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 March 31, 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.
2,194,518 shares of $2.50 (par value) common stock were
outstanding as of 4-28-98 .
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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...................................... 18
PART II - OTHER INFORMATION
Item 1. through Item 6..................................... 19
SIGNATURES................................................. 20
EXHIBIT 27, Financial Data Schedule........................ 21
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PART I - FINANCIAL INFORMATION: Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
March 31, December 31, March 31,
(dollars in thousands) 1998 1997 1997
Assets --------- --------- ---------
Cash and due from banks:
Interest bearing deposits with banks $ 117 $ 123 $ 343
Non-interest bearing deposits and cash 8,263 7,721 6,010
Federal funds sold 6,975 5,350 1,100
Loans held for sale 3,093 0 0
Securities available for sale 41,831 40,303 53,962
Loans 187,360 191,342 171,093
Less-allowance for loan losses (2,158) (2,098) (1,972)
-------- -------- --------
Total net loans 185,202 189,244 169,121
Premises and equipment 9,648 9,797 6,481
Interest receivable 1,457 1,538 1,691
Other assets 896 982 1,547
-------- -------- --------
Total assets............................$257,482 $255,058 $240,255
======== ======== ========
Liabilities
Deposits
Non-interest bearing demand $ 20,701 $ 21,152 $ 16,558
NOW 23,438 22,041 23,030
Insured money fund 30,320 28,901 27,507
Savings 20,744 19,992 21,129
Time CD's less than $100,000 112,089 112,874 107,575
Time CD's $100,000 and above 21,107 21,303 17,032
-------- -------- --------
Total deposits 228,399 226,263 212,831
Long-term borrowings 2,746 2,802 2,965
Interest payable 905 820 896
Other liabilities 660 748 542
-------- -------- --------
Total liabilities....................... 232,710 230,633 217,234
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; 2,194,518 shares
shares issued at 3/31/98; 1,097,259 at
12/31/97 and 1,045,296 at 3/31/97 5,486 2,743 2,613
Common stock distributable, par value $2.50
per share; 1,097,259 shares payable 0 2,743 0
Additional paid-in capital 8,063 8,063 6,556
Retained earnings 10,906 10,444 13,632
Accumulated other comprehensive income from
unrealized gains on securities, net of tax 317 432 220
-------- -------- --------
Total stockholders' equity.............. 24,772 24,425 23,021
Total liabilities and stockholders'
equity.................................$257,482 $255,058 $240,255
======== ======== ========
See accompanying notes. 1
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three months ended
March 31,
(dollars in thousands, except per share data) 1998 1997
Interest Income ------ ------
Interest and fees from loans $4,290 $3,803
Interest from federal funds sold and interest
bearing deposits with banks 109 18
Interest and dividends from securities:
Taxable interest income 526 756
Tax-exempt interest income 58 51
Dividend income 15 15
------ ------
Total interest income.............................. 4,998 4,643
Interest Expense
NOW 84 97
Insured money fund 213 192
Savings 113 117
Time CD's less than $100,000 1,541 1,445
Time CD's $100,000 and above 295 214
------ ------
Total interest expense on deposits 2,246 2,065
Interest expense on short-term borrowings and
federal funds purchased 0 3
Interest expense on long-term borrowings 47 58
------ ------
Total interest expense............................ 2,293 2,126
------ ------
Net interest income................................ 2,705 2,517
Provision for Loan Losses 75 67
------ ------
Net interest income after provision for loan losses 2,630 2,450
Non-interest Income
Trust and investment services fees 133 107
Service charges on deposit accounts 108 101
Other service charges and fees 67 73
Gain on sales of securities 122 0
------ ------
Total non-interest income 430 281
Non-interest Expense
Salaries and benefits 982 918
Occupancy of premises 207 110
Furniture and equipment 233 191
Postage, stationery and supplies 89 103
Professional and legal 48 36
Marketing and advertising 115 69
Acquired real estate, net 19 (9)
Other 350 381
------ ------
Total non-interest expense 2,043 1,799
Income before income taxes 1,017 932
Provision for Income Taxes 336 292
------ ------
Net income..........................................$ 681 $ 640
====== ======
Net income per share, basic and diluted..............$0.29 $0.28
===== =====
See accompanying notes. 2
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three months ended
March 31,
1998 1997
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 681 $ 640
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 205 139
Provision for loan losses 75 67
Provision for losses on assets acquired in foreclosure 22 0
Gain on sales of assets acquired in foreclosure (6) 0
