UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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. As of 07/25/00, 2,453,923
shares of common stock, par value $2.50, were outstanding.
<PAGE>
CODORUS VALLEY BANCORP, INC.
10Q INDEX
Page #
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.............. 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................... 18
PART II - OTHER INFORMATION
Item 1. Legal proceedings.................................. 22
Item 2. Changes in securities and use of proceeds.......... 22
Item 3. Defaults by the company on its senior securities... 22
Item 4. Results of votes of security holders............... 22
Item 5. Other information.................................. 23
Item 6. Exhibits and reports on Form 8-K................... 23
SIGNATURES................................................. 24
EXHIBIT 27, Financial Data Schedule........................ 25
<PAGE>
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
June December
30, 31,
(dollars in thousands) 2000 1999
Assets --------- ---------
Cash and due from banks
Interest bearing deposits with banks $ 240 $ 226
Noninterest bearing deposits and cash 8,929 10,399
Federal funds sold 4,527 568
Securities available-for-sale 44,526 46,268
Securities held-to-maturity(market value $8,380
at 6/30/00 and $8,835 at 12/31/99) 9,360 9,361
Loans 206,813 207,318
Less-allowance for loan losses (1,946) (2,023)
-------- --------
Total net loans 204,867 205,295
Premises and equipment 9,298 9,547
Interest receivable 1,572 1,617
Other assets 7,987 7,875
-------- --------
Total assets............................. $291,306 $291,156
======== ========
Liabilities
Deposits
Noninterest bearing demand $ 25,693 $ 23,427
NOW 24,539 24,376
Money market 42,311 40,449
Savings 18,974 19,007
Time CDs less than $100,000 112,259 112,251
Time CDs $100,000 and above 19,132 18,948
-------- --------
Total deposits 242,908 238,458
Federal funds purchased 0 2,657
Other short-term borrowings 10,750 13,000
Long-term borrowings 10,191 10,342
Interest payable 656 731
Other liabilities 619 596
-------- --------
Total liabilities............................ 265,124 265,784
Stockholders' Equity
Series preferred stock, par value $2.50
per share; 1,000,000 shares authorized;
0 shares issued and outstanding 0 0
Common stock, par value $2.50 per share;
10,000,000 shares authorized; 2,454,923 shares
issued and outstanding at 6/30/00 and 2,343,183
at 12/31/99. 6,137 6,019
Additional paid-in capital 12,447 11,978
Retained earnings 8,080 9,050
Accumulated other comprehensive loss (482) (523)
Less: Treasury stock, 64,544 at 12/31/99 0 (1,152)
-------- --------
Total stockholders' equity................... 26,182 25,372
-------- --------
Total liabilities and stockholders' equity... $291,306 $291,156
======== ========
See accompanying notes.
1
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CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
<TABLE>
Three months ended Six months ended
June 30, June 30,
(dollars in thousands, except per share data) 2000 1999 2000 1999
------ ------ ------ -----
<S> <C> <C> <C> <C>
Interest Income
Interest and fees from loans $4,517 $4,290 $9,036 8,419
Interest from federal funds sold and interest
bearing deposits with banks 52 30 83 67
Interest and dividends from securities
Taxable interest income 672 583 1,377 1,208
Tax-exempt interest income 108 94 219 176
Dividend income 55 23 111 42
------ ------ ------ ------
Total interest income.............................. 5,404 5,020 10,826 9,912
Interest Expense
NOW 62 62 121 138
Money market 374 309 723 590
Savings 95 107 191 210
Time CDs less than $100,000 1,493 1,498 2,997 3,000
Time CDs $100,000 and above 252 236 512 479
------ ------ ------ ------
Total interest expense on deposits 2,276 2,212 4,544 4,417
Interest expense on short-term borrowings and
federal funds purchased 209 24 424 37
Interest expense on long-term borrowings 169 55 340 108
------ ------ ------ ------
Total interest expense............................ 2,654 2,291 5,308 4,562
------ ------ ------ ------
Net interest income................................ 2,750 2,729 5,518 5,350
Provision for Loan Losses 69 75 69 150
------ ------ ------ ------
Net interest income after provision for loan losses 2,681 2,654 5,449 5,200
Noninterest Income
Trust and investment services fees 162 137 337 261
Service charges on deposit accounts 171 146 333 273
Other income 265 208 522 409
Gain on sales of securities 0 6 0 43
Gains, other 3 2 (3) 2
------ ------ ------ ------
Total noninterest income 601 499 1,189 988
Noninterest Expense
Salaries and benefits 1,214 1,178 2,379 2,258
Occupancy of premises 194 199 404 407
Furniture and equipment 267 251 527 479
Postage, stationery and supplies 110 121 208 208
Professional and legal 77 68 108 141
Marketing and advertising 72 115 185 173
Other real estate owned, net 13 20 52 78
Other 434 372 887 775
------ ------ ------ ------
Total noninterest expense 2,381 2,324 4,750 4,519
Income before income taxes 901 829 1,888 1,669
Provision for Income Taxes 254 230 533 469
------ ------ ------ ------
Net income..........................................$ 647 $ 599 1,355 $1,200
Net income per share ====== ====== ====== ======
Basic..............................................$0.27 $0.24 $0.57 $0.49
Diluted............................................$0.27 $0.24 $0.57 $0.49
See accompanying notes.
