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, 1999
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.
2,297,909 shares of $2.50 (par value) common stock were
outstanding as of 4-27-99 .
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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...................................... 20
PART II - OTHER INFORMATION
Item 1. Legal proceedings.................................. 21
Item 2. Changes in securities and use of proceeds.......... 21
Item 3. Defaults by the company on its senior securities... 21
Item 4. Results of votes of security holders............... 21
Item 5. Other information.................................. 21
Item 6. Exhibits and reports on Form 8-K................... 21
SIGNATURES................................................. 22
EXHIBIT 27, Financial Data Schedule........................ 23
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PART I - FINANCIAL INFORMATION: Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
March December March
31, 31, 31,
(dollars in thousands) 1999 1998 1998
Assets --------- --------- ---------
Cash and due from banks
Interest bearing deposits with banks $ 255 $ 203 $ 117
Noninterest bearing deposits and cash 7,280 10,889 8,263
Federal funds sold 8,022 0 6,975
Loans held for sale 0 0 3,093
Securities available for sale 47,486 56,225 41,831
Loans 194,855 189,111 187,360
Less-allowance for loan losses (1,943) (1,865) (2,158)
-------- -------- --------
Total net loans 192,912 187,246 185,202
Premises and equipment 9,495 9,345 9,648
Interest receivable 1,616 1,588 1,457
Other assets 7,900 7,586 896
-------- -------- --------
Total assets............................$274,966 $273,082 $257,482
======== ======== ========
Liabilities
Deposits
Noninterest bearing demand $ 24,943 $ 25,047 $ 20,701
NOW 25,605 26,936 23,438
Insured money fund and money market 40,055 36,577 30,320
Savings 21,274 20,655 20,744
Time CDs less than $100,000 113,748 113,688 112,089
Time CDs $100,000 and above 18,289 19,010 21,107
-------- -------- --------
Total deposits 243,914 241,913 228,399
Federal funds purchased 0 1,234 0
Long-term borrowings 3,536 2,571 2,746
Interest payable 824 770 905
Other liabilities 555 536 660
-------- -------- --------
Total liabilities....................... 248,829 247,024 232,710
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; 2,300,415 shares
issued and outstanding at 3/31/99; 2,303,987
at 12/31/98 and 2,194,518 at 3/31/98 5,760 5,760 5,486
Additional paid-in capital 10,279 10,279 8,063
Retained earnings 9,920 9,561 10,906
Accumulated other comprehensive income from
unrealized gains on securities, net of tax 243 458 317
Less: Treasury stock, 3,572 common shares (65) 0 0
-------- -------- --------
Total stockholders' equity.............. 26,137 26,058 24,772
Total liabilities and stockholders'
equity.................................$274,966 $273,082 $257,482
======== ======== ========
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) 1999 1998
Interest Income ------ ------
Interest and fees from loans $4,129 $4,290
Interest from federal funds sold and interest
bearing deposits with banks 37 109
Interest and dividends from securities
Taxable interest income 625 526
Tax-exempt interest income 82 58
Dividend income 19 15
------ ------
Total interest income.............................. 4,892 4,998
Interest Expense
NOW 76 84
Insured money fund and money market 281 213
Savings 103 113
Time CDs less than $100,000 1,502 1,541
Time CDs $100,000 and above 243 295
------ ------
Total interest expense on deposits 2,205 2,246
Interest expense on short-term borrowings and
federal funds purchased 13 0
Interest expense on long-term borrowings 53 47
------ ------
Total interest expense............................ 2,271 2,293
------ ------
Net interest income................................ 2,621 2,705
Provision for Loan Losses 75 75
------ ------
Net interest income after provision for loan losses 2,546 2,630
Noninterest Income
Trust and investment services fees 124 133
Service charges on deposit accounts 127 108
Other income 201 67
Gain on sales of securities 37 122
------ ------
Total noninterest income 489 430
Noninterest Expense
Salaries and benefits 1,080 982
Occupancy of premises 208 207
Furniture and equipment 228 233
Postage, stationery and supplies 87 89
Professional and legal 73 48
Marketing and advertising 60 115
Acquired real estate, net 58 19
Other 401 350
------ ------
Total noninterest expense 2,195 2,043
Income before income taxes 840 1,017
Provision for Income Taxes 239 336
------ ------
Net income..........................................$ 601 $ 681
Net income per share ====== ======
Basic..............................................$0.25 $0.28
Diluted............................................$0.25 $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,
