UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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.)
105 Leader Heights Road, P.O. Box 2887 York, PA 17405
(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.
2,303,987 shares of $2.50 (par value) common stock were
outstanding as of 7-28-98 .
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CODORUS VALLEY BANCORP, INC.
10Q INDEX
Page
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PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition... 1
Consolidated Statements of Income................ 2
Consolidated Statements of Cash Flows............ 3
Notes to Consolidated Financial Statements....... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 19
PART II - OTHER INFORMATION
Item 1. through Item 6..................................... 20
SIGNATURES................................................. 22
EXHIBIT 27, Financial Data Schedule........................ 23
<PAGE>
PART I - FINANCIAL INFORMATION: Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
June 30, December 31, June 30,
(dollars in thousands) 1998 1997 1997
Assets --------- --------- ---------
Cash and due from banks
Interest bearing deposits with banks $ 119 $ 123 $ 126
Non-interest bearing deposits and cash 7,861 7,721 7,936
Federal funds sold 4,998 5,350 400
Loans held for sale 0 0 4,018
Securities available for sale 48,950 40,303 49,712
Loans 186,444 191,342 181,583
Less-allowance for loan losses (1,922) (2,098) (2,063)
-------- -------- --------
Total net loans 184,522 189,244 179,520
Premises and equipment 9,578 9,797 8,774
Interest receivable 1,560 1,538 1,628
Other assets 1,918 982 1,716
-------- -------- --------
Total assets............................$259,506 $255,058 $253,830
======== ======== ========
Liabilities
Deposits
Non-interest bearing demand $ 23,528 $ 21,152 $ 16,983
NOW 23,194 22,041 21,113
Insured money fund and money market 31,839 28,901 30,665
Savings 21,419 19,992 21,712
Time CD's less than $100,000 110,757 112,874 110,203
Time CD's $100,000 and above 19,889 21,303 16,932
-------- -------- --------
Total deposits 230,626 226,263 217,608
Short-term borrowings 0 0 8,542
Long-term borrowings 2,688 2,802 2,911
Interest payable 793 820 752
Other liabilities 307 748 484
-------- -------- --------
Total liabilities....................... 234,414 230,633 230,297
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; 2,303,987 shares
shares issued at 6/30/98; 1,097,259 at
12/31/97 and 6/30/97 5,760 2,743 2,743
Common stock distributable, par value $2.50
per share; 1,097,259 shares payable 0 2,743 0
Additional paid-in capital 10,279 8,063 8,063
Retained earnings 8,786 10,444 12,355
Accumulated other comprehensive income from
unrealized gains on securities, net of tax 267 432 372
-------- -------- --------
Total stockholders' equity.............. 25,092 24,425 23,533
Total liabilities and stockholders'
equity.................................$259,506 $255,058 $253,830
======== ======== ========
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) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees from loans $4,269 $4,001 $8,559 $7,804
Interest from federal funds sold and interest
bearing deposits with banks 118 23 227 41
Interest and dividends from securities:
Taxable interest income 598 707 1,124 1,463
Tax-exempt interest income 74 52 132 103
Dividend income 14 14 29 29
------ ------ ------ ------
Total interest income.............................. 5,073 4,797 10,071 9,440
Interest Expense
NOW 87 93 171 190
Insured money fund 238 217 451 409
Savings 119 120 232 237
Time CD's less than $100,000 1,541 1,527 3,082 2,972
Time CD's $100,000 and above 280 230 575 444
------ ------ ------ ------
Total interest expense on deposits 2,265 2,187 4,511 4,252
Interest expense on short-term borrowings and
federal funds purchased 0 33 0 54
Interest expense on long-term borrowings 47 50 94 90
------ ------ ------ ------
Total interest expense............................ 2,312 2,270 4,605 4,396
------ ------ ------ ------
Net interest income................................ 2,761 2,527 5,466 5,044
Provision for Loan Losses 225 67 300 134
------ ------ ------ ------
Net interest income after provision for loan losses 2,536 2,460 5,166 4,910
Non-interest Income
Trust and investment services fees 151 82 284 189
Service charges on deposit accounts 123 102 231 203
Other service charges and fees 82 51 149 124
Gain on sale of loans 104 3 104 3
Gain on sales of securities 0 0 122 0
------ ------ ------ ------
Total non-interest income 460 238 890 519
Non-interest Expense
Salaries and benefits 1,007 949 1,989 1,867
Occupancy of premises 195 115 402 225
Furniture and equipment 239 208 472 399
Postage, stationery and supplies 112 116 201 219
Professional and legal 57 87 105 123
Marketing and advertising 84 92 199 161
Acquired real estate, net 12 21 31 12
Other 353 261 703 642
------ ------ ------ ------
Total non-interest expense 2,059 1,849 4,102 3,648
Income before income taxes 937 849 1,954 1,781
Provision for Income Taxes 341 281 677 573
------ ------ ------ ------
Net income..........................................$ 596 $ 568 $1,277 $1,208
====== ====== ====== ======
Net income per share, basic and diluted..............$0.26 $0.25 $0.55 $0.52
===== ===== ====== =====
See accompanying notes.
