FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-15536
Codorus Valley Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2428543
(State of incorporation) (I.R.S. Employer ID No.)
1 Manchester Street, P.O. Box 67, Glen Rock, PA 17327
(Address of principal executive offices) (Zip Code)
(717) 235-6871 or (717) 846-1970
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
1,097,259 shares of $2.50 (par value) common stock were
outstanding as of 7-22-97 .
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CODORUS VALLEY BANCORP, INC.
10Q INDEX
Page
#
PART I - FINANCIAL INFORMATION:
- Consolidated Statements of Financial Condition... 1
- Consolidated Statements of Income................ 2
- Consolidated Statements of Cash Flows............ 3
- Notes to Consolidated Financial Statements....... 4
- Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 8
PART II - OTHER INFORMATION ............................... 19
Signature Page ............................................ 21
<PAGE>
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
June December June
30, 31, 30,
1997 1996 1996
--------- --------- ---------
Assets (dollars in thousands)
Cash and due from banks:
Interest bearing deposits with banks $ 126 $ 337 $ 352
Non-interest bearing deposits and cash 7,936 7,012 8,609
Federal funds sold 400 300 2,250
Loans held for sale 4,018 0 0
Securities available for sale 49,712 56,859 69,220
Loans 181,583 166,651 156,278
Less-allowance for loan losses (2,063) (2,110) (2,364)
-------- -------- --------
Total net loans 179,520 164,541 153,914
Premises and equipment 8,774 5,025 3,971
Interest receivable 1,628 1,642 1,810
Other assets 1,716 1,613 1,534
-------- -------- --------
Total assets............................$253,830 $237,329 $241,660
======== ======== ========
Liabilities
Deposits
Non-interest bearing demand $ 16,983 $ 19,142 $ 19,002
NOW 21,113 22,237 21,185
Insured money fund 30,665 25,651 27,263
Savings 21,712 20,652 22,529
Time CD's less than $100,000 110,203 106,283 109,957
Time CD's $100,000 and above 16,932 15,495 16,396
-------- -------- --------
Total deposits 217,608 209,460 216,332
Short-term borrowings 8,542 4,000 2,500
Long-term borrowings 2,911 0 0
Interest payable 752 796 831
Accrued expenses and other liabilities 484 367 598
-------- -------- --------
Total liabilities....................... 230,297 214,623 220,261
Stockholders' Equity
Series preferred stock, par value $2.50
per share; 1,000,000 shares authorized;
0 shares issued and outstanding 0 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 1,097,259
shares issued and outstanding at 6/30/97
and 1,045,296 at 12/31/96 and 6/30/96. 2,743 2,613 2,613
Additional paid-in capital 8,063 6,556 6,552
Retained earnings 12,355 13,191 12,220
Net unrealized gains on securities
available for sale, net of taxes 372 346 14
-------- -------- --------
Total stockholders' equity.............. 23,533 22,706 21,399
Total liabilities and stockholders'
equity.................................$253,830 $237,329 $241,660
======== ======== ========
See accompanying notes.
1
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
<TABLE>
Three months ended Six months ended
June 30, June 30,
(dollars in thousands, except per share data) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees from loans $4,001 $3,540 $7,804 $7,134
Interest from federal funds sold and interest
bearing deposits with banks 23 39 41 79
Interest and dividends from securities:
Taxable interest income 707 990 1,463 1,839
Tax-exempt interest income 52 60 103 134
Dividend income 14 11 29 25
------ ------ ------ ------
Total interest income.............................. 4,797 4,640 9,440 9,211
Interest Expense
NOW 93 119 190 235
Insured money fund 217 191 409 377
Savings 120 139 237 274
Time CD's less than $100,000 1,527 1,537 2,972 3,066
Time CD's $100,000 and above 230 224 444 443
------ ------ ------ ------
Total interest expense on deposits 2,187 2,210 4,252 4,395
Interest expense on short-term borrowings and
federal funds purchased 33 8 54 8
Interest expense on long-term borrowings 50 0 90 0
------ ------ ------ ------
Total interest expense............................. 2,270 2,218 4,396 4,403
------ ------ ------ ------
Net interest income................................. 2,527 2,422 5,044 4,808
Provision for Loan Losses 67 50 134 108
------ ------ ------ ------
Net interest income after provision for loan losses 2,460 2,372 4,910 4,700
Non-interest Income
Trust income 82 70 189 136
Service charges on deposit accounts 102 103 203 205
Other service charges and fees 51 50 124 110
Gain on sale of loans 3 7 3 7
Gain on sales of securities 0 2 0 2
------ ------ ------ ------
Total non-interest income 238 232 519 460
Non-interest Expense
Salaries and benefits 949 870 1,867 1,750
Occupancy of premises 115 105 225 217
Furniture and equipment 208 127 399 245
Postage, stationery and supplies 116 94 219 174
Professional and legal 87 51 123 101
Marketing and advertising 92 57 161 75
Acquired real estate, net 21 22 12 12
Other 261 267 642 557
------ ------ ------ ------
Total non-interest expense 1,849 1,593 3,648 3,131
Income before income taxes 849 1,011 1,781 2,029
Provision for Income Taxes 281 334 573 648
------ ------ ------ ------
Net income..........................................$ 568 $ 677 $1,208 $1,381
====== ====== ====== ======
Net income per common share..........................$0.52 $0.62 $1.10 $1.26
===== ===== ===== =====
See accompanying notes.