1999 1998
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 601 $ 681
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 198 205
Provision for loan losses 75 75
Provision for losses on assets acquired in foreclosure 15 22
Net loss (gain) on sales of assets acquired in foreclosure 4 (6)
Gain on sales of securities (37) (122)
(Increase) decrease in interest receivable (28) 81
Increase in other assets (186) (39)
Increase in interest payable 54 85
(Decrease)increase in other liabilities 106 (88)
Other, net 7 (35)
------- -------
Net cash provided by operating activities............. 809 859
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 3,030 6,584
Proceeds from maturities and calls of securities
available for sale 7,123 4,419
Purchase of securities available for sale (1,748) (12,583)
Net (increase)decrease in loans made to customers (6,039) 831
Proceeds from loan sales 109 78
Purchases of premises and equipment (348) (56)
Proceeds from sale of assets acquired in foreclosure 104 168
------- -------
Net cash provided in investing activities............ 2,231 (559)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 2,662 3,117
Net decrease in time deposits (661) (981)
Net (decrease)in short-term borrowings and
federal funds purchased (1,234) 0
Net increase (decrease) in long-term borrowings 965 (56)
Dividends paid (242) (219)
Payment to repurchase common stock (65) 0
------- -------
Net cash provided by financing activities............ 1,425 1,861
------- -------
Net increase in cash and cash equivalents............ 4,465 2,161
Cash and cash equivalents at beginning of year....... 11,092 13,194
------- -------
Cash and cash equivalents at March 31,...............$15,557 $15,355
======= =======
Supplemental Disclosures:
Interest payments $2,151 $2,161
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 1998 Annual Report to
Stockholders.
The consolidated financial statements include the accounts of Codorus
Valley Bancorp, Inc. and its wholly owned bank subsidiary, PeoplesBank,
A Codorus Valley Company, 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 134,009 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan; 75,711 shares for the 1996 Stock Incentive Plan; 105,000
shares for the 1998 Independent Directors' Stock Option Plan; and those
shares reserved for the Shareholders' Rights Plan.
The results of operations for the three month period ended March 31,
1999 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 declared. The weighted average
number of shares of common stock outstanding used was approximately
2,417,918 for the three month period ended March 31, 1999 and 2,419,008
for the same period in 1998.
Reclassifications - Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the 1999 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
4
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 2 - Summary of Significant Accounting Policies, continued
unrealized gains or losses on available for sale securities, to be
included in other comprehensive income. During the first quarter of
1999, total comprehensive income was $386,000, compared to $566,000
for the same period of 1998.
Note 3-Current Accounting Developments
In December 1998, the Financial Accounting Standards Board (FASB) issued
an Invitation to Comment Document entitled "Methods of Accounting for
Business Combinations: Recommendations of the G4+1 for Achieving
Convergence." Subsequently, in April 1999, the FASB tentatively agreed
to eliminate the pooling-of-interests method of accounting for business
combinations. In reaching its conclusion, the Board commented that the
use of two methods, purchase and pooling-of-interests, makes it
difficult for users to compare the financial statements of companies
engaged in business combinations, and that the pooling method is
inconsistent with the general concept of fair value associated with
acquisitions. Accordingly, the Board concluded that there should be a
single method of accounting for all business combinations, and that
method is the purchase method. As a general rule, the purchase method
establishes a new accounting basis for the assets and liabilities
acquired based on fair value and recognizes goodwill (positive or
negative). Goodwill, the difference between the purchase price and total
value of the assets and liabilities obtained, is an intangible asset
that must be amortized over future periods. Regarding transition, the
Board tentatively concluded that all business combinations reported
before final issuance of a new standard, as well as all combinations in
process at the time the new standard is issued should be accounted for
under APB 16 as a pooling, if the pooling criteria within that standard
are met. The FASB expects to issue an Exposure Draft during 1999, but
has not yet indicated when it expects to issue the final standard.