</TABLE>
2
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six months ended
June 30,
1998 1997
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 1,277 $ 1,208
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 416 284
Provision for loan losses 300 134
Provision for losses on assets acquired in foreclosure 22 0
Net loss (gain) on sales of assets acquired in foreclosure 1 (2)
Gain on sales of loans (104) (3)
Gain on sales of securities (122) 0
(Increase) decrease in interest receivable (22) 14
Decrease (increase) in other assets 128 (100)
Decrease in interest payable (27) (44)
(Decrease) increase in other liabilities (441) 117
Other, net (82) (3)
------- -------
Net cash provided by operating activities............. 1,346 1,605
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 8,360 219
Proceeds from maturities and calls of securities
available for sale 5,220 9,211
Purchase of securities available for sale (22,368) (2,273)
Net increase in loans made to customers (51) (19,695)
Proceeds from loan sales 3,384 545
Purchases of premises and equipment (197) (4,033)
Proceeds from sale of assets acquired in foreclosure 286 39
------- -------
Net cash used in investing activities................ (5,366) (15,987)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 7,894 2,791
Net (decrease) increase in time deposits (3,531) 5,357
Net increase in short-term borrowings and
federal funds purchased 0 4,542
Net (decrease) increase in long-term borrowings (114) 2,911
Dividends paid (439) (397)
Cash paid in lieu of fractional shares (6) (9)
------- -------
Net cash provided by financing activities............ 3,804 15,195
------- -------
Net (decrease) increase in cash and cash equivalents. (216) 813
Cash and cash equivalents at beginning of year....... 13,194 7,649
------- -------
Cash and cash equivalents at June 30,................$12,978 $8,462
======= =======
Supplemental Disclosures:
Interest payments $4,538 $4,295
Income tax payments $662 $510
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 1997 Annual Report to
Stockholders.
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.
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 121,550 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan; 72,630 shares for the 1996 Stock Incentive Plan; 100,000
shares for the 1998 Independent Directors' Stock Option Plan; and those
shares reserved for the Shareholders' Rights Plan.
The results of operations for the six month period ended June 30,
1998 are not necessarily indicative of the results to be expected for
the full year.
Note 2-Summary of Significant Accounting Policies
Loans Held for Sale - Loans held for sale are reported at the lower of
cost or market value. The amount by which cost exceeds market value, if
any, is accounted for as a valuation allowance and is charged to
expense in the period of the change.
Per Share Computations - All per share computations include the
retroactive effect of stock dividends, including the two-for-one stock
split effected in the form of a 100 percent stock dividend paid in
January 1998, and the 5 percent stock dividend paid in June 1998. The
weighted average number of shares of common stock outstanding used was
approximately 2,303,987 for the six month periods ended June 30, 1998
and 1997.
Reclassifications - Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the 1998 presentation.
Comprehensive Income - As of January 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's
net income or shareholders' equity. Statement No. 130 requires
unrealized gains or losses on available for sale securities, to be
included in other comprehensive income. Total comprehensive income was
$546,000 for the quarter ended June 30, 1998, compared to $720,000 for
the same period of 1997. Year to date total comprehensive income was
$1,112,000 for 1998, compared to $1,234,000 for 1997.
4
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 3-Current Accounting Developments
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 did not have a
material impact on the EPS calculations of the Corporation.
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 has adopted this Statement and disclosed the
impact of adoption in Note 2 to the financial statements included in
this filing.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Statement No. 131 establishes standards for the
reporting of financial information from the operating segments in annual
and interim financial statements. This Statement requires that
financial information be reported on the basis that it is reported
internally for evaluating segment performance and deciding how to
allocate resources to segments. Because this Statement addresses how
supplemental financial information is disclosed in annual and interim
reports, the adoption will have no material impact on the financial
statements. Statement No. 131 is effective for annual financial
statements for fiscal years beginning after December 15, 1997, and
interim comparative financial statements for fiscal years beginning
after December 15, 1998, with early adoption encouraged.