</TABLE>
2
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six months ended
June 30,
1997 1996
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 1,208 $ 1,381
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 284 181
Provision for loan losses 134 108
Provision for losses on assets acquired in foreclosure 0 (2)
Gain on sales of assets acquired in foreclosure (2) (13)
Gain on sales of loans (3) (7)
Gain on sales of securities 0 (2)
Decrease (increase) in interest receivable 14 (107)
(Increase) in other assets (100) (259)
(Decrease) in interest payable (44) (34)
Increase in other liabilities 117 188
Other, net (3) 5
------- -------
Net cash provided by operating activities............. 1,605 1,439
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 219 2,378
Proceeds from maturities and calls of securities
available for sale 9,211 9,454
Purchase of securities available for sale (2,273) (20,339)
Net (increase) in loans made to customers (19,695) (3,904)
Proceeds from loan sales 545 7,484
Purchases of premises and equipment (4,033) (629)
Proceeds from sale of assets acquired in foreclosure 39 500
------- -------
Net cash used in investing activities................ (15,987) (5,056)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 2,791 4,269
Net increase (decrease) in time deposits 5,357 (377)
Increase in short-term borrowings and
federal funds purchased 4,542 2,500
Increase in long-term borrowings 2,911 0
Dividends paid (397) (398)
Cash paid in lieu of fractional shares (9) (13)
------- -------
Net cash provided by financing activities............ 15,195 5,981
------- -------
Net increase in cash and cash equivalents............ 813 2,364
Cash and cash equivalents at beginning of year....... 7,649 8,847
------- -------
Cash and cash equivalents at June 30,................$ 8,462 $11,211
======= =======
Supplemental Disclosures:
Interest payments $4,295 $4,429
Income tax payments $510 $695
See accompanying notes.
3
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1-General
The interim financial statements are unaudited. However, they reflect
all adjustments which are, in the opinion of management, necessary to
present fairly the financial condition and results of operations for the
reported periods, and are of a normal and recurring nature.
These statements should be read in conjunction with notes to the audited
financial statements contained in the 1996 Annual Report to
Stockholders.
No shares of common stock are reserved for issuance in the event of
conversions or the exercise of warrants, options or other rights, except
for 57,881 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan, 50,300 shares for the 1996 Stock Incentive Plan, and
those shares reserved for the Shareholders' Rights Plan.
The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results to be expected for
the full year.
Note 2-Summary of Significant Accounting Policies
Allowance for Loan Losses - Management considers the allowance for loan
losses (reserve) to be adequate at this time.
Held for Sale Loans - Loans held for sale are reported at the lower of
cost or market value. The amount by which cost exceeds market value, if
any, is accounted for as a valuation allowance and is charged to
expense in the period of the change.
Per Share Computations - All per share computations include the
retroactive effect of stock dividends. The weighted average number of
shares of common stock outstanding was approximately 1,097,259 for the
six month periods ended June 30, 1997 and 1996.
Reclassifications - Certain reclassifications have been made to the 1996
consolidated financial statements to conform with the 1997 presentation.
Note 3-Current Accounting Developments
SFAS No. 121 - Effective January 1, 1996 the Corporation adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The new rule specifies, among other things, when assets should be
reviewed for impairment, how to determine if an asset is impaired, how
to measure an impairment loss, and what disclosures are necessary in the
financial statements. Adoption of Statement No. 121 did not affect the
assets, earnings or capital of the Corporation.
4
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 3-Current Accounting Developments, continued
SFAS No. 122 - Effective January 1, 1996, the Corporation adopted
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights." The new rule requires that management
recognize as separate assets, rights to service mortgage loans for
others, regardless of how they were acquired. Management should
allocate the total cost of mortgage loans, either purchased or
originated, to the loans and the servicing rights based on their
relative fair value. Statement No. 122 also specifies how mortgage
servicing rights and excess servicing rights should be evaluated for
impairment. In June 1996, Statement No. 122 was superseded by SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" as described more fully below. Adoption
of Statement No. 122 did not materially affect the assets, earnings or
capital of the Corporation.