</TABLE>
2
<PAGE>
CODORUS VALLEY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six months ended
June 30,
2000 1999
------- -------
Cash Flows From Operating Activities: (dollars in thousands)
Net Income $ 1,355 $ 1,200
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 441 413
Provision for loan losses 69 150
Provision for losses on other real estate owned 22 15
Net(gain)loss on sales of other real estate owned (39) 4
Gain on sales of securities 0 (43)
Gain on sales of loans 0 (2)
Loss on sales of premises and equipment 3 0
Decrease in interest receivable 45 83
Increase in other assets (286) (432)
Decrease in interest payable (75) (19)
Increase (decrease)in other liabilities 23 (23)
Other, net (96) 1
------- -------
Net cash provided by operating activities............. 1,462 1,347
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 0 6,055
Proceeds from maturities and calls of securities
available-for-sale 7,665 10,319
Purchase of securities available-for-sale (5,869) (9,689)
Net decrease(increase) in loans made to customers 147 (14,838)
Proceeds from loan sales 194 306
Proceeds from sales of premises and equipment 36 0
Purchases of premises and equipment (231) (426)
Proceeds from sales of other real estate owned 293 354
------- -------
Net cash provided by (used for) investing activities... 2,235 (7,919)
Cash Flows From Financing Activities:
Net increase in demand and savings deposits 4,258 2,756
Net increase (decrease)in time deposits 192 (990)
Net (decrease) increase in short-term borrowings and
federal funds purchased (4,907) 2,566
Net (decrease) increase in long-term borrowings (151) 904
Dividends paid (515) (483)
Payment to repurchase common stock (68) (243)
Cash paid in lieu of fractional shares (3) (5)
------- -------
Net cash (used for) provided by financing activities..(1,194) 4,505
------- -------
Net increase(decrease) in cash and cash equivalents.. 2,503 (2,067)
Cash and cash equivalents at beginning of year....... 11,193 11,092
------- -------
Cash and cash equivalents at June 30,................$13,696 $ 9,025
======= =======
Supplemental Disclosures:
Interest payments $4,619 $4,436
Income tax payments $637 $592
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 1999 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 140,710 shares for the Corporation's Dividend Reinvestment and Stock
Purchase Plan; 79,492 shares for the 1996 Stock Incentive Plan; 100,000
shares for the 2000 Stock Incentive Plan; 110,250 shares for the 1998
Independent Directors' Stock Option Plan; and those shares reserved for the
Shareholders' Rights Plan.
The results of operations for the six month period ended June 30, 2000
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, including the 5% stock dividend paid
June 23, 2000. The weighted average number of shares of common stock
outstanding used was approximately 2,390,507 for the six month period
ended June 30, 2000 and 2,451,421 for the same period in 1999.
Reclassifications - Certain reclassifications have been made to the 1999
consolidated financial statements to conform with the 2000 presentation.
Comprehensive Income - As of January 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement No. 130 requires unrealized gains or
losses on available-for-sale securities, to be included in other
comprehensive income. Total comprehensive income was $724,000 for
the quarter ended June 30, 2000, compared to $194,000 for the same
period of 1999. Year to date total comprehensive income was $1,396,000 for
2000, compared to $580,000 for 1999.
