 0 $ 0 $ 0 $ 0
Interest-bearing deposits 337 0 0 0 0 0
Securities available for sale (1) 2,004 2,647 4,308 8,764 17,318 16,936
Loans (2) 42,520 8,466 14,327 30,565 25,172 43,538
--------- --------- --------- --------- --------- ---------
Total earning assets 45,161 11,113 18,635 39,329 42,490 60,474
Noninterest-earning assets (3) -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total assets 45,161 11,113 18,635 39,329 42,490 60,474
Liabilities and Stockholders' Equity
NOW deposits 22,237 0 0 0 0 0
Insured Money Fund deposits 25,651 0 0 0 0 0
Savings deposits 20,652 0 0 0 0 0
Time deposits less than $100,000 24,820 11,270 13,736 14,093 15,567 26,797
Time deposits $100,000 and above 8,434 1,554 1,708 1,232 521 2,046
Short-term borrowings 4,000 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 105,794 12,824 15,444 15,325 16,088 28,843
Noninterest-bearing liabilities (4) 0 0 0 0 0 0
Stockholders' equity 0 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 105,794 $ 12,824 $ 15,444 $ 15,325 $ 16,088 $ 28,843
Traditional interest sensitivity gap $ (60,633) $ (1,711) $ 3,191 $ 24,004 $ 26,402 $ 31,631
Traditional cumulative interest
sensitivity gap $ (60,633) $ (62,344) $ (59,153) $ (35,149) (8,747) $ 22,884
Traditional cumulative gap as
a percent of earning assets at
December 31, 1996 -27.4% -28.1% -26.7% -15.9% -3.9% 10.3%
Weighted interest sensitivity gap (5) $ (28,085) $ (2,128) $ 2,388 $ 21,979 $ 22,006 $ 26,165
Weighted cumulative interest
sensitivity gap (5) $ (28,085) $ (30,213) $ (27,825) $ (5,846) $ 16,160 $ 42,325
Weighted cumulative gap as
a percent of earning assets at
December 31, 1996 (5) 12.7% -13.6% -12.6% -2.6% 7.3% 19.1%
<CAPTION>
After Non-
5 years Market Total
--------- --------- ---------
(dollars in thousands)
Assets
<S> <C> <C> <C>
Federal funds sold $ 0 $ 0 $ 300
Interest-bearing deposits 0 0 337
Securities available for sale (1) 4,357 525 56,859
Loans (2) 0 2,063 166,651
--------- --------- ---------
Total earning assets 4,357 -- --
Noninterest-earning assets (3) -- 13,182 13,182
--------- --------- ---------
Total assets 4,357 15,770 237,329
Liabilities and Stockholders' Equity
NOW deposits 0 0 22,237
Insured Money Fund deposits 0 0 25,651
Savings deposits 0 0 20,652
Time deposits less than $100,000 0 0 106,283
Time deposits $100,000 and above 0 0 15,495
Short-term borrowings 0 0 4,000
--------- --------- ---------
Total interest-bearing liabilities 0 0 194,318
Noninterest-bearing liabilities (4) 0 20,305 20,305
Stockholders' equity 0 22,706 22,706
--------- --------- ---------
Total liabilities and
stockholders' equity $ 0 $ 43,011 $ 237,329
Traditional interest sensitivity gap $ 4,357 $ -- $ --
Traditional cumulative interest
sensitivity gap $ 27,241 $ -- $ --
Traditional cumulative gap as
a percent of earning assets at
December 31, 1996 12.3%
Weighted interest sensitivity gap (5) $ 3,311
Weighted cumulative interest
sensitivity gap (5) $ 45,636
Weighted cumulative gap as
a percent of earning assets at
December 31, 1996 (5) 20.6%
</TABLE>
(1) The non-market column consists of net unrealized holding gains.
(2) The non-market column consists of non-accrual loans.