5
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Impaired Loans
The Corporation records impaired loans in accordance with Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." For all
reportable periods, impaired loans were 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) 1998 1997 1997
------ ------ ------
Impaired loans $3,239 $2,842 $2,889
Amount of impaired loans that
have a related allowance $3,239 $2,842 $2,889
Amount of impaired loans with
no related allowance $0 $0 $0
Allowance for impaired loans $563 $500 $390
For the six month period ended
June 30,
1998 1997
------ ------
Average investment in impaired loans $2,650 $1,904
Interest income recognized on
impaired loans (all cash-basis method) $46 $49
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) 1998 1997
------ ------
Balance-January 1, $2,098 $2,110
Provision charged to operating expense 300 134
Loans charged off (488) (244)
Recoveries 12 63
------ ------
Balance-June 30, $1,922 $2,063
====== ======
6
<PAGE>
CODORUS VALLEY BANCORP, INC.
Item 2. 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).
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 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. For example, risks and
uncertainties can arise with changes in: general economic conditions,
including their impact on capital expenditures; business conditions in the
financial services industry; the regulatory environment; rapidly changing
technology and evolving banking industry standards; competitive factors,
including increased competition with community, regional and national
financial institutions; new service and product offerings by competitors;
and price pressures. 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. In addition, 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, 1998
compared to three months ended June 30, 1997
INCOME STATEMENT ANALYSIS
Overview
Net income for the current three month period was $596,000, or $0.26 per
share, compared to $568,000, or $0.25 per share, for the same period in 1997.
All per share amounts were adjusted for stock dividends. The increase in
current period net income was due primarily to an increase in interest income
and fees from loans which was attributable to a larger average volume of
loans. A $68,000 after-tax gain from the sale of a $3.1 million portfolio of
mortgage loans also contributed to the increase in net income. An explanation
of the factors and trends that caused changes between the two periods, by
earnings category, is provided below.
7
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CODORUS VALLEY BANCORP, INC.
Net interest income
Net interest income for the current three month period was $2,761,000, an
increase of $234,000 or 9.3 percent more than the second quarter of 1997. The
increase in net interest income was a result of a larger volume of earning
assets which averaged $236 million for the second quarter of 1998 compared to
$227 million for the second quarter of 1997. Growth in earning assets
occurred primarily in the commercial loan and overnight investment
portfolios.
In April 1998, the Bank sold approximately $3.1 million in residential fixed
rate mortgage loans, classified as held-for-sale. The loan sale resulted in
the recognition of a pretax gain as previously described with retention of
loan servicing rights. Also in April 1998, the Bank recorded a significant
loan servicing fee (prepayment penalty fee) of $60,000 from an early payoff
of a large commercial loan.
During the current period the Bank introduced a money market deposit account
called the Peoples Index Fund (PIF) which is only available to business,
governmental and charitable organizations. The interest rate is subject to
change weekly based on the 91 day treasury bill discount rate. The PIF
permits six transfers per statement cycle, according to law, and requires a
minimum balance of $50,000. At June 30, 1998, the balance in this account was
approximately $2.5 million, representing transfers primarily from the Insured
Money Fund deposit account which pays a lower rate of interest. A money
market deposit vehicle was deemed necessary to meet competitive pressures,
retain customers and attract new commercial business.
Provision for loan losses
The provision expense for possible loan losses was $225,000 for the current
three month period compared to $67,000 for the second quarter of 1997. The
increase in the loss provision was due to an increase in the level of loan
charge-offs. The risk management section of this report provides more
information about the loan loss allowance (reserve) and loan losses.
Noninterest income
Total noninterest income for the current three month period was $460,000, an
increase of $222,000 or 93 percent more than the same period in 1997. The
increase was due in part to a $69,000 or 84 percent increase in trust and
investment services fees, which included the periodic recognition of estate
fees. A $103,000 pretax gain from the sale of $3.1 million in residential
mortgage loans, as described earlier in this report, also contributed to the
increase in noninterest income.
Noninterest expense
Total noninterest expense for the current three month period was $2,059,000,
8
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CODORUS VALLEY BANCORP, INC.
an increase of $210,000 or 11 percent more than the same period in 1997. The
increase in noninterest expense primarily reflects the implementation of many
long term strategic initiatives during 1997 and 1996 to enhance the corporate
infrastructure, and normal business growth. Additional information about
noninterest expense is provided in the six month analysis section of this
report.