4
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CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 3-Current Accounting Developments
During the fourth quarter of 1999, the Financial Accounting Standards Board
(FASB) issued an Exposure Draft on Business Combinations and Intangible
Assets. Under the proposed Draft, companies would be required to: account
for all business combinations using the purchase method; amortize goodwill
over its useful economic life, but in no event over a period longer than 20
years; present goodwill charges on a net-of-tax basis as the last component
of continuing operations on the income statement; recognize negative
goodwill as an extraordinary gain; and recognize all reliably measureable
identifiable intangible assets at their fair value, among other
recommendations. The FASB expects to issue a final statement in the fourth
quarter of 2000, applicable to business combinations and to intangible
assets acquired in transactions initiated after the issuance date of the
final statement.
5
<PAGE>
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 4-Impaired Loans
The Corporation records impaired loans in accordance with Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118, "Accounting by Creditors for
impairment of a Loan--Income Recognition and Disclosure." For all
reportable periods, impaired loans were comprised of collateral dependent
commercial loans and residential mortgage loans classified as
nonaccrual(cash basis). Additional information regarding impaired loans
is provided in the schedule that follows.
June 30, December 31,
(dollars in thousands) 2000 1999
------ ------
Impaired loans $3,631 $1,892
Amount of impaired loans that have a related
allowance $2,982 $1,892
Amount of impaired loans with no related
allowance $649 $0
Allowance for impaired loans $492 $500
For the six months ended June 30, 2000 1999
------ ------
Average investment in impaired loans $2,323 $2,045
Interest income recognized on impaired loans
(all cash-basis) $29 $30
Note 5-Analysis of Allowance for Loan Losses
Changes in the allowance for loan losses for the six month period
ended June 30, were as follows:
2000 1999
(dollars in thousands) ------ ------
Balance-January 1, $2,023 $1,865
Provision charged to operating expense 69 150
Loans charged off (166) (4)
Recoveries 20 10
------ ------
Balance-June 30, $1,946 $2,021
====== ======
6
<PAGE>
CODORUS VALLEY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
Note 6-Long-term Borrowings
June 30, December 31,
2000 1999
(dollars in thousands) ------- -------
Notes issued by PeoplesBank to FHLB Pittsburgh:
Due 2004, 5.12%, 5 year bullet $ 1,025 $ 1,025
Due 2007, 6.82%, 10 year amortizing 2,194 2,324
Due 2014, 6.43%, convertible quarterly after
July 2009, 15 year bullet (convertible select) 5,000 5,000
Note issued by Codorus Valley Bancorp, Inc.:
Due 2009, 7.35%, payment based on 20 year
amortization, 10 year bullet 1,972 1,993
------- -------
Total $10,191 $10,342
======= =======
The FHLBP notes payable are fixed rate and fixed/floating rate (convertible
select) instruments. The 15 year convertible select is fixed for 10 years.
During the remaining 5 years, the FHLBP has the option to convert the rate
to a floating rate based on the 3 month Libor plus 16 basis points. If the
FHLBP elects to exercise the conversion option, PeoplesBank can repay the
loan without a prepayment penalty. The note issued by Codorus Valley
Bancorp, Inc. is secured by a mortgage on the Codorus Valley Corporate
Center office building at 105 Leader Heights Road, York, Pennsylvania.
7
<PAGE>
CODORUS VALLEY BANCORP, INC.
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
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 (Codorus Valley or Corporation), and its
wholly-owned subsidiary, PeoplesBank, A Codorus Valley Company
(PeoplesBank) are provided below. Codorus Valley=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 Codorus Valley or
PeoplesBank. 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 management
incorporates by reference, could affect the future financial results of
Codorus Valley 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:
* 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.
The Corporation 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 Codorus Valley files periodically
with the Securities and Exchange Commission.
8
<PAGE>
CODORUS VALLEY BANCORP, INC.