Gain on sales of securities (122) 0
Decrease (increase) in interest receivable 81 (49)
(Increase) decrease in other assets (39) 72
Increase in interest payable 85 100
(Decrease) increase in other liabilities (88) 175
Other, net (35) 23
------- -------
Net cash provided by operating activities............. 859 1,167
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 7,503 219
Proceeds from maturities and calls of securities
available for sale 3,500 3,699
Purchase of securities available for sale (12,583) (1,231)
Net decrease (increase) in loans made to customers 831 (4,840)
Proceeds from loan sales 78 225
Purchases of premises and equipment (56) (1,595)
Proceeds from sale of assets acquired in foreclosure 168 23
------- -------
Net cash used in investing activities................ (559) (3,500)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 3,117 542
Net (decrease) increase in time deposits (981) 2,829
Net (decrease) in short-term borrowings and
federal funds purchased 0 (4,000)
Net (decrease) increase in long-term borrowings (56) 2,965
Dividends paid (219) (199)
------- -------
Net cash provided by financing activities............ 1,861 2,137
------- -------
Net increase (decrease) in cash and cash equivalents. 2,161 (196)
Cash and cash equivalents at beginning of year....... 13,194 7,649
------- -------
Cash and cash equivalents at March 31,...............$15,355 $ 7,453
======= =======
Supplemental Disclosures:
Interest payments $2,161 $1,965
Income tax payments $0 $0
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 115,762 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan, 72,630 shares for the 1996 Stock Incentive Plan, and
those shares reserved for the Shareholders' Rights Plan.
The results of operations for the three month period ended March 31,
1998 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.
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. At March 31, 1998, the market
value of loans held for sale was approximately $3,139,000.
Per Share Computations - All per share computations include the
retroactive effect of stock dividends. The weighted average
number of shares of common stock outstanding used was approximately
2,304,244 for the three month periods ended March 31, 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. During the first quarter of
1998, total comprehensive income was $566,000, compared to $514,000 for
the same period of 1997.
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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 financial statements for
fiscal years beginning after December 15, 1997 with early adoption
encouraged.
5
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Impaired Loans
The Corporation records impaired loans in accordance with Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." For all
reportable periods, impaired loans were, for practical purposes,
comprised of collateral dependent commercial loans and residential
mortgage loans classified as nonaccrual(cash basis). Additional
information regarding impaired loans is provided in the schedule that
follows.
March December March
31, 31, 31,
(dollars in thousands) 1998 1997 1997
------ ------ ------
Impaired loans $2,969 $2,842 $1,803
Amount of impaired loans that
have a related allowance $2,969 $2,842 $1,803
Amount of impaired loans with
no related allowance $0 $0 $0
Allowance for impaired loans $522 $500 $204
For the three month period ended
March 31,
1998 1997
------ ------
Average investment in impaired loans $2,843 $1,930
Interest income recognized on
impaired loans (all cash-basis method) $11 $4
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the nine month period
ended March 31, were as follows:
(dollars in thousands) 1998 1997
------ ------
Balance-January 1, $2,098 $2,110
Provision charged to operating expense 75 67
Loans charged off (15) (226)
Recoveries 0 21
------ ------
Balance-March 31, $2,158 $1,972
====== ======
6
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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. Readers should carefully
review the risk factors described in other documents the Corporation files
periodically with the Securities and Exchange Commission.
Three months ended March 31, 1998
compared to three months ended March 31, 1997
INCOME STATEMENT ANALYSIS
Overview
Net income for the current three month period was $681,000, or $0.29 per
share, compared to $640,000, or $0.28 per share, for the same period in 1997.
All per share amounts were adjusted to reflect stock dividends, including the
5 percent stock dividend declared April 14, 1998, described in the
Stockholders' Equity section of this report. Net income was up from the first
quarter of last year, due primarily to an increase in interest and fees from
loans which was attributable to a larger volume of loans. Gains from the sale
of investment securities also contributed to the increase in net income.