(3) The non-market column is comprised of: non-interest bearing deposits &
cash; premises & equipment; interest receivable; other assets; and the
allowance for loan losses.
(4) The non-market column is comprised of: demand deposit accounts; interest
payable; and accrued expenses and other liabilities.
(5) "Weighted" interest sensitivity gaps are considered more reliable
point-in-time indicators of interest rate risk than traditional, or
unweighted gaps. Weighted interest sensitivity gaps reflect adjustments
to the repriceable cash flows in the above table, based on correlation
factors, which take into consideration that interest rate relationships and
spreads differ depending on the cycle and level of external market interest
rates.
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
factors. These factors correlate changes in a base or driver rate, such as the
NY Prime Rate, with changes in the rates for interest sensitive assets and
liabilities. Correlation factors for interest sensitive assets are based on
historical national averages. Correlation factors for interest sensitive
deposits are based on historical averages unique to the Bank. These factors take
into consideration that interest rate relationships and spreads differ depending
on the cycle and level of external market interest rates.
One way to predict how a change in interest rates will impact net interest
income for specific time frames is through the weighted cumulative gap measure.
For example, the weighted cumulative gap in the "181-365 days" repricing
category represents a one year net liability position of approximately
($5,846,000) or -2.6% of earning assets at December 31, 1996. The liability
sensitive gap position implies that over the next year there will be a positive
impact on net interest income if market interest rates decline. The theory is
that more liabilities will reprice, at lower market interest rates, than the
assets that they support. Conversely, an increase in market interest rates would
have a negative impact on net interest income.
It is important to note that the table displays a point in time analysis and
is only a general indicator of interest rate sensitivity. In addition, the
interest rate sensitivity of the Corporation's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used. As perceptions about interest rates and the market change, positions at
the end of any period may not reflect the Corporation's view in subsequent
periods.
Based on the results of a recent analysis of interest rate risk, management
believes the Corporation is reasonably well positioned to respond expeditiously
to market interest rate changes.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate
equity-to-assets ratio. Another significant effect of inflation is on
non-interest expenses, which tend to rise during periods of general inflation.
The level of inflation, as measured by the annual average percentage change in
the Consumer Price Index for all urban consumers, was 2.9%, 2.8%, and 2.6% for
1996, 1995 and 1994 respectively.
Management believes the most significant impact on financial results is the
Corporation's ability to react to changes in market interest rates. As discussed
previously, Management strives to structure the balance sheet to increase net
interest income by managing interest rate sensitive assets and liabilities in
such a way that they reprice in response to changes in market interest rates.
- --------------------------------------------------------------------------------
Table 12-Summary of Quarterly Financial Data
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands,
except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 4,632 $ 4,680 $ 4,640 $ 4,571 $ 4,825 $ 4,656 $ 4,550 $ 4,315
Interest expense 2,163 2,190 2,218 2,185 2,259 2,292 2,174 1,997
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 2,469 2,490 2,422 2,386 2,566 2,364 2,376 2,318
Provision for loan losses 1 25 50 58 196 0 31 1
Non-interest income 255 275 223 228 304 218 238 214
Non-interest expense 1,939 1,685 1,593 1,550 1,711 1,535 1,703 1,614
------- ------- ------- ------- ------- ------- ------- -------
Net operating income 784 1,055 1,002 1,006 963 1,047 880 917
Gain (loss) securities sales 100 0 2 0 0 0 0 (62)
Gain other 0 0 7 12 0 0 4 0
------- ------- ------- ------- ------- ------- ------- -------
Pretax income 884 1,055 1,011 1,018 963 1,047 884 855
Provision for income taxes 279 334 334 314 301 324 279 251
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 605 $ 721 $ 677 $ 704 $ 662 $ 723 $ 605 $ 604
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income per share (1) $ 0.58 $ 0.69 $ 0.65 $ 0.67 $ 0.63 $ 0.69 $ 0.58 $ 0.58
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
(1) Net income per share was retroactively adjusted for stock dividends.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
CODORUS VALLEY BANCORP, INC.