SFAS No. 125 - On June 30, 1996, the FASB issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" which supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights," and amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." This
Statement provides accounting and reporting guidance for transfers and
servicing of financial assets and extinguishments of liabilities based
on the application of a "financial-components approach" that focuses on
control. Under this approach, when an entity transfers financial
assets, it recognizes the financial and servicing asset it controls
and the liabilities it has incurred, and derecognizes liabilities when
extinguished. The Statement is effective for specified transactions
occurring after December 31, 1996. On October 31, 1996, the FASB issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS No. 125," which defers until January 1, 1998, the effective date of
paragraph 9-12 for the following specific transactions: securities
lending, repurchase agreements, dollar rolls, and other similar secured
transactions. Additionally, the FASB agreed to defer for one year
paragraph 15 for all transactions. Statement No. 125 must be applied
prospectively. Adoption of this Statement did not, and is not expected
to have a material impact on the assets, earnings or capital of the
Corporation.
SFAS No. 128 - In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" which supersedes APB
Opinion No. 15. Statement No. 128, effective for financial statements
issued after December 15, 1997, simplifies the computation of earnings
per share (EPS) by replacing the presentation of primary EPS with a
presentation of basic EPS. Under this Statement the dilutive effect of
stock options will be excluded when calculating basic EPS. Statement
No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Adoption of Statement No. 128 is not
expected to have a material impact on the EPS calculations of the
Corporation.
5
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 3-Current Accounting Developments, continued
SFAS No. 130 - In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income includes net income
plus all other non-owner changes in equity currently excluded from net
income. These other non-owner changes in equity currently include
transactions specified in SFAS No. 52, "Foreign Currency Translation",
SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 87,
"Employers' Accounting for Pensions", and SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Statement No.
130 is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. Management is currently reviewing
this Statement and the impact it may have on the Corporation.
SFAS No. 131 - In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This rule changes the way in
which companies currently report segment information in annual
financial statements and also requires those companies to report
selected segment information in interim financial reports to
shareholders. Statement No. 131 supersedes Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise," by
requiring management to use a "management approach" in reporting
segment information as opposed to an "industry approach." The
management approach requires public companies to report financial and
descriptive information on segments of the enterprize that produce
revenue, are internally measured, and whose operating results are
regularly reviewed. Statement No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 with
early adoption encouraged. Adoption of this Statement is not expected
to have a material impact on the assets, earnings or capital of the
Corporation.
6
<PAGE>
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Impaired Loans
The Corporation records impaired loans in accordance with Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." For all
reportable periods, impaired loans were, for practical purposes,
comprised of collateral dependent commercial loans and residential
mortgage loans classified as nonaccrual(cash basis). Additional
information regarding impaired loans is provided in the schedule that
follows.
June December June
30, 31, 30,
(dollars in thousands) 1997 1996 1996
------ ------ ------
Impaired loans $2,889 $2,063 $2,867
Amount of impaired loans that
have a related allowance $2,889 $2,063 $2,867
Amount of impaired loans with
no related allowance $0 $0 $0
Allowance for impaired loans $390 $371 $388
For the six month period ended
June 30,
1997 1996
------ ------
Average investment in impaired loans $1,904 $3,964
Interest income recognized on
impaired loans (all cash-basis method) $49 $39
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the six month period
ended June 30, were as follows:
(dollars in thousands) 1997 1996
------ ------
Balance-January 1, $2,110 $2,286
Provision charged to operating expense 134 108
Loans charged off (244) (73)
Recoveries 63 43
------ ------
Balance-June 30, $2,063 $2,364
====== ======
7
<PAGE>
CODORUS VALLEY BANCORP, INC.
Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity
presented in its accompanying consolidated financial statements for Codorus
Valley Bancorp, Inc., a bank holding company (the Corporation), and its
wholly-owned subsidiary, PeoplesBank, A Codorus Valley Company (the Bank),
formerly Peoples of Glen Rock until February 1997. The Corporation's
consolidated financial condition and results of operations consist almost
entirely of the Bank's financial condition and results of operations. This
discussion should be read in conjunction with the 1996 Annual Report.
Current performance does not guarantee, assure, or may not be indicative of
similar performance in the future.
In addition to historical information, this 10-Q Report contains forward-
looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Important factors that might
cause such a difference include, but are not limited to, those discussed in
this "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" section. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Corporation
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in other
documents the Corporation files periodically with the Securities and
Exchange Commission.
Three months ended June 30, 1997
compared to three months ended June 30, 1996
RESULTS OF OPERATIONS
Net income for the current three month period was $568,000, or $.52 per
share, compared to $677,000 or $.62 per share, for the same period in 1996.
Per share amounts for both periods were adjusted to reflect a five percent
stock dividend declared on April 8, 1997, payable on June 12, 1997, to
shareholders of record April 22, 1997. Net income was down from 1996 due
primarily to a higher level of noninterest expense. The increase in
noninterest expense was due primarily to increased investment in facilities,
systems and new technology in accordance with the Corporation's strategic
plan. Staffing and marketing expenses also contributed to the increase in
noninterest expenses. In April 1997 the Bank opened its eighth full service
community banking office in East York, Pennsylvania.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
8
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CODORUS VALLEY BANCORP, INC.