Three months ended June 30, 2000
compared to three months ended June 30, 1999
--------------------------------------------
INCOME STATEMENT ANALYSIS
Overview
Net income for the current three month period was $647,000 or $.27 per
share, compared to $599,000 or $0.24 per share, for the same period in
1999. All per share amounts were adjusted for stock dividends. The increase
in current period net income was caused by a $102,000 or 20 percent
increase in noninterest income that more than offset a $57,000 or 2 percent
increase in noninterest operating expense. Noninterest income was up in all
categories with the exception of gains from asset sales.
On June 30, 2000, total assets were approximately $291 million, unchanged
from December 31, 2000, but $13 million above June 30, 1999. The increase
in assets from one year ago occurred primarily in the investment securities
and loan portfolios in the second half of 1999, and were funded primarily
by borrowings.
An explanation of the factors and trends that caused changes between the
two periods, by earnings category, follows.
Net interest income
Net interest income for the current three-month period was $2,750,000,
slightly above the $2,729,000 recorded for the second quarter of 1999.
Total interest earning assets averaged $259 million with a weighted average
tax equivalent yield of 8.12 percent for the second quarter of 2000
compared to $250 million and 7.86 percent, respectively, for the same
quarter of 1999. Growth in the average volume of interest earning assets
occurred evenly between consumer and commercial loans, and investment
securities. Interest income from a larger volume of earnings assets at
higher yields, was largely offset by an increase in funding costs. The
increase in funding costs was driven primarily by borrowings, which
compensated for a lack of deposit growth. Interest rate sensitive
liabilities averaged $235 million with a weighted average rate of 4.52
percent for the second quarter of 2000 compared to $224 million and 4.09
percent, respectively, for the same period of 1999. Net interest income
continues to be constrained by a flat/inverse U.S. treasury yield curve,
competitive price pressures and higher funding costs.
9
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CODORUS VALLEY BANCORP, INC.
Provision for loan losses
A $69,000 provision expense for possible loan losses was recorded in the
second quarter of 2000 to correspond to an increase in nonperforming loans
and net charge-offs, which arose during that time. Comparatively, a $75,000
provision was recorded for the same period of 1999 to support growth in the
commercial loan portfolio.
Noninterest income
Total noninterest income for the current three-month period was $601,000,
an increase of $102,000 or 20 percent above the second quarter of 1999.
Income increased in all categories except for gains from asset sales.
Explanations for the increase in noninterest income can be found under the
subheading noninterest income within the six-month analysis section of this
report.
Noninterest expense
Total noninterest expense for the current three-month period was
$2,381,000,
an increase of $57,000 or 2 percent above the second quarter of 1999. The
increase in noninterest expense primarily reflects increases in salaries
and benefits, equipment and other operating expense. Explanations for the
increase in these expense categories can be found under the subheading
noninterest expense within the the six-month analysis section of this
report.
Capital investment in technology
In April 2000, PeoplesBank upgraded its IBM AS400 host computer system,
which was nearing the limits of its processing capacity. The upgrade, which
cost approximately $90,000, proceeded smoothly and is expected to extend
system life by three years. Annual depreciation is approximately $30,000.
The benefits of this investment include increased processing capacity and
speed, which translate to better customer service and increased processing
efficiencies.
Income taxes
The provision for federal income taxes was $254,000 for the current three-
month period, compared to $230,000 for the second quarter of 1999. The
increase in federal taxes was due to an increase in taxable income.
10
<PAGE>
CODORUS VALLEY BANCORP, INC.
Six months ended June 30, 2000
compared to six months ended June 30, 1999
------------------------------------------
INCOME STATEMENT ANALYSIS
Overview
A growing economy, and continued emphasis on sales and risk management were
factors that contributed to an increase in net income. Net income for the
current six-month period was $1,355,000 or $.57 per share, compared to
$1,200,000 or $0.49 per share, for the same period in 1999. All per share
amounts were adjusted for stock dividends. The increase in current period
net income was caused by a $168,000 increase in net interest income, a
$201,000 increase in noninterest income, and a $81,000 decrease in the
provision for loan losses. The favorable effect of these three income
statement categories more than offset a $231,000 increase in noninterest
operating expense. For the six-month period (annualized) of 2000, the
return on average assets was approximately 0.94 percent compared to 0.88
percent for 1999. For the same periods, the return on average equity was
approximately 10.6 percent for 2000 compared to 9.2 percent for 1999.