1. PEOPLESBANK, A Codorus Valley Company - 100% owned
1 Manchester Street, P.O. Box 67
Glen Rock, Pennsylvania 17327
2. SYC Realty Company, Inc. - 100% owned
1 Manchester Street, P.O. Box 67
Glen Rock, Pennsylvania 17327
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-
K) of Codorus Valley Bancorp, Inc. of our report dated January 13, 1997,
included in the 1996 Annual Report of Codorus Valley Bancorp, Inc.
We also consent to the incorporation by reference in the Registration
Statement (Post-Effective Amendment No. 2 to Form S-3 No. 33-46171) and Form
S-8 (Registration No. 333-09277) pertaining to the 1996 Stock Incentive Plan
of Codorus Valley Bancorp, Inc. of our report dated January 13, 1997, with
respect to the consolidated financial statements of Codorus Valley Bancorp,
Inc. incorporated by reference in this Annual Report (Form 10-K) for the year
ended December 31, 1996.
Harrisburg Pennsylvania /s/ Ernst & Young LLP
March 24, 1997
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Larry J. Miller and Jann A. Weaver, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Codorus Valley Bancorp, Inc.), to sign this Form 10-K and any or all amendments
to this Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
/s/ George A. Trout Chairman of the Board of 3/25/97
- ----------------------- Directors and Director
George A. Trout, D.D.S.
/s/ Larry J. Miller President, Chief Executive 3/25/97
- ----------------------- Officer and Director
Larry J. Miller
(Principal Executive Officer)
/s/ Barry A. Keller Vice Chairman of the Board of 3/25/97
- ----------------------- Directors and Director
Barry A. Keller
/s/ Dallas L. Smith Secretary and Director 3/25/97
- -----------------------
Dallas L. Smith
/s/ M. Carol Druck Assistant Secretary, 3/25/97
- ----------------------- Assistant Treasurer and Director
M. Carol Druck
/s/ MacGregor S. Jones Assistant Secretary and 3/25/97
- ----------------------- Director
MacGregor S. Jones
/s/ Rodney L. Krebs Treasurer and Director 3/25/97
- -----------------------
Rodney L. Krebs
/s/ Donald H. Warner Vice President and Director 3/25/97
- -----------------------
Donald H. Warner
/s/ D. Reed Anderson Director 3/25/97
- -----------------------
D. Reed Anderson, Esq.
/s/ Jann A. Weaver Assistant Treasurer and 3/25/97
- ----------------------- Assistant Secretary
Jann A. Weaver
(Principal Financial and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,012
<INT-BEARING-DEPOSITS> 337
<FED-FUNDS-SOLD> 300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,859
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 166,651
<ALLOWANCE> 2,110
<TOTAL-ASSETS> 237,329
<DEPOSITS> 209,460
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 1,163
<LONG-TERM> 0
0
0
<COMMON> 2,613
<OTHER-SE> 20,093
<TOTAL-LIABILITIES-AND-EQUITY> 237,329
<INTEREST-LOAN> 14,447
<INTEREST-INVEST> 3,963
<INTEREST-OTHER> 113
<INTEREST-TOTAL> 18,523
<INTEREST-DEPOSIT> 8,669
<INTEREST-EXPENSE> 87
<INTEREST-INCOME-NET> 9,767
<LOAN-LOSSES> 134
<SECURITIES-GAINS> 102
<EXPENSE-OTHER> 6,755
<INCOME-PRETAX> 3,968
<INCOME-PRE-EXTRAORDINARY> 3,968
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,707
<EPS-PRIMARY> 2.59
<EPS-DILUTED> 2.59
<YIELD-ACTUAL> 4.38
<LOANS-NON> 2,063
<LOANS-PAST> 524
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,286
<CHARGE-OFFS> 387
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 2,110
<ALLOWANCE-DOMESTIC> 2,110
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