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.
March December March
31, 31, 31,
(dollars in thousands) 1999 1998 1998
------ ------ ------
Impaired loans $2,253 $1,706 $2,969
Amount of impaired loans that
have a related allowance $2,253 $1,706 $2,969
Amount of impaired loans with
no related allowance $0 $0 $0
Allowance for impaired loans $529 $456 $522
For the three month period ended
March 31,
1999 1998
------ ------
Average investment in impaired loans $1,789 $2,843
Interest income recognized on
impaired loans (all cash-basis) $16 $11
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the three month period
ended March 31, were as follows:
(dollars in thousands) 1999 1998
------ ------
Balance-January 1, $1,865 $2,098
Provision charged to operating expense 75 75
Loans charged off (3) (15)
Recoveries 6 0
------ ------
Balance-March 31, $1,943 $2,158
====== ======
6
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CODORUS VALLEY BANCORP, INC.
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Below 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 (CVB), and its wholly-owned subsidiary,
PeoplesBank, A Codorus Valley Company (PeoplesBank). CVB's consolidated
financial condition and results of operations consist almost entirely of
PeoplesBank's financial condition and results of operations. Current
performance does not guarantee and may not be indicative of similar
performance in the future.
Management has made forward-looking statements in this report, and in
documents that are incorporated by reference, that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of the Corporation or
Bank. Management is making forward-looking statements when it uses words
such as "believes," "expects," "anticipates" or other similar expressions.
Readers should note that many factors, some of which are discussed
elsewhere in this document and in the documents that are incorporated by
reference, could affect the future financial results of CVB or PeoplesBank
and could cause those results to differ materially from those expressed in
forward-looking statements contained or incorporated by reference in this
document. These factors include the following: operating, legal and
regulatory risks; economic, political and competitive forces affecting
banking, securities, asset management and credit services businesses; and
the risk that management's analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
CVB undertakes no obligation to publicly revise or update these forward-
looking statements to reflect events or circumstances that arise after the
date of this report. Readers should carefully review the risk factors
described in other documents that CVB files periodically with the
Securities and Exchange Commission.
Three months ended March 31, 1999
compared to three months ended March 31, 1998
INCOME STATEMENT ANALYSIS
Overview
Net income for the current three month period was $601,000, or $0.25 per
share, compared to $681,000, or $0.28 per share, for the same period in 1998.
Per share amounts for both periods were adjusted for stock dividends. Net
7
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CODORUS VALLEY BANCORP, INC.
income for the prior period was positively impacted by gains from periodic
asset sales and a one-time expense reduction associated with the termination
of the Bank's defined benefit retirement plan. For the three month period
(annualized) of 1999, the return on average assets was approximately 0.89
percent compared to 1.07 percent for 1998. For the same periods, the return
on average equity was approximately 9.2 percent for 1999 compared to 10.9
percent for 1998.
On March 31, 1999, total assets were approximately $275 million, an increase
of $17 million or 7 percent above March 31, 1998. Book value per share, as
adjusted for stock dividends, was $11.36 on March 31, 1999, compared to
$10.75 on March 31, 1998. As of March 31, 1999, management believes that
CVB's capital meets all capital requirements to which it is subject.
PeoplesBank's capital ratios also exceed the quantitative federal regulatory
minimums for well capitalized commercial banks.
An explanation of the factors and trends that caused changes between the two
periods, by earnings category, is provided below.
Net interest income
Net interest income for the current three month period was $2,621,000, a
decrease of $84,000 or 3.1 percent less than the same period in 1998.
Generally, the decline in net interest income was attributable to declining
market interest rates and competitive price pressures. An additional factor
which contributed to the decline in net interest income was a $5 million
investment in bank owned life insurance (boli) during the third quarter of
1998. Tax exempt income generated from the boli investment is recorded as
noninterest income.