Total interest income for the current three month period was $4,797,000, up
$157,000 or 3.4% above the $4,640,000 earned in the same period of 1996. The
$157,000 increase in interest income was due primarily to a larger volume of
loans. The average volume of total loans (including held-for-sale loans) for
the current quarter was approximately $175.7 million, up $24.1 million or 16%
above the second quarter in 1996. Conversely, the quarterly average volume of
total investment securities declined approximately $18.8 million from 1996 as
proceeds from sales and maturities were used to partially fund loan demand.
As of June 30, 1997, approximately $4 million in fixed rate mortgage loans
were reclassified as held-for-sale.
Total interest expense for the current three month period was $2,270,000, up
$52,000 or 2.3% above the $2,218,000 incurred for the same period in 1996.
The $52,000 increase in interest expense reflects a larger volume of interest
bearing liabilities, principally borrowings, e.g., purchased funds, from the
Federal Home Loan Bank of Pittsburgh (FHLBP). Borrowing from the FHLBP
provided a source of funding for loan growth. Total average deposits were
basically unchanged between the two periods due to competitive pressures.
Net interest income for the current three month period was $2,527,000, up
$105,000 or 4.3% above the $2,422,000 earned in the second quarter of 1996.
The increase net interest income for the current period was achieved
primarily from a larger volume of loans.
The provision (expense) for possible loan losses was $67,000 for the current
three month period compared to $50,000 for the second quarter of 1996. The
provision for both periods was necessary to support loan growth.
Total noninterest income for the current three month period was $238,000
which approximated the same quarter in 1996.
Total noninterest expense for the current three month period was $1,849,000,
up $256,000 or 16% above the $1,593,000 incurred for the second quarter of
1996. The $256,000 increase in non-interest expense was due primarily to
increased investment in facilities, systems and new technology in accordance
with the Corporation's strategic plan. Staffing and marketing expenses also
contributed to the increase in noninterest expenses. In April 1997 the Bank
opened its eighth full service community banking office in East York,
Pennsylvania. A more detailed explanation of increases in specific
noninterest expense components is provided in the year-to-date section of
this report.
The provision for federal income taxes declined $53,000 in the current period
due to a reduction in income before income taxes.
9
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CODORUS VALLEY BANCORP, INC.
Six months ended June 30, 1997
compared to six months ended June 30, 1996
Net income for the current six month period was $1,208,000, or $1.10 per
share, compared to $1,381,000, or $1.26 per share, for the same period in
1996. Per share amounts were adjusted to reflect the five percent stock
dividend described earlier. Net income for the first six months of 1997 was
down from 1996, as anticipated, due primarily to a higher level of
noninterest expense. The increase in noninterest expense was driven in part
by capital investments in facilities, and systems and technology in
accordance with the Corporation's strategic plan. Staffing costs increased
due primarily to the addition of a new branch. In April 1997, the Bank opened
its eighth full service community banking office in East York, Pennsylvania.
Marketing expenditures also contributed to the increase in noninterest
expense due to the Bank's "brand image" campaign and promotion of the new
branch. For the first six months of 1997, the annualized return on average
assets (ROA) and average equity (ROE) were approximately 1% and 10.3%,
respectively, compared to 1.17% and 12.9%, respectively, for 1996.
At June 30, 1997, total assets were approximately $254 million, reflecting a
5% increase above June 30, 1996. Book value per share, as adjusted for stock
dividends, was $21.45 on June 30, 1997, compared to $19.50 on June 30, 1996.
The Corporation's capital remained sound as evidenced by a Tier I Risked-
Based Capital Ratio of 12.4% and a Total Risk-Based Capital Ratio of 13.5% on
June 30, 1997.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
Total interest income for the current six month period was $9,440,000, up
$229,000 or 2.5% above the $9,211,000 earned in the same period of 1996. The
$229,000 increase in total interest income was due primarily to a larger
volume of earning assets, principally commercial loans. The average volume of
total loans for the current six month period (including held-for-sale loans)
was approximately $171.3 million, up $17.5 million or 11.4% above the average
loan balance for the same period in 1996. The yield on total loans,
annualized and on a taxable equivalent basis, was 9% and 9.13% for 1997 and
1996, respectively. During the second quarter of 1997, approximately $4
million in fixed rate residential mortgage loans were classified as held-for-
sale. In July 1997, the Bank committed to sell the held-for-sale loan
portfolio to the Federal National Mortgage Association (FNMA). The sale is
expected to generate a pretax gain of approximately $54,000. In contrast to
loan growth, the average volume of securities available-for-sale for the
current period was approximately $52 million, down $13 million or 20% below
the average balance for the same period in 1996. Proceeds from the maturity,
sale, or call of investment securities were used to partially fund loan
demand. For the third quarter of 1997 interest earning assets are expected to
grow at a slower pace than the second quarter due to seasonal factors and
reduced demand.