On June 30, 2000, total assets were approximately $291 million, unchanged
from December 31, 1999. Book value per share was $10.67 on June 30, 2000,
compared to $10.61 on December 31, 1999. As of June 30, 2000, management
believes that Codorus Valley meets all capital requirements to which it is
subject. PeoplesBank's capital ratios exceed the quantitative federal
regulatory minimums for well-capitalized commercial banks.
Recently, management received all regulatory approvals to open a full
service community office in Hanover, Pennsylvania. Details can be found in
the branch office expansion section of this report.
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 six-month period was $5,518,000, an
increase of $168,000 or 3 percent above the same period in 1999. The
increase in net interest income was due primarily to a greater volume of
interest earning assets, which more than offset a decrease in the net yield
on earning assets. Total interest earning assets averaged $261 million for
the first six months of 2000 compared to $247 million for the first six
months of 1999. The net yield on earning assets averaged 4.30 percent for
the first six months of 2000 compared to 4.43 percent for the same period
of 1999. Growth in the average volume of interest earning assets occurred
primarily in the commercial loan and investment securities portfolios. Net
interest income
11
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CODORUS VALLEY BANCORP, INC.
continues to be constrained by a flat/inverse U.S. treasury yield curve,
competitive price pressures and higher funding costs.
Total deposits averaged $237 million with a weighted average rate of 3.85
percent for the first six months of 2000 compared to $241 million and 3.70
percent, respectively, for the same period of 1999. The average balances of
noninterest and interest bearing demand deposits increased 4.5 percent
above 1999, while passbook savings deposits declined 10 percent and CD
deposits declined 4 percent. Deposit funding costs are expected to increase
in the period ahead due to rising market interest rates and competition.
Deposit growth remains a challenge for PeoplesBank and the financial
services industry, due to the popularity of higher yield/risk market
alternatives.
Total borrowings averaged $24 million with a weighted average cost of 6.27
percent for the first six months of 2000 compared to $5 million and 5.93
percent, respectively, for the same period of 1999. The increase in
borrowings compensated for a lack of deposit growth.
Provision for loan losses
A $69,000 provision expense for possible loan losses was recorded in the
second quarter of 2000 to correspond to an increase in nonperforming loans
and net charge-offs occurring in that time period. Comparatively, a
$150,000 provision was recorded for the same period of 1999 to support
growth in the commercial loan portfolio.
Noninterest income
Total noninterest income for the current six-month period was $1,189,000,
an increase of $201,000 or 20 percent above the same period in 1999. Income
increased in all categories except for gains from asset sales. Trust and
investment services fees increased $76,000 or 29 percent due primarily to a
price increase effective July 1, 1999. Service charges on deposit accounts
increased $60,000 or 22 percent due primarily to selected price increases.
Other income increased $115,000 or 28 percent due to fee income from
PeoplesBank subsidiaries, principally SYC Insurance Services, Inc., which
began operations in January 2000. During the current period, rising market
interest rates constrained asset sales and gains thereon. For the year
2000, noninterest income is expected to exceed the 1999 level, with the
exception of gains from asset sales. The expected increase is based on the
following presumptions: normal business growth, added revenue from the fee-
based bank subsidiary SYC Insurance, and a full year=s impact of selected
price increases.
12
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CODORUS VALLEY BANCORP, INC.
Fee-based subsidiary
In January 2000, PeoplesBank subsidiary, SYC Insurance Services, Inc.,
began operations. To date, sales and fee income have met management=s
expectations. PeoplesBank created SYC Insurance, at nominal cost, to
generate fee income by facilitating the sale of investment products through
a third-party marketing arrangement. The initial product offering is a
fixed rate annuity. Variable rate annuities and mutual fund products will
be offered later this year. Licensed sales representatives throughout
PeoplesBank=s branch offices and divisions conduct sales of investment
products. Products sold by SYC Insurance are not FDIC insured, not
obligations of, nor guaranteed by PeoplesBank, and are subject to market
risks including the possible loss of principal.