Total interest earning assets averaged $244.6 million with a weighted average
tax equivalent yield of 7.93 percent for the first quarter of 1999 compared
to $234 million and 8.47 percent, respectively, for the first quarter of
1998. Growth in the average volume of interest earning assets occurred
primarily in the investment securities and commercial loan portfolios.
Total deposits averaged $238.3 million with a weighted average rate of 3.75
percent for the first quarter of 1999 compared to $224.9 million and 4.05
percent, respectively, for the first quarter of 1998. The average balances of
demand and interest bearing demand deposits increased significantly above
first quarter 1998, while savings deposits remained flat and CD deposits
declined slightly. Due to the growth in relatively low cost core deposits and
the need to manage net interest income compression, PeoplesBank has not
priced CDs aggressively.
8
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CODORUS VALLEY BANCORP, INC.
Provision for loan losses
The provision expense for possible loan losses was $75,000 for the current
three month period, the same as in 1998. The current period provision
supported growth in the commercial loan portfolio.
Noninterest income
Total noninterest income for the current three month period was $489,000, an
increase of $59,000 or 13.7 percent above the same period in 1998. The
overall increase was due primarily to a 200 percent increase in the other
income category which reflects increases in the cash surrender value of bank
owned life insurance (boli), ATM fees and rental income. Service charge fees
on deposit accounts also increased 18 percent above the first quarter of 1998
due to a larger deposit base. During the current period, PeoplesBank recorded
$37,000 in gains from the periodic sale of investment securities compared to
$122,000 for the same period in 1998.
For 1999, noninterest income is expected to exceed the 1998 level, with the
possible exception of gains from asset sales. Boli investment income and
rental income from leasing space in CVB and PeoplesBank facilities is
projected to make a larger contribution to noninterest income. Additionally,
fee income is expected to be generated from the new PeoplesBank subsidiary,
SYC Settlement Services, Inc. which began operations in January 1999. SYC
Settlement provides real estate title insurance and settlement services.
Noninterest expense
Total noninterest expense for the current three month period was $2,195,000,
an increase of $152,000 or 7.4 percent above the same period in 1998. The
increase in noninterest expense primarily reflects increases in salaries and
benefits, professional and legal, acquired real estate and other operating
expenses. Salaries and benefits expense increased $98,000 or 10 percent above
1998 due primarily to merit raises and higher replacement costs. Professional
and legal expense increased $25,000 or 52 percent due primarily to consulting
fees associated with a third party investment management arrangement for
selected accounts within the trust and investment services division, and
technology planning. Marketing and advertising expense decreased $55,000 or
48 percent due a lower level of sales training expenses associated with the
retail sales training program. Acquired real estate expense increased $39,000
or 205 percent due to greater carrying costs and deterioration in the market
value of selected properties. Other expense increased $51,000 or 14.6 percent
due in part to accounting reclassifications, timing and normal business
growth. Noninterest expense is expected to increase in 1999 due to planned
strategic initiatives, and normal business growth.
9
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CODORUS VALLEY BANCORP, INC.
Sales and product training
In January 1998, PeoplesBank contracted with a national sales training and
consulting firm to implement a sales and product training program. 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. Formal training of the retail banking
staff began in May 1998. This comprehensive retail training program is
expected to take approximately 30 months to complete at an estimated cost of
$175,000. Through March 31, 1999, PeoplesBank expensed approximately $97,200
on this program ($2,200 in 1999 and $95,000 for the full year 1998).
Year 2000 compliance
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact of the Year 2000 issue (Y2K) on CVB
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
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 or 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.
PeoplesBank is subject to the regulation and oversight of various banking
regulators, whose oversight includes the provision of specific timetables,
programs and guidance regarding Y2K issues. Regulatory examination of
PeoplesBank's Y2K programs are conducted periodically, and reports from
management are submitted quarterly to CVB's Board of Directors.