Income taxes
The provision for federal income taxes was $341,000 for the current period,
an increase of $60,000 or 21 percent more than the second quarter of 1997 due
primarily to a greater level of pretax income and a higher effective tax
rate.
Six months ended June 30, 1998
compared to six months ended June 30, 1997
OVERVIEW
Net income for the current six month period was $1,277,000, or $0.55 per
share, compared to $1,208,000, or $0.52 per share, for the same period in
1997. All per share amounts were adjusted to reflect stock dividends,
including the two-for-one stock split effected in the form of a 100 percent
stock dividend paid in January 1998, and the 5 percent stock dividend paid in
June 1998. The increase in current period net income was due primarily to an
increase in interest income and fees from loans which was attributable to a
larger volume of loans. Gains from the sale of held-for-sale mortgage loans
and available-for-sale investment securities also contributed to the increase
in net income.
At June 30, 1998, total assets were approximately $260 million, an increase
of $6 million or 2.2 percent greater than June 30, 1997. Book value per
share, as adjusted for stock dividends, was $10.89 on June 30, 1998, compared
to $10.21 on June 30, 1997. At June 30, 1998, management believes that the
Corporation's capital remained sound, and the Bank's capital ratios exceeded
the federal regulatory minimums for well capitalized commercial banks.
For the first six months of operations for 1998 and 1997 (annualized), the
return on average assets was approximately 1.0 percent. For the same periods,
the return on average equity was approximately 10.2 percent for 1998 compared
to 10.3 percent for 1997.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
9
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CODORUS VALLEY BANCORP, INC.
INCOME STATEMENT ANALYSIS
Net interest income
Net interest income for the current six month period was $5,466,000, an
increase of $422,000 or 8.4 percent more than the same period in 1997. The
increase in net interest income was a result of a larger volume of earning
assets which averaged $235 million through June 1998 compared to $225 million
for the same period in 1997. Growth in earning assets occurred primarily in
the commercial loan and overnight investment portfolios. Funding for
commercial loans and overnight investments was provided by deposit growth,
proceeds from asset sales, and matured investment securities. The weighted
average yield on earning assets was approximately 8.43 percent through June
1998 compared to 8.35 percent through June 1997. The weighted average cost of
deposits was approximately 4.05 percent through June 1998 and June 1997.
Provision for loan losses
The provision expense for possible loan losses was $300,000 for the current
six month period which was necessary to support a higher level of net loan
charge-offs. Comparatively, for the same period in 1997, the provision
expense was $134,000 which was necessary to support loan growth and net loan
charge-offs.
Noninterest income
Total noninterest income for the current six month period was $890,000, an
increase of $371,000 or 72 percent more than the same period in 1997. The
$371,000 increase in noninterest income was due primarily to the periodic
recognition of net gains from asset sales, trust and investment services
fees, and normal business growth. In January 1998, the Bank sold $6.5 million
of available-for-sale investment securities and recognized a pretax gain of
$122,000 from the sale. In April 1998, the Bank sold a $3.1 million portfolio
of held-for-sale fixed rate mortgage loans and recognized a pretax gain of
$103,000 from the sale. Current period trust and investment services fees
increased $95,000 or 50 percent more than the same period in 1997 due to
asset appreciation, new business and estate fees. The recent historical
growth rate for noninterest income, as adjusted for gains from periodic asset
sales, is expected to be sustained in the period ahead based on normal
business growth.
Noninterest expense
Total noninterest expense for the current six month period was $4,102,000, an
increase of $454,000 or 12.4 percent more than the same period in 1997. The
$454,000 increase in noninterest expense primarily reflects the
implementation of strategic initiatives in 1997 to expand, staff, and equip
the organization, as well as normal business growth. Long-term investments
10
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CODORUS VALLEY BANCORP, INC.
were made to position the Corporation for future expansion and to increase
its service capabilities.
The implementation of strategic initiatives resulted in increases within the
following expense categories: salaries and benefits, up $122,000 or 7
percent; occupancy, up $177,000 or 79 percent; furniture and equipment, up
$73,000 or 18 percent; and marketing and advertising, up $38,000 or 24
percent. The increase in salaries and benefits was primarily attributable to
planned staff additions, merit raises and higher replacement costs. The
increase in occupancy expense reflects increased depreciation, maintenance
and property tax expenses associated with a branch office addition in April
1997, and construction of the Codorus Valley Corporate Center ("Corporate
Center") which was operational in August 1997. The increase in furniture and
equipment expense reflects increased depreciation and maintenance costs from
increased investment in computer equipment and systems in 1997, and increased
depreciation expense as a result of furnishing the Corporate Center. The
increase in marketing and advertising expense for the current period was
attributable to initial implementation costs for a sales and product training
program as described below. The other operating expense category increased
$80,000 or 12 percent due primarily to increases in problem loan carrying
costs, capital stock taxes and telephone expense. Noninterest expense is
expected to increase in the period ahead due to past and planned capital
investments, in accordance with the Corporation's long range strategic plan,
sales training, and normal business growth.