10
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CODORUS VALLEY BANCORP, INC.
Total interest expense for the current six month period was $4,396,000, which
approximated the cost for the comparable period in 1996. The six month
average balance of total deposits was approximately $212 million for 1997
compared to $213 million for 1996. The average annualized rate paid on
interest bearing deposits for period ended June 30, 1997, was approximately
4.39%, compared to 4.47% for period ended June 30, 1996. In the absence of
deposit growth during the current period, the Bank partially funded loan
growth with funds borrowed primarily from the Federal Home Loan Bank of
Pittsburgh (FHLBP). For 1997, the six month average balance of borrowed funds
approximated $4.6 million at an average annualized rate of 6.31%. Deposit
growth will continue to challenge PeoplesBank as well as the commercial
banking industry due to competitive pressures, and increased investment by
households and businesses in the stock and mutual fund markets. Some deposit
growth is anticipated for the third quarter of 1997 due primarily to the
recent addition of a full service community banking office.
Net interest income for the current six month period was $5,044,000, up
$236,000 or 4.9% above the same period in 1996. The increase in net interest
income for the current period was a result of a larger volume of earning
assets, principally commercial loans. The net yield on average earning
assets, annualized and on a taxable equivalent basis, was approximately 4.57%
for the current six month period compared to 4.43% for the same period in
1996. The increase in the net yield on average earning assets was
attributable to a larger volume of higher yielding loans and a smaller volume
of lower yielding investment securities.
The provision (expense) for possible loan losses was $134,000 for the current
six month period compared to $108,000 for the same period in 1996. The
provision for both periods was necessary to support loan growth.
Total noninterest income for the current six month period was $519,000, up
$59,000 or 13% above the same period in 1996. The $59,000 increase in
noninterest income was due primarily to an increase in trust fees
attributable to business growth and asset appreciation. The recent historical
growth rate for noninterest income is expected to be sustained in the period
ahead based on normal business growth.
Total noninterest expense for the current six month period was $3,648,000, up
$517,000 or 16.5% above the same period in 1996. The $517,000 increase in
noninterest expense was primarily the result of increases within the
following expense categories: salaries and benefits, up $117,000; furniture
and equipment, up $154,000; marketing and advertising, up $86,000; and other
expenses, up $85,000. The increase in salaries and benefits was primarily
attributable to planned staff additions necessary to support business growth.
This includes staffing the full service community banking office which opened
in April 1997 at 2701 Eastern Boulevard, East York, Pennsylvania. The
increase in furniture and equipment expense reflects increased depreciation
and maintenance costs from increased investment in computer equipment and
systems that were purchased in the latter half of 1996
11
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CODORUS VALLEY BANCORP, INC.
and in 1997. Comparatively, depreciation expense for the first half of 1996
was low because the Bank's computer system was fully depreciated in 1995. The
increase in marketing and advertising expense was primarily attributable to
a brand image campaign associated with the new name of the Corporation's
financial services subsidiary PeoplesBank, A Codorus Valley Company (formerly
Peoples Bank of Glen Rock). Promotion of the new branch and increased product
promotions also contributed to the increase in marketing and advertising
expense. The increase in other expense, an aggregate of individual items,
increased primarily as a result of increased charitable donations and normal
business growth. Noninterest expense is expected to increase in the period
ahead due to depreciation and other expenses associated with increased
capital investment in physical facilities, principally the Codorus Valley
Corporate Center and new branch, and technological system solutions in
accordance with the Corporation's strategic plan.
The provision for federal income taxes declined $75,000 in the current period
due to a reduction in income before income taxes.
CREDIT RISK AND LOAN QUALITY
A summary of nonperforming assets and past due loans, and related ratios, is
provided in Table 1 incorporated herein. An explanation of changes within
each classification for June 30, 1997, compared to June 30, 1996, is provided
below.
The major component of nonperforming assets is impaired loans. A quarterly
analysis of loans and reserve adequacy in June 1997 resulted in the
classification of approximately $1 million in loans to impaired status.
Approximately half of the $1 million addition was attributable to one
commercial borrower. The recent classification increased the impaired loan
portfolio to its current level of $2,889,000 on June 30, 1997, which
approximated the size of the impaired loan portfolio on June 30, 1996. At
June 30, 1997, the impaired loans portfolio was comprised of twenty four
unrelated relationships, primarily commercial loan relationships, ranging in
size from approximately $3,500 to $545,000. These loan relationships vary by
industry and are generally collateralized with real estate assets. A loss
reserve, which is evaluated quarterly, has been established for accounts that
appear to be under-collateralized. The Corporation uses the cash basis method
to recognize interest income on loans that are impaired. For all reportable
periods, impaired loans were principally comprised of collateral dependent
commercial loans and residential mortgage loans classified as nonaccrual.