Corporation's State of Year 2000 Readiness
Resolving the Year 2000 issue is one of CVB's highest priorities. In 1997, a
project team was formed to address the Y2K issue. Based on an internal
assessment of CVB's systems and software, the project team determined that
some existing systems and software must be remediated or replaced prior to
the millennium.
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CODORUS VALLEY BANCORP, INC.
Management presently believes that as a result of modifications to existing
software and hardware and conversions to new software, the Y2K issue can be
mitigated. However, if such modifications and conversions are not made, or
are not completed on a timely basis, the Y2K issue could have a material
adverse impact on the operations of CVB.
CVB has initiated communications with its major vendors to determine the
extent to which these third parties will be Y2K compliant. To date, responses
have been positive; however, there is no guarantee that the systems and
software of other companies on which CVB relies will be Y2K compliant. As a
precaution CVB will test, and develop contingency plans, as needed, for
mission critical systems.
Further, PeoplesBank has communicated with its large commercial borrowers.
These borrowers may pose a credit risk to PeoplesBank if they are not Y2K
compliant, and their businesses are disrupted. Responses from large
commercial borrowers are currently being evaluated, and PeoplesBank will take
appropriate action based upon their level of readiness for Year 2000.
PeoplesBank has also incorporated a Y2K readiness review in its underwriting
process for business loans.
Costs of Year 2000 Readiness
As of March 31, 1999, management's best estimate of the total cost of Y2K
readiness is $45,000. Of the total estimate, $12,000 is expected to be
expended in 1999. The remaining $33,000 was expended in 1998. Y2K
expenditures were incurred principally for external technicians for system
test plans and testing. In addition, PeoplesBank replaced an aged item-
processing system in April 1999. On a comparable basis, this system cost
approximately $300,000 (exclusive of the cost of a check imaging capability
unique to the new system) which produces an annual after-tax depreciation
expense of $28,000 based on a seven-year expected useful life. Implementation
of this mission critical system was accelerated from its original fourth
quarter 1999 target date.
The cost of the Y2K project and the date on which CVB plans to become Y2K
compliant is based on management's best estimates, which assume the continued
availability of certain resources, third party modification plans and other
factors. However, there is no guarantee that these estimates will be achieved
and actual results could differ materially from management's plan.
Risks of Year 2000
At present, management believes its progress in remedying CVB's systems,
programs and applications and installing Y2K compliant upgrades is on target.
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CODORUS VALLEY BANCORP, INC.
The Y2K problem creates risk for CVB from unforeseen problems in its own
computer systems and from third party vendors who provide the majority of
mainframe and pc-based computer applications. Failure of third party systems
relative to the Y2K issue could have a material impact on CVB's ability to
conduct business. CVB is also exposed to credit risk if large commercial
borrowers are not Y2K compliant and their businesses are disrupted.
Contingency Plans for Year 2000
Mission critical systems have been remediated and tested for Year 2000
compliance. Mission critical systems were successfully tested and operated
correctly within the test environment. CVB will continue to monitor and test
mission critical systems and is in the process of developing a business
resumption contingency plan.
In accordance with regulatory mandate, CVB was substantially Year 2000
compliant by year end 1998. However, uncertainties remain about whether or
not CVB's third party vendors and large commercial borrowers will be Year
2000 compliant. Accordingly, the financial impact of the Year 2000 issue on
CVB's assets, earnings and liquidity cannot be determined at this time.
Sales of insurance and related investment products
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. In January 1999, PeoplesBank subsidiary, SYC Settlement
Services, Inc. began operations. This subsidiary, created and operated at
minimal cost, will generate fee income for PeoplesBank by providing real
estate title insurance and settlement services. PeoplesBank is currently
evaluating its options regarding the sale of other insurance and related
investment products.
Income taxes
The provision for federal income taxes was $239,000 for the current three
month period, compared to $336,000 for the same period in 1998. The decrease
in the tax provision for 1999 was the result of a lower level of income
before income taxes and a higher level of tax-exempt income.
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CODORUS VALLEY BANCORP, INC.