Sales and product training
In January 1998, the Bank began implementing a sales and product training
program under the direction of Financial Selling Systems, a national sales
training and consulting firm. The program is focused on the retail banking
staff and has two primary objectives. First, to expedite the transformation
of the Bank to a customer-focused corporate culture, based upon superior
sales and service. Second, to increase sales through improved selling skills,
increased product knowledge and confidence, and sales incentives. This
comprehensive retail training program is expected to take approximately 30
months to complete at an estimated cost of $175,000. Through June 30, 1998,
the Bank has incurred approximately $68,000 for this program.
Year 2000 compliance
The Year 2000 issue poses significant risks for all businesses, households
and governments. The risk is that on January 1, 2000, date sensitive systems
using two digits to represent the year may not be able to distinguish between
the Year 2000 and the Year 1900. The date problem could result in system
failures and miscalculations causing disruptions in normal business and
governmental operations. The problem has broad implications far beyond
familiar computer systems and could adversely impact security systems,
telephone systems, climate control systems, elevators, automobiles and other
date sensitive systems. Unfortunately, there is no universal solution for
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CODORUS VALLEY BANCORP, INC.
this problem and resolution of the Year 2000 issue may be both labor
intensive and costly for some companies.
Resolving the Year 2000 issue is one of the Corporation's highest priorities.
In 1997, a project team was formed to address the Year 2000 issue. Based on
an internal assessment of the Corporation's systems and software, the project
team determined that some existing systems and software must be remediated or
replaced prior to the millennium. The replacement date for an aged item
processing system, which is not Year 2000 compliant, has been advanced to
1998, a year earlier than initially planned. A preliminary cost estimate to
replace this mission critical system is approximately $300,000 which produces
an annual after-tax depreciation expense of $40,000 based on a five year
expected useful life. Generally, other than as discussed above, the cost of
replacing systems and software which are not Year 2000 compliant is not
expected to be material.
The Corporation has initiated communications with its major vendors to
determine the extent to which these third parties will be Year 2000
compliant. To date, responses have been positive; however, there is no
guarantee that the systems and software of other companies on which the
Corporation relies will be Year 2000 compliant. As a precaution the
Corporation will test and develop contingency plans for mission critical
systems.
Finally, the Bank has communicated with its large commercial borrowers. These
borrowers pose a credit risk to the Bank if they are not Year 2000 compliant,
and their businesses are disrupted. Responses from large commercial borrowers
are being evaluated.
In accordance with regulatory mandate, the Corporation's goal is to be
substantially Year 2000 compliant by year end 1998. However, uncertainties
remain about whether or not the Corporation's third party vendors and large
commercial borrowers will be Year 2000 compliant. Accordingly, the financial
impact of the Year 2000 issue on the Corporation's assets, earnings and
liquidity cannot be determined at this time.
Insurance sales
During 1997, Pennsylvania enacted a law to permit State chartered banking
institutions to sell insurance. This followed the U.S. Supreme Court decision
in favor of nationwide insurance sales by banks and barring states from
blocking insurance sales by national banks in towns with populations of no
more than 5,000. The Bank is currently evaluating its options regarding the
sale of insurance.
Income taxes
The provision for federal income taxes was $677,000 for the current period,
representing an increase of $104,000 or 18 percent above 1997 due primarily
12
<PAGE>
CODORUS VALLEY BANCORP, INC.
to a greater level of pretax income and a higher effective tax rate.
BALANCE SHEET REVIEW
Investment securities
During the current period total investment securities averaged (amortized
cost) approximately $40 million, down $11.5 million or 22 percent below 1997.
The portfolio decline was a result of proceeds from scheduled maturities and
periodic calls being used to fund loan demand during the latter half of 1997.
Additionally, in January 1998, the Bank sold approximately $6.5 million of
investment securities to take advantage of attractive market prices and
realize a portion of the relatively high level of unrealized portfolio
holding gains.