Efforts to modify contractual terms for individual accounts, based on
prevailing market conditions, or liquidate collateral assets, are proceeding
as quickly as potential buyers can be located and legal constraints permit.
The other component of nonperforming assets, assets acquired in foreclosure
(net of a related reserve) increased $406,000 or 105% since June 30, 1996, to
a level of $791,000. The increase in assets acquired, reflected loan
12
<PAGE>
CODORUS VALLEY BANCORP, INC.
collateral taken in satisfaction of debt. At June 30, 1997, the assets
acquired portfolio consisted primarily of improved real estate from six
unrelated accounts. Generally Accepted Accounting Principles require that
assets taken in satisfaction of debt be accounted for on an individual asset
basis, at the lower of (a) fair value minus estimated costs to sell or (b)
cost. A loss reserve, which is evaluated quarterly, has been established for
assets whose estimated market value, less selling expenses, is below their
financial carrying costs. At June 30, 1997 and 1996, the reserve level was
deemed adequate and no loss provisions were recorded for either period.
Efforts to liquidate assets acquired are proceeding as quickly as potential
buyers can be located and legal constraints permit.
At June 30, 1997, loans past due 90 days or more and still accruing interest
totalled $1,381,000. Of this total, $1,043,000 was attributable to one
commercial loan account. Generally, loans in the past due category are well
collateralized and in the process of collection. The current level of past
due loans is closely monitored and believed to be within a manageable range.
At June 30, 1997, there were no potential problem loans, as defined by the
Securities and Exchange Commission, identified by management. However,
management was monitoring loans of approximately $6.2 million for which the
ability of the borrower to comply with present repayment terms was uncertain.
These loans were not included in the Table 1 disclosure. They are monitored
closely, and management presently believes that the allowance for loan losses
is adequate to cover anticipated losses that may be attributable to these
loans. Comparatively, management was monitoring loans of approximately $10.8
million on June 30, 1996.
Table 2, Analysis of Allowance for Loan Losses, incorporated herein, depicts
a $2,063,000 allowance (reserve) at June 30, 1997. The reserve as a
percentage of total loans was 1.11% at June 30, 1997, compared to 1.51% at
June 30, 1996. The decrease in the reserve ratio for the current period was
primarily attributable to improvement in the quality of individual loans
within the impaired loan portfolio. The provision expense was $134,000 for
the current period which primarily supported loan growth, principally
commercial loans. Of the total $244,000 charged-off in the current period,
$172,000 was attributable to one commercial loan borrower whose accounts were
deemed uncollectible. Based on a recent evaluation of potential loan losses,
management believes that the allowance is adequate to support any reasonably
foreseeable level of losses that may arise. Ultimately, however, the adequacy
of the allowance is largely dependent upon future economic factors beyond the
Corporation's control. With this in mind, additions to the allowance for
loan losses may be required in future periods.
LIQUIDITY
During the current period the need for funds increased as a result of
increased loan demand, principally commercial loans, and planned capital
13
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CODORUS VALLEY BANCORP, INC.
expenditures. Primary funding sources included matured investment securities,
deposit growth, and loans from the Federal Home Loan Bank of Pittsburgh
(FHLBP).
The loan-to-deposit ratio, excluding held-for-sale loans, was approximately
83% at June 30, 1997, compared to 72% at June 30, 1996. The increase in this
ratio reflected a decline in liquidity, as loan growth outpaced deposit
growth in the current period.
During the current period, the Bank routinely used its line of credit with
the FHLBP as a short term funding strategy. The rate is established daily by
the FHLBP based on prevailing market prices for overnight funds. The Bank's
maximum borrowing capacity under the line of credit, established quarterly by
the FHLBP, was approximately $68 million as of March 31, 1997, the most
recent FHLBP analysis available. At June 30, 1997, the Bank had $8.5 million
outstanding on its line of credit with the FHLBP.
In January, 1997, the Bank borrowed $3 million from the FHLBP under a ten
year, 6.82% fixed rate note arrangement to help fund its residential mortgage
loan program.
In light of competitive pressures and the public allure with the stock and
mutual fund markets, traditional deposit funding, by necessity, will continue
to be supplemented with borrowed funds for the foreseeable future.
STOCKHOLDERS' EQUITY (CAPITAL)
Total stockholders' equity, or capital, was $23,533,000 at June 30, 1997,
compared to $21,399,000 at June 30, 1996. Growth in equity during the current
period was due primarily to earnings retention from profitable operations.
Book value per share, adjusted for both periods for the 5 percent stock
dividend declared in April 1997, was $21.45 on June 30, 1997, compared to
$19.50 on June 30, 1996.