BALANCE SHEET REVIEW
Investment securities
The average volume (based on amortized cost) of securities available-for-sale
was $49.9 million for the first quarter of 1999 compared to $37.1 million for
the first quarter of 1998. During the current quarter, management sold
securities with a carrying cost of approximately $3 million which generated
a pretax gain of $37,000. Comparatively, $6.5 million of securities were sold
to generate a pretax gain of $122,000 during the first quarter of 1998.
Investment securities were sold to benefit from 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 $191.6 million, an
increase of $2.6 million or 1.4 percent above the average for the first
quarter of 1998. The increase was due primarily to growth in commercial
loans, principally within the fixed rate commercial loan portfolio.
Commercial loan growth was strong during the current quarter and began to
compensate for portfolio runoff that occurred during 1998. Runoff in the
prior year was attributable to competitive price pressures and early loan
payoffs associated with clients selling businesses.
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, PeoplesBank is committed to maintain high
underwriting standards.
Other assets
On March 31, 1999, other assets were $7.9 million, an increase of $7 million
above March 31, 1998. Most of the increase in other assets was caused by a $5
million investment in bank owned life insurance in the third quarter of 1998.
This investment was purchased to provide a tax-exempt return to PeoplesBank,
and offset the costs associated with supplemental benefit plans for selected
executive officers and Board members. The tax-exempt yield on the investment
is projected to range from 5.5 to 6.0 percent. This investment was funded by
the liquidation of short-term investments with correspondent banks. The
increase in other assets also reflects a $1.8 million increase in assets
acquired, ie., assets taken in satisfaction of debt, as discussed in the risk
management section of this report.
13
<PAGE>
CODORUS VALLEY BANCORP, INC.
FUNDING
Deposits
For the current quarter, the average balance of deposits was approximately
$238.3 million, an increase of $13.5 million or 6 percent above the same
quarter in 1998. The deposit mix continues to change favorably as relatively
low cost demand deposits outgrow higher priced CDs. Management believes that
deposit growth is attributable to increased selling effectiveness by the
retail banking staff pursuant to the formal sales and product training
program, and the addition of new customers who left selected banking
competitors that were merged with, or acquired by, large non-local financial
corporations.
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
In order to meet short-term funding needs PeoplesBank can borrow from larger
correspondent banks in the form of funds purchased. PeoplesBank 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.
PeoplesBank's maximum borrowing capacity, as established quarterly by the
FHLBP, was approximately $69 million, at December 31, 1998, the most recent
available date. At March 31, 1999, PeoplesBank had approximately $3.5 million
outstanding 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 CVB to
maintain asset growth and to absorb losses. Total stockholders' equity was
$26,137,000 at March 31, 1999, an increase of $1,365,000 or 5.5 percent above
March 31, 1998. The increase in total equity in the current period was
primarily attributable to earnings retention from profitable operations. Book
value per share was $11.36 on March 31, 1999, compared to $10.75 on March 31,
1998. Per share amounts for both periods were adjusted for stock dividends,
including a stock dividend declared in April 1999.
The level of capital for CVB and PeoplesBank remained sound for both periods.
PeoplesBank exceeded all minimum regulatory requirements for well capitalized
commercial banks as established by the FDIC, its primary federal
regulator. The FDIC's minimum quantitative standards for a well capitalized
14
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CODORUS VALLEY BANCORP, INC.
institution are as follows: Tier I risk-based capital, 6 percent; Total 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. CVB's and PeoplesBank's capital amounts and classification are also
subject to qualitative judgements by regulators. The table below depicts the
capital ratios for CVB and PeoplesBank for the periods ended March 31, 1999
and 1998. The level of PeoplesBank's capital reflects dividends PeoplesBank
paid to CVB to fund construction of the Corporate Center.