7
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CODORUS VALLEY BANCORP, INC.
At March 31, 1998, total assets were approximately $257 million, an increase
of $17 million or 7.2 percent greater than March 31, 1997. Book value per
share, as adjusted for stock dividends, was $10.75 on March 31, 1998,
compared to $9.99 on March 31, 1997. At March 31, 1998, the Corporation's
capital remained sound, and the Bank's capital ratios exceeded the federal
regulatory minimums for well capitalized commercial banks.
For the three month period (annualized) of 1998, the return on average assets
was 1.07 percent compared to 1.08 percent for the first quarter of 1997. For
the same periods, the return on average equity was 10.9 percent for 1998
compared to 11.0 percent for 1997.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, is provided below.
Net interest income
Net interest income for the current three month period was $2,705,000, an
increase of $188,000 or 7.5 percent more than the same period in 1997. The
increase in net interest income was a result of a larger volume of earning
assets, principally commercial loans. Total commercial loans averaged $130
million for the current period reflecting a $22 million or 20.7 percent
increase above 1997. Loan growth was funded primarily by deposit growth,
principally time deposits, and proceeds from matured or called investment
securities. The net yield on average earning assets, annualized and on a
taxable equivalent basis, was approximately 4.73 percent for the current
three month period compared to 4.65 percent for the same period in 1997.
Provision for loan losses
The provision expense for possible loan losses was $75,000 for the current
three month period which was necessary to support a larger portfolio of
loans. Comparatively, for the same period in 1997, the provision expense was
$67,000 which supported loan growth and a higher level of net loan charge-
offs.
Noninterest income
Total noninterest income for the current three month period was $430,000, up
$149,000 or 53% above the same period in 1997. The $149,000 increase in
noninterest income was due primarily to the periodic recognition of net gains
from asset sales. In January 1998, the Bank sold $6.5 million of its
investment securities and recognized a pretax gain of $122,000 from the sale.
A $26,000 or 24 percent increase in trust and investment services fees also
contributed to the increase in noninterest income. The recent historical
growth rate, as adjusted for gains from periodic asset sales, for noninterest
income is expected to be sustained in the period ahead based on normal
business growth.
8
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CODORUS VALLEY BANCORP, INC.
Noninterest expense
Total noninterest expense for the current three month period was $2,043,000,
an increase of $244,000 or 13.6 percent more than the same period in 1997.
The $244,000 increase in noninterest expense primarily reflects the
implementation of strategic initiatives in 1997 to expand, staff, and equip
the organization. These long-term investments 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 $64,000; occupancy,
up $97,000; furniture and equipment, up $42,000; and marketing and
advertising, up $46,000. The increase in salaries and benefits was primarily
attributable to planned staff additions necessary to support business growth,
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. Current period
furniture depreciation expense increased 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 declined slightly in the current period due in part to a higher than
normal charitable donation expense in the prior period. 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 its objectives are twofold. 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,
product knowledge, confidence and sales incentives. This comprehensive retail
training program is expected to take approximately two years to complete at
an estimated cost of $175,000. Through March 31, 1998, the Bank incurred
approximately $63,000 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
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CODORUS VALLEY BANCORP, INC.
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
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 planned replacement. 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 are no
guaranties 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 presently.
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
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CODORUS VALLEY BANCORP, INC.
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 $336,000 for the current period,
up $44,000 or 15 percent above 1997 due primarily to a greater level of
pretax income.
BALANCE SHEET REVIEW
Investment securities
During the current period total investment securities averaged (amortized
cost) approximately $38 million, down $16.6 million or 30 percent below 1997.
The portfolio decline was a result of proceeds from scheduled maturities and
periodic calls being used to fund loan demand during 1997, and a bond sale in
1998. In January 1998, the Bank sold approximately $6.5 million bonds to take
advantage of attractive market prices and to realize a portion of the
relatively high level of unrealized portfolio holding gains. The bond sale
generated a pretax gain of approximately $122,000.
Loans
During the current period total performing loans, including held-for-sale
loans, averaged approximately $189 million, an increase of $22 million or
13.2 percent more than 1997. The increase was due primarily to growth in
commercial loans, principally within the fixed rate commercial loan
portfolio.