On July 8, 1997, the Board of Directors declared a regular quarterly cash
dividend of $.20 per share, payable on or before August 12, 1997, to
shareholders of record July 22, 1997. The recent cash dividend declaration
represents a $.01 increase above the $.19 per share paid in February and May
of the current year. Additionally, a five percent stock dividend was paid on
June 12, 1997, to shareholders of record April 22, 1997, as previously
disclosed in the Form 10-Q for the period ended March 31, 1997.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends, was approximately 1,097,258 for the six month periods
ended June 30, 1997, and June 30, 1996, respectively.
The Corporation's capital level, on a consolidated basis, remained sound for
the current period as evidenced by a Tier I Risk-Based Capital Ratio of 12.4
14
<PAGE>
CODORUS VALLEY BANCORP, INC.
percent and a Total Risk-Based Capital Ratio of 13.5 per cent on June 30,
1997. Comparatively, these ratios were 13.9 percent and 15.2 percent,
respectively, on June 30, 1996. The decline in the capital ratios reflected
a change in the mix of assets. The level of commercial loans and fixed
assets, which are assigned a 100 percent weighting for risk, increased
relative to lower risk-weighted investment securities. The Bank Only Tier I
Risk-Based Capital Ratio was 10.3 percent and its Total Risk-Based Capital
Ratio was 11.4 percent. The Bank Only capital ratios exceeded the minimum
federal regulatory requirements for well capitalized banks of 6 percent and
10 percent, respectively.
As previously disclosed in the 1996 Annual Report to Shareholders and
Securities and Exchange Commission filings, the Board of Directors began
implementing a series of initiatives, in accordance with the Corporation's
long-range strategic plan. These initiatives are designed to strengthen the
position of the Corporation as a financial services provider for the twenty-
first century. One such initiative is the construction of a new corporate
headquarters, to be known as Codorus Valley Corporate Center. Occupancy of
this approximately $5.4 million project is scheduled for August 1997, at
which time the Corporation plans to lease seventy-five percent of the space
to the Bank. The remaining space will be available for lease to nonaffiliated
parties. Another initiative involved branch office expansion. On April 22,
1997, the Bank opened it's eighth full service community banking office,
located in East York, Pennsylvania. The approximate cost of this project was
$825,000 which included purchase price, renovations, and furniture and
equipment. Both capital projects are being funded with cash generated from
current Bank operations. On April 25, 1997, another strategic initiative was
accomplished when the Corporation's common stock began quotation on the
Nasdaq National Stock Market System under the symbol "CVLY."
In June 1997, the Bank introduced a twenty-four hour telephone banking
service called PhoneconnecT. This system, which cost approximately $41,000,
enables clients to obtain information about their accounts, transfer funds,
and make loan payments by using a touch-tone telephone. Recently, the Bank
purchased a platform automation system which is being installed in each of
its community banking offices. Platform automation will increase process
efficiency for the Bank and improve client service and sales. This system is
projected to cost $70,000 and completion is scheduled by September 30, 1997.
Capital investments made in 1996 and 1997 to date, and additional planned
investment, relative to physical expansion and cost effective technological
system solutions, will reduce Corporate net income and capital growth in the
period ahead. However, these expenditures are necessary to grow market share
and net income over the long term, and are important components of the
overall strategy to achieve the goal of enhancing long term shareholder
value.
15
<PAGE>
CODORUS VALLEY BANCORP, INC.
OTHER MATTERS
The Corporation's noncontributory defined benefit plan (the "Plan") was
terminated effective May 1, 1997. This action was taken because it was
determined that the costs associated with the Plan exceeded the eventual
benefit to employees, and that there are more beneficial plan alternatives
available. Pursuant to Plan termination, excess assets will be distributed to
employees in the form of cash or deposited to another retirement plan.
Retirees received an irrevocable annuity. Management currently believes that
Plan termination will not have a material impact on the Corporation during
1997.
On January 1, 1997, the SEC issued new disclosure rules related to
derivatives and exposures to market risk (e.g., interest rate risk, foreign
currency exchange risk, commodity price risk, equity price risk) from
derivative instruments, other financial instruments and certain derivative
commodity instruments. The new disclosure rules have two parts: market risk
disclosures (both quantitative and qualitative) outside the financial
statements, and accounting policy disclosures about derivatives in the notes
to the financial statements. Market risk disclosures must be included in
financial statements for years ending after June 15, 1997, for registrants
with market capitalization in excess of $2.5 billion. Other registrants are
required to provide the new market risk disclosures in their annual report to
shareholders and their Form 10-K for fiscal years ending after June 15, 1998.
Accounting policy disclosures for derivative financial instruments are
effective for all registrants beginning with financial statements for periods
ending after June 15, 1997. Management is currently reviewing the SEC's new
rules and the impact they may have on the Corporation.
Periodically, various types of federal and state legislation is proposed that
could result in additional regulation of, or restrictions on, the business of
the Corporation and the Bank. It cannot be predicted whether such legislation
will be adopted or, if adopted, how such legislation would affect the
business of the Corporation and the Bank.