Ratios CVB PeoplesBank
3/31/99 3/31/98 3/31/99 3/31/98
Tier I risk-based capital 12.2 12.6 10.0 10.2
Total risk-based capital 13.2 13.7 11.0 11.3
Leverage 9.6 9.7 7.8 7.7
Capital investments made in earlier periods, 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
community office franchise, purchase of technological system solutions, and
acquisition of other financial services companies. Recently, management
contracted for the purchase of an item processing system with check imaging
capability. This system replaces an aged item processing system that is not
Y2K compliant. The new system, which is more efficient and has more capacity,
is projected to cost approximately $650,000 ($300,000 for item processing and
$350,000 for check imaging) and will be depreciated over an expected useful
life of five to seven years. Installation of the system was completed during
April 1999. 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.
On April 13, 1999, the Board declared a regular quarterly cash dividend of
$.105 cents per share, payable May 11, 1999, to shareholders of record April
27, 1999. This follows a $.105 cents per share cash dividend paid on February
9, 1999.
Also on April 13, 1999, the Board declared a 5 percent stock dividend,
payable on or before June 10, 1999, to shareholders of record April 27, 1999.
Payment of this dividend will result in the issuance of approximately 115,021
shares of common stock. Comparatively, a 5 percent stock dividend was paid in
June 1998. In January 1998, CVB paid a two-for-one stock split effected in
the form of a 100 percent stock dividend. The payment of stock dividends is
another method of enhancing shareholder value.
In February 1999, CVB publicly announced that its Board authorized the
purchase, in open market and privately negotiated transactions, of up to
112,500 shares or 4.9 percent of CVB's outstanding common stock. Purchases
are authorized periodically when market conditions warrant, and are expected
15
<PAGE>
CODORUS VALLEY BANCORP, INC.
to be funded using available excess capital. As of March 31, 1999, 3,572
shares were purchased by CVB at a total cost of $65,000 and held in treasury.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends, was approximately 2,417,918 shares for the three month
period ended March 31, 1999, and 2,419,008 shares for the same period in
1998.
RISK MANAGEMENT
Nonperforming assets
A summary of nonperforming assets and past due loans, and related ratios, is
provided in Table 1 included in this report. An explanation of changes within
each classification for March 31, 1999, compared to March 31, 1998, is
provided below.
A 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, CVB uses the cash basis method to recognize interest
income on loans that are impaired. On March 31, 1999, the impaired loan
portfolio was $2,253,000, which reflected a $716,000 or 24 percent decline
since March 31, 1998, due primarily to reclassifications to the assets
acquired category. At March 31, 1999, the impaired loan portfolio was
comprised of twenty unrelated accounts, primarily commercial loan
relationships, ranging in size from $25,000 to $759,000. These loan
relationships vary by industry and are generally collateralized with real
estate assets. A loss allowance, 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.
Assets acquired in foreclosure, net of allowance, were $1,968,000 on March
31, 1999, an increase of $1,772,000 above March 31, 1998. The increase in
assets acquired was caused primarily by a reclassification of impaired loans
for two commercial accounts. The most significant account involved an
improved real estate property taken via deed-in-lieu of foreclosure in May
1998. CVB's carrying value for this asset, which makes up 51 percent of the
assets acquired portfolio, is approximately $996,000. Management believes
that the net realizable value of this property is sufficiently greater than
its carrying value based on a recent external appraisal. A loss allowance,
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 March 31, 1999, the allowance for assets acquired was
$69,000. For the first three months of 1999, a $15,000 loss provision was
16
<PAGE>
CODORUS VALLEY BANCORP, INC.
recorded to reflect a decline in fair value. Comparatively, a $22,000 loss
provision was deemed necessary for the same period in 1998. Efforts to
liquidate assets acquired are proceeding as quickly as potential buyers can
be located and legal constraints permit.
At March 31, 1999, loans past due 90 days or more and still accruing interest
totalled $106,000, compared to $162,000 for March 31, 1998. 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, 1999, there were no potential problem loans, as defined by the
Securities and Exchange Commission, identified by management. However,
management was monitoring loans of approximately $7.5 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 $14
million on March 31, 1998.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses depicts a $1,943,000 allowance
at March 31, 1999, which was 1 percent of total loans. The current period
allowance 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 three month period was $75,000, the same as the first three months of
1998.