During the current period the Bank reclassified approximately $3.1 million in
residential fixed rate mortgage loans to a held-for-sale category.
FUNDING
Deposits
Deposit growth is a traditional source of funding for loans and investment
securities. For the current quarter, average deposits were approximately $225
million, more than $16 million or 7.7 percent more than 1997. Most of the
increase in total deposits was due to growth in time deposits and demand
deposits which was attributable in part 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.
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CODORUS VALLEY BANCORP, INC.
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.
Short-Term and Long-Term Borrowings
To meet day-to-day funding needs the Bank may borrow from larger
correspondent banks, in the form of federal 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 $58.4 million, at December, 31, 1997, the most recent
available date. At March 31, 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 $24,772,000 at March 31, 1998, up $1,751,000 or 7.6
percent above March 31, 1997. The increase in total equity in the current
period was primarily attributable to earnings retention from profitable
operations. Book value per share was $10.75 on March 31, 1998, compared to
$9.99 on March 31, 1997. Per share amounts for both periods were adjusted for
stock dividends, including the 5 percent stock dividend declared April 14,
1998.
On December 9, 1997, the Board of Directors declared a two-for-one stock
split effected in the form of a 100 percent stock dividend payable January
26, 1998, to shareholders of record December 23, 1997.
On April 14, 1998, the Board declared a regular quarterly cash dividend of
ten cents ($.10) per share, payable on or before May 12, 1998, to
shareholders of record April 28, 1998.
Also on April 14, 1998, the Board declared a 5 percent stock dividend,
payable on or before June 11, 1998, to shareholders of record April 28, 1998.
Comparatively, a 5 percent stock dividend was paid in June 1997. The stock
dividend is another method of enhancing shareholder value.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends, was approximately 2,304,244 for the three month periods
ended March 31, 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
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CODORUS VALLEY BANCORP, INC.
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 March 31, 1998 and 1997. The decline in
Corporation's consolidated risk-based capital ratios was primarily
attributable to a change in the mix of assets, ie., loans and fixed assets
which have a higher risk weighting increased relative to lower risk weighted
investment securities which decreased. The decline in the Bank's capital
ratios also reflected the change in the asset mix, and a reduction in equity.
The Bank's equity declined due to dividends it paid to the Corporation to pay
for construction of the Corporate Center.
Ratios Corporation Bank
3/31/98 3/31/97 3/31/98 3/31/97
Tier I risk-based capital 12.6 13.5 10.2 12.1
Tier II risk-based capital 13.7 14.6 11.3 13.3
Leverage 9.7 9.6 7.7 8.6
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 March 31, 1998, compared to March 31, 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 March 31, 1998, the
impaired loan portfolio was $2,969,000, up $1,166,000 or 65 percent above
March 31, 1997. Impaired loans increased primarily as a result of a
$1,043,000 commercial loan account addition in September 1997. This single
account, which management believes is well collaterized by real estate,
13
<PAGE>
CODORUS VALLEY BANCORP, INC.
represented 35 percent of the impaired loan portfolio at March 31, 1998. At
March 31, 1998, the impaired loan portfolio was comprised of eighteen
unrelated accounts, primarily commercial loan relationships, ranging in size
from $25,000 to $1,043,000. These loan relationships vary by industry and are
generally collateralized with real estate assets. A loss reserve, which is
evaluated quarterly, has been established for accounts that appear to be
under-collateralized. Efforts to modify contractual terms for individual
accounts, based on prevailing market conditions, or liquidate collateral
assets, are proceeding as quickly as potential buyers can be located and
legal constraints permit.
Assets acquired in foreclosure, net of reserve, were $196,000 for March 31,
1998, down $521,000 or 73 percent below March 31, 1997. The decline in assets
acquired was primarily attributable to asset sales. At March 31, 1998, the
assets acquired portfolio consisted primarily of improved real estate from
three 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 March 31, 1998, the reserve for assets
acquired was $15,000. For the first three 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 first quarter of 1997. Efforts to
liquidate assets acquired are proceeding as quickly as potential buyers can
be located and legal constraints permit.