Loans
During the current period, total performing loans averaged approximately $186
million, an increase of $14 million or 8.5 percent above the average for the
first six months of 1997. The increase was due primarily to commercial loan
growth in the second half of 1997, principally within the fixed rate
commercial loan portfolio. Consistent growth in home equity loans, due to
competitive pricing, also contributed to the increase in total average
performing loans.
It is probable that competitive pressures, particularly for commercial loans,
will constrain loan growth for commercial banks in the period ahead. In spite
of competitive pressures, the Bank is committed to maintain high underwriting
standards.
FUNDING
Deposits
Deposit growth is a traditional source of funding for loans and investment
securities. For the current six month period, total average deposits were
approximately $225 million, an increase of $13 million or 6 percent more than
1997. Most of the increase in total deposits was due to growth in time
deposits and demand deposits which was partly attributable to the addition of
a full service banking office in April 1997. The growth in time deposits,
principally one-time adjustable rate CD's, was also a result of pricing.
It is probable that competitive pressures, particularly the stock and mutual
funds markets, will continue to constrain deposit growth for commercial banks
in the period ahead.
13
<PAGE>
CODORUS VALLEY BANCORP, INC.
Short-Term and Long-Term Borrowings
To meet short term funding needs the Bank may borrow from larger
correspondent banks in the form of funds purchased. The Bank also utilizes
available credit through the Federal Home Loan Bank of Pittsburgh (FHLBP).
The rate is established daily based on prevailing market conditions for
overnight funds.
The Bank's maximum borrowing capacity, as established quarterly by the FHLBP,
was approximately $59.9 million, at March 31, 1998, the most recent available
date. At June 30, 1998, the Bank had $2.7 million outstanding on its account
with the FHLBP in the form of long term fixed rate debt.
Stockholders' Equity
Stockholders' equity, or capital, is a source of funds which enables the
Corporation to maintain asset growth and to absorb losses. Total
stockholders' equity was $25,092,000 at June 30, 1998, an increase of
$1,559,000 or 6.6 percent above June 30, 1997. The increase in total equity
in the current period was primarily attributable to earnings retention from
profitable operations. Book value per share was $10.89 on June 30, 1998,
compared to $10.21 on June 30, 1997. Per share amounts for both periods were
adjusted for stock dividends.
In January 1998, the Corporation paid a two-for-one stock split effected in
the form of a 100 percent stock dividend. In June 1998, the Corporation paid
a 5 percent stock dividend which was comparable to the 5 percent stock
dividend paid in June 1997. The payment of stock dividends is another method
of enhancing shareholder value.
Through June 1998, the Corporation paid regular quarterly cash dividends of
ten cents ($.10) per share on February 10, 1998, and May 12, 1998. On July
14, 1998, the Board declared a regular quarterly cash dividend of ten and one
half cents ($.105) per share, payable August 11, 1998, to shareholders of
record July 28, 1998.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends, was approximately 2,303,987 for the six month periods
ended June 30, 1998 and 1997.
The level of capital for the Corporation and Bank remained sound for both
periods. The Bank exceeded all minimum regulatory requirements for well
capitalized commercial banks as established by the FDIC, its primary federal
regulator. The FDIC's minimum standards for a well capitalized institution
are as follows: Tier I risk-based capital, 6 percent; Tier II risk-based
capital, 10 percent; and Leverage ratio, 5 percent. At the state level, the
Pennsylvania Department of Banking uses a Leverage ratio guideline of 6
percent. The table below depicts the capital ratios for the Corporation and
Bank for the periods ended June 30, 1998 and 1997. The level of Bank capital
14
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CODORUS VALLEY BANCORP, INC.
reflects dividends the Bank upstreamed to the Corporation to pay for
construction of the Corporate Center.
Ratios Corporation Bank
6/30/98 6/30/97 6/30/98 6/30/97
Tier I risk-based capital 12.7 12.4 10.3 10.3
Tier II risk-based capital 13.7 13.5 11.3 11.4
Leverage 9.7 9.5 7.8 7.8
Capital investments made in 1997 and 1996, as described in previous SEC
filings, and future investment will impact current and future earnings and
capital growth. Possible future investments could include expansion of the
branch office franchise, purchase of technological system solutions, and
acquisition of other financial services companies. Management and the Board
of Directors believe that capital investments, guided by a long range
strategic plan, are necessary to develop an infrastructure to grow market
share and net income over the long-term, and are important components of the
overall strategy of enhancing long-term shareholder value.