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.
Liquidity
Liquidity is deemed adequate and the principal funding sources include:
deposit growth, 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 percent at March 31, 1999,
compared to 82 percent at March 31, 1998. The ratio for both periods was
within current policy guidelines.
17
<PAGE>
CODORUS VALLEY BANCORP, INC.
Market risk management
In the normal course of conducting business CVB 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, 1998.
Other risks
Periodically, various types of federal and state legislation are proposed
that could result in additional regulation of, or restrictions on, the
business of CVB and its subsidiaries. It cannot be predicted whether such
legislation will be adopted or, if adopted, how such legislation would affect
the business of CVB and its subsidiaries.
Further, the business of CVB 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.
Congress is currently considering legislation to modernize the financial
services industry. This proposed legislation will likely deregulate many
activities engaged in currently, or prospectively, by CVB and PeoplesBank. It
is also likely to present many opportunities and challenges to CVB and
PeoplesBank. However, the exact effects of this legislation cannot be
determined at this time.
18
<PAGE>
CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
March 31, December 31, March 31,
(dollars in thousands) 1999 1998 1998
------ ------ ------
Impaired loans (1) $2,253 $1,706 $2,969
Assets acquired in foreclosure (2) 1,968 1,871 196
------ ------ ------
Total nonperforming assets $4,221 $3,577 $3,165
====== ====== ======
Loans past due 90 days or more
and still accruing interest $106 $13 $162
Ratios:
Impaired loans as a % of
total period-end loans 1.16% .90% 1.56%
Nonperforming assets as a % of
total period-end loans and net
assets acquired in foreclosure 2.14% 1.87% 1.66%
Nonperforming assets as a % of
total period-end stockholders'
equity 16.15% 13.73% 12.78%
Allowance for loan losses as a
multiple of impaired loans .9x 1.1x .7x
Interest not recognized on impaired
loans at period-end: (3)
Contractual interest due $225 $312 $365
Interest revenue recognized 16 73 11
---- ---- ----
Interest not recognized in operations $209 $239 $354
==== ==== ====
(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.
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CODORUS VALLEY BANCORP, INC.
Table 2-Analysis of Allowance for Loan Losses
(dollars in thousands) 1999 1998
------ ------
Balance-January 1, $1,865 $2,098
Provision charged to operating expense 75 75
Loans charged off:
Commercial 1 15
Real estate-mortgage 0 0
Consumer 2 0
------ ------
Total loans charged off 3 15
Recoveries:
Commercial 3 0
Real estate-mortgage 0 0
Consumer 3 0
------ ------
Total recoveries 6 0
------ ------
Net (recoveries)chargeoffs (3) 15
Balance-March 31, $1,943 $2,158
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans .00% 0.03%
Allowance for loan losses to total loans
at period-end 1.00% 1.13%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 82.4% 68.9%
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, 1998. (SEC file number 000-
15536, "Item 7A: Quantitative and Qualitative Disclosures About Market
Risk," pages 9 and 10 of Form 10-K.)
20
<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, 1999.
(b) Reports on Form 8-K-
Codorus Valley Bancorp, Inc. filed a Form 8-K, via EDGAR, dated February 11,
1999. It disclosed that on February 9, 1999, the Corporation released a
Press Release announcing the initiation of a common stock repurchase program.
The Board of Directors authorized the purchase, in open market and privately
negotiated transactions, of up to 112,500 shares of its outstanding common
stock, or approximately 4.9% of the then outstanding shares. Repurchases are
authorized to be made from time to time when market conditions warrant. The
purchases are expected to be funded by using available excess capital.
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)
May 12, 1999 /s/ Larry J. Miller
Date Larry J. Miller,
President & CEO
(principal executive officer)
May 12, 1999 /s/ Jann A. Weaver
Date Jann A. Weaver,
Assistant Treasurer &
Assistant Secretary
(principal financial and
accounting officer)
22
<PAGE>
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