Further, the business of the Corporation is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives to increase profits and market share. Management also expects
increased diversification of financial products and services offered by the
Corporation or subsidiary thereof, and its competitors. Management believes
that such consolidations and mergers, and diversification of products and
services may enhance its competitive position as a community bank.
Except as disclosed herein, the Corporation is not currently aware of any
other trends, events or uncertainties which may materially and adversely
effect capital, results of operations or liquidity.
16
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
June 30, December 31, June 30,
(dollars in thousands) 1997 1996 1996
------ ------ ------
Impaired loans (1) $2,889 $2,063 $2,867
Assets acquired in foreclosure (2) 791 780 385
------ ------ ------
Total nonperforming assets $3,680 $2,843 $3,252
====== ====== ======
Loans past due 90 days or more
and still accruing interest $1,381 $524 $1,552
Ratios:
Impaired loans as a % of
total period-end loans 1.56% 1.24% 1.83%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 1.97% 1.70% 2.08%
Nonperforming assets as a % of
total period-end stockholders'
equity 15.64% 12.52% 15.20%
Allowance for loan losses as a
multiple of impaired loans .7x 1.0x .8x
Interest not recognized on impaired
loans at period-end: (3)
Contractual interest due $277 $246 $285
Interest revenue recognized 53 18 39
---- ---- ----
Interest not recognized in operations $224 $228 $246
==== ==== ====
(1) Comprised solely of nonaccrual loans.
(2) Net of related allowance(reserve).
(3) This table includes interest not recognized on loans which were
classified as impaired at period-end. While every effort is being
made to collect this interest revenue, it is probable a portion will
never be recovered.
17
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 1997 1996
------ ------
Balance-January 1, $2,110 $2,286
Provision charged to operating expense 134 108
Loans charged off:
Commercial 189 7
Real estate-mortgage 0 2
Consumer 55 64
------ ------
Total loans charged off 244 73
Recoveries:
Commercial 40 19
Real estate-mortgage 20 0
Consumer 3 24
------ ------
Total recoveries 63 43
------ ------
Net charge-offs 181 30
Balance-June 30, $2,063 $2,364
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans 0.21% 0.04%
Allowance for loan losses to total loans
at period-end 1.11% 1.51%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 48.3% 53.5%
18
<PAGE>
CODORUS VALLEY BANCORP, INC.
PART II - Other Information:
Item 1. Legal proceedings
Various legal actions or proceedings, arising in the ordinary course of
business, are pending involving the Corporation or its subsidiaries. In the
opinion of management, these matters are without merit or, if determined
adversely to the Registrant, will not have a material impact on the
Corporation's liquidity, capital resources, or results of operations.
Item 2. Changes in securities - nothing to report.
Item 3. Defaults upon senior securities - nothing to report.
Item 4. Submission of matters to a vote of security holders -
(a) An annual meeting of shareholders was held on May 20, 1997, at
10:00 am, at the Holiday Inn Holidome, 2000 Loucks Road, York,
Pennsylvania, 17404.
(b), (c) Two matters were voted upon at the May 20, 1997, meeting
as follows:
(1) Three directors were re-elected:
Votes Votes
Term cast Against or
Re-elected Expires For Withheld*
Class A:
Rodney L. Krebs 2000 832,338 1,682
Dallas L. Smith 2000 827,062 6,958
George A. Trout, DDS 2000 831,875 2,145
*includes broker nonvotes.
Directors whose term continued after the meeting:
Term Expires
Class B:
M. Carol Druck 1998
Barry A. Keller 1998
Donald H. Warner 1998
Class C:
D. Reed Anderson, Esq. 1999
MacGregor S. Jones 1999
Larry J. Miller 1999
(2) The shareholders ratified the selection of Ernst & Young LLP,
Harrisburg, Pennsylvania, as the independent auditors for the
Corporation for the year ending December 31, 1997. Votes were cast
as follows: 831,835 for, 2,044 against, and 141 abstentions or
broker nonvotes.
19
<PAGE>
CODORUS VALLEY BANCORP, INC.
PART II - Other Information, continued:
Item 5. Other information - nothing to report.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -
The Corporation filed a Form 8-K, via EDGAR, dated April 25, 1997. It
disclosed the issuance, by the Registrant, of a press release on April 22,
1997, titled "Shares to Trade in Nasdaq National Market." The press release
stated that the common stock of Codorus Valley Bancorp, Inc. will begin
quotation on April 25, 1997, in the Nasdaq National Stock Market System under
the symbol CVLY. The press release, in its entirety, filed as Exhibit 99 to
the Form 8-K, is incorporated herein by reference.
(b) Reports on Form 8-K - see Item 6(a) above.
20
<PAGE>
CODORUS VALLEY BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Codorus Valley Bancorp, Inc.
(Registrant)
August 1, 1997 By /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
August 1, 1997 By /s/ Jann A. Weaver
Date Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
21
<PAGE>
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