At March 31, 1998, loans past due 90 days or more and still accruing interest
totalled $162,000, representing a $573,000 or 78 percent decline from March
31, 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 March 31, 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 $14 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 $7.6
million on March 31, 1997.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses (the "allowance"),
incorporated herein, depicts a $2,158,000 allowance (reserve) at March 31,
1998, which is $186,000 or 9.4 percent more than the allowance on March 31,
1997. The increase in the allowance was necessary to support loan growth and
14
<PAGE>
CODORUS VALLEY BANCORP, INC.
a greater volume of impaired loans. The allowance as a percentage of total
loans was 1.13 percent at March 31, 1998, compared to 1.15 percent at March
31, 1997. The provision expense for the current period was $75,000 which
supported loan growth. Comparatively, the provision expense for the prior
period was $67,000 which supported loan growth and net charge-offs. Net
charge-offs as of March 31, 1998, were $15,000 compared to $205,000 as of
March 31, 1997. The higher level of net charge-offs in the prior period was
attributable to a $172,000 charge-off for a single 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
Liquidity is deemed adequate. Primary funding sources include maturing
investment securities, anticipated deposit growth, and the ability to borrow
from the Federal Home Loan Bank of Pittsburgh.
The loan-to-deposit ratio was approximately 82.0 percent at March 31, 1998,
compared to 80.4 percent at March 31, 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
15
<PAGE>
CODORUS VALLEY BANCORP, INC.
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.
16
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
March 31, December 31, March 31,
(dollars in thousands) 1998 1997 1997
------ ------ ------
Impaired loans (1) $2,969 $2,842 $1,803
Assets acquired in foreclosure (2) 196 380 717
------ ------ ------
Total nonperforming assets $3,165 $3,222 $2,520
====== ====== ======
Loans past due 90 days or more
and still accruing interest $162 $107 $735
Ratios:
Impaired loans as a % of
total period-end loans 1.56% 1.49% 1.05%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 1.66% 1.68% 1.47%
Nonperforming assets as a % of
total period-end stockholders'
equity 12.78% 13.19% 10.95%
Allowance for loan losses as a
multiple of impaired loans .7x .7x 1.1x
Interest not recognized on impaired
loans at period-end: (3)
Contractual interest due $365 $398 $246
Interest revenue recognized 11 103 4
---- ---- ----
Interest not recognized in operations $354 $295 $242
==== ==== ====
(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) 1998 1997
------ ------
Balance-January 1, $2,098 $2,110
Provision charged to operating expense 75 67
Loans charged off:
Commercial 15 183
Real estate-mortgage 0 0
Consumer 0 43
------ ------
Total loans charged off 15 226
Recoveries:
Commercial 0 21
Real estate-mortgage 0 0
Consumer 0 0
------ ------
Total recoveries 0 21
------ ------
Net charge-offs 15 205
Balance-March 31, $2,158 $1,972
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans 0.03% 0.49%
Allowance for loan losses to total loans
at period-end 1.13% 1.15%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 68.9% 77.7%
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.)
18
<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 - nothing to report.
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 March 31, 1998.
(b) Reports on Form 8-K-
The Corporation filed a Form 8-K, via EDGAR, dated March 13, 1998. It
contained a comprehensive electronic filing of four exhibits as follows:
Exhibit 10.1: Amendment to the Employment Agreement by and among
PeoplesBank, A Codorus Valley Company, Codorus Valley Bancorp, Inc. and
Larry J. Miller dated October 1, 1997, including Executive Employment
Agreement dated January 1, 1993 between Codorus Valley Bancorp, Inc.,
Peoples Bank of Glen Rock and Larry J. Miller.
Exhibit 10.2: Change of Control Agreement between PeoplesBank, A Codorus
Valley Company, Codorus Valley Bancorp, Inc. and Jann A. Weaver, dated
October 1, 1997.
Exhibit 10.3: Change of Control Agreement between PeoplesBank, A Codorus
Valley Company, Codorus Valley Bancorp, Inc. and Bruce A. Lamborne, dated
October 1, 1997.
Exhibit 10.4: Change of Control Agreement between PeoplesBank, A Codorus
Valley Company, Codorus Valley Bancorp, Inc. and Harry R. Swift, dated
October 1, 1997.
19
<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)
May 5, 1998 By /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
May 5, 1998 By /s/ Jann A. Weaver
Date Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
20
<PAGE>
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