RISK MANAGEMENT
Nonperforming assets
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, 1998, compared to June 30, 1997, is provided
below.
The major component of nonperforming assets is impaired loans. For all
reporting periods, impaired loans were principally comprised of collateral
dependent commercial loans and residential mortgage loans classified as
nonaccrual. Accordingly, the Corporation uses the cash basis method to
recognize interest income on loans that are impaired. On June 30, 1998, the
impaired loan portfolio was $3,239,000, an increase of $350,000 or 12 percent
more than June 30, 1997. Impaired loans increased primarily as a result of a
$1,373,000 commercial loan account addition in June 1998. This single
account, which management believes is adequately collaterized by real estate,
represented 42 percent of the impaired loan portfolio at June 30, 1998. At
June 30, 1998, the impaired loan portfolio was comprised of eighteen
unrelated accounts, primarily commercial loan relationships, ranging in size
from $25,000 to $1,373,000. These loan relationships vary by industry and are
generally collateralized with real estate assets. A loss reserve, which is
evaluated at least quarterly, has been established for accounts that appear
to be under-collateralized. Efforts to modify contractual terms for
individual accounts, based on prevailing market conditions, or liquidate
collateral assets, are proceeding as quickly as potential buyers can be
located and legal constraints permit.
15
<PAGE>
CODORUS VALLEY BANCORP, INC.
Assets acquired in foreclosure, net of reserve, were $1,283,000 on June 30,
1998, representing an increase of $492,000 or 62 percent above June 30, 1997.
The increase in assets acquired was caused by the addition of an improved
real estate property taken via deed-in-lieu of foreclosure in May 1998. The
Corporation's carrying value for this asset is approximately $999,000.
Management believes that the net realizable value of this property, which
makes up 78 percent of total assets acquired, is sufficiently greater than
its carrying value based on a recent external appraisal. A loss reserve,
which is evaluated at least quarterly, has been established for assets whose
estimated market value, less selling expenses, are below their financial
carrying costs. At June 30, 1998, the reserve for assets acquired was
$15,000. For the first six months of 1998 a $22,000 loss provision was
recorded to reflect a decline in fair value. Comparatively, no loss provision
was deemed necessary for the same period of 1997. Efforts to liquidate assets
acquired are proceeding as quickly as potential buyers can be located and
legal constraints permit.
At June 30, 1998, loans past due 90 days or more and still accruing interest
totalled $191,000, representing a $1,190,000 or 86 percent decline from June
30, 1997. 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, 1998, there were no potential problem loans, as defined by the
Securities and Exchange Commission, identified by management. However,
management was monitoring loans of approximately $10.1 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 $6.2
million on June 30, 1997.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses (the "allowance"),
incorporated herein, depicts a $1,922,000 allowance (reserve) at June 30,
1998, which was 1.03 percent of total loans. The current period reserve
declined from the prior year primarily as a result of a $456,000 charge-off
attributable to a single commercial borrower whose account was deemed
partially uncollectible in June 1998. The provision expense for the current
six month period was $300,000 which was greater than the $134,000 provision
in 1997, due to a greater level of net charge-offs.
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
16
<PAGE>
CODORUS VALLEY BANCORP, INC.
be required in future periods.
Liquidity
Liquidity is deemed adequate and the principal funding sources include:
maturing investment securities, the ability to borrow from the Federal Home
Loan Bank of Pittsburgh, and asset sales.
The loan-to-deposit ratio was approximately 80.8 percent at June 30, 1998,
compared to 83.4 percent at June 30, 1997. The ratio for both periods was
within current policy guidelines.
Market risk management
In the normal course of conducting business activities the Corporation is
exposed to market risk, principally interest rate risk, through the
operations of its banking subsidiary. Interest rate risk arises from market
driven fluctuations in interest rates which may affect cash flows, income,
expense and values of financial instruments. Interest rate risk is managed by
an Asset-Liability Management Committee comprised of members of senior
management and an outside director. No material changes in market risk
strategy occurred during the current period. A detailed discussion of market
risk is provided in the SEC Form 10-K for period ended December 31, 1997.
Other risks
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 its subsidiaries. It cannot be predicted whether such
legislation will be adopted or, if adopted, how such legislation would affect
the business of the Corporation and its subsidiaries.
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
affect capital, results of operations or liquidity.
17
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
June 30, December 31, June 30,
(dollars in thousands) 1998 1997 1997
------ ------ ------
Impaired loans (1) $3,239 $2,842 $2,889
Assets acquired in foreclosure (2) 1,283 380 791
------ ------ ------
Total nonperforming assets $4,522 $3,222 $3,680
====== ====== ======
Loans past due 90 days or more
and still accruing interest $191 $107 $1,381
Ratios:
Impaired loans as a % of
total period-end loans 1.74% 1.49% 1.56%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 2.41% 1.68% 1.97%
Nonperforming assets as a % of
total period-end stockholders'
equity 18.02% 13.19% 15.64%
Allowance for loan losses as a
multiple of impaired loans .6x .7x .7x
Interest not recognized on impaired
loans at period-end: (3)
Contractual interest due $278 $398 $277
Interest revenue recognized 46 103 53
---- ---- ----
Interest not recognized in operations $232 $295 $224
==== ==== ====
(1) Comprised solely of nonaccrual loans.
(2) Net of related allowance(reserve).
(3) This table includes interest not recognized on loans which were
classified as impaired at period-end. While every effort is being
made to collect this interest revenue, it is probable a portion will
never be recovered.
18
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 1998 1997
------ ------
Balance-January 1, $2,098 $2,110
Provision charged to operating expense 300 134
Loans charged off:
Commercial 474 189
Real estate-mortgage 0 0
Consumer 14 55
------ ------
Total loans charged off 488 244
Recoveries:
Commercial 7 60
Real estate-mortgage 0 0
Consumer 5 3
------ ------
Total recoveries 12 63
------ ------
Net charge-offs 476 181
Balance-June 30, $1,922 $2,063
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans 1.01% 0.21%
Allowance for loan losses to total loans
at period-end 1.03% 1.11%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 56.0% 48.3%
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the market risk strategy as discussed in
the Form 10-K for the period ended December 31, 1997. (SEC file number 000-
15536, Exhibit 13, pages 49 through 52.)
19
<PAGE>
CODORUS VALLEY BANCORP, INC.
PART II - OTHER INFORMATION:
Item 1. Legal proceedings
In the opinion of the management of the Corporation, there are no proceedings
pending to which the Corporation and the Bank are a party or to which its
property is subject, which, if determined adversely to the Corporation and
the Bank, would be material in relation to the Corporation's and the Bank's
financial condition. There are no proceedings pending other than ordinary
routine litigation incident to the business of the Corporation and the Bank.
In addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and the Bank by government
authorities.
Item 2. Changes in securities and use of proceeds - nothing to report.
Item 3. Defaults by the company on its senior securities - nothing to report.
Item 4. Results of votes of security holders -
(a) An annual meeting of shareholders was held on May 19, 1998, at
10:00 am, at The Inn at Heritage Hills, Links Center, 2700 Mount
Rose Avenue, York, Pennsylvania.
(b), (c) Three matters were voted upon at the May 19, 1998, meeting as
follows:
(1) Three directors were re-elected:
Votes Votes
Term cast Against or
Re-elected Expires For Withheld*
Class B:
M. Carol Druck 2001 1,734,853 25,285
Barry A. Keller 2001 1,747,448 12,690
Donald H. Warner 2001 1,734,485 25,653
*includes broker nonvotes.
Directors whose term continued after the meeting:
Term Expires
Class C:
D. Reed Anderson, Esq. 1999
MacGregor S. Jones 1999
Larry J. Miller 1999
Class A:
Rodney L. Krebs 2000
Dallas L. Smith 2000
George A. Trout, D.D.S. 2000
20
<PAGE>
Codorus Valley Bancorp, Inc.
PART II - OTHER INFORMATION, continued
Item 4. Results of votes of security holders, continued -
(2) The shareholders approved and adopted the Codorus Valley
Bancorp, Inc. 1998 Independent Directors' Stock Option Plan. Votes
were cast as follows: 1,498,418 for, 231,346 against, and 30,374
abstentions or broker nonvotes.
(3) The shareholders ratified the selection of Ernst & Young LLP,
Harrisburg, Pennsylvania, as the independent auditors for the
Corporation for the year ending December 31, 1998. Votes were cast
as follows: 1,751,572 for, 1,323 against, and 7,243 abstentions or
broker nonvotes.
Item 5. Other information - nothing to report.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits-The following exhibit is being filed as part of this
Report: (see also Item 6(b))
Exhibit No. Description
27 Financial Data Schedule as of June 30, 1998.
(b) Reports on Form 8-K- none.
21
<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)
July 29, 1998 By /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
July 29, 1998 By /s/ Jann A. Weaver
Date Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
22
<PAGE>
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