Noninterest expense
Total noninterest expense for the current six-month period was $4,750,000,
an increase of $231,000 or 5 percent above the same period in 1999. The
increase in noninterest expense primarily reflects increases in salaries
and benefits, equipment and other operating expense. The $212,000 or 5
percent increase in salary and benefit expense reflects planned staff
additions, merit raises, and higher replacement costs. The $48,000 or 10
percent increase in equipment expense reflects increased investment in
technology. The $112,000 or 15 percent increase in other operating expense
was caused by a $59,000 increase in problem loan carrying costs due to a
higher level of impaired loans, and a one-time $30,000 loss associated with
an error made by a former employee. The $33,000 or 23 percent decrease in
professional and legal expense reflects termination of a temporary
investment management arrangement by the Trust and Investment Services
Division of PeoplesBank. Noninterest expense is expected to increase in the
period ahead due to normal business growth and implementation of strategic
initiatives such as staff additions, branch office expansion and technology
investments.
Branch office expansion
PeoplesBank recently received regulatory approval to establish a community
banking office in Penn Township, Hanover, Pennsylvania. Plans call for
leasing a 1,850 square foot office to be located adjacent to a soon-to-be
constructed Rutter=s Farm Store. PeoplesBank plans to have this office
operational during the first quarter of 2001. Project progress will be
reported in future SEC filings.
13
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CODORUS VALLEY BANCORP, INC.
Capital investment in technology
In January 2000, PeoplesBank introduced internet banking with on-line bill
payment to its customers. To date, customer response has been very positive
and usage has met management=s expectations. Capital investment in the
internet banking system, exclusive of marketing and maintenance expenses,
was approximately $61,000. Annual depreciation is approximately $20,000
based on an expected three-year useful life.
In April 2000, PeoplesBank upgraded its IBM AS400 host computer system.
Project detail is provided in the second quarter review under the capital
investment in technology section of this report.
For the remainder of 2000, PeoplesBank will focus on several technology
initiatives as defined in the Corporation=s strategic technology plan. One
key initiative is to develop a new bank website that is interactive and
flexible. Resources will also be focused on improving on-line systems
security through intruder detection and security upgrades. Other
initiatives include improving the technology infrastructure by expanding
the local area network to branch banking offices and decentralizing access
to imaging technology.
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 PeoplesBank 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 and is expected to be completed
by December 2000. Through June 30, 2000, PeoplesBank expended approximately
$163,000 on this program ($36,000 in 2000 to date; $32,000 in 1999; and
$95,000 in 1998).
Income taxes
The provision for federal income taxes was $533,000 for the current six-
month period, compared to $469,000 for the same period in 1999. The
increase in federal taxes was due to an increase in taxable income.
14
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CODORUS VALLEY BANCORP, INC.
BALANCE SHEET REVIEW
Investment securities, loans & deposits
On June 30, 2000, investment securities declined slightly from December 31,
1999, while loan balances remained stable. Retail loan growth was largely
offset by a decline in commercial loans. The decline in commercial loans
was caused by anticipated early payoffs from selected commercial clients.
Total deposits increased $4.4 million since year-end 1999 primarily within
the noninterest bearing demand and money market deposit categories.
Short-Term and Long-Term Borrowings
In order to meet short-term funding needs PeoplesBank may borrow from
larger correspondent banks in the form of funds purchased. PeoplesBank also
uses 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 $58 million, on
March 31, 2000, the most recent available date. On June 30, 2000,
PeoplesBank had approximately $19 million in total borrowings with the
FHLBP.
On June 30, 2000, short-term (overnight) borrowings were $10.8 million,
representing a $4.9 million decrease from year-end 1999. In light of rising
market interest rates, it is management=s intent to reduce the level of
overnight borrowings in the period ahead. On June 30, long-term borrowings
were $10.2 million, representing a slight decline from year-end 1999. A
listing of long-term borrowing agreements and terms is provided in Note 6
of this report.
Stockholders' Equity
Stockholders' equity, or capital, is a source of funds which enables
Codorus Valley to maintain asset growth and to absorb losses. Total
stockholders' equity was $26.2 million on June 30, 2000, an increase of
$810,000 above December 31, 1999. The increase was caused primarily by
profitable operations. Book value per share, as adjusted, was $10.67 on
June 30, 2000, compared to $10.61 on December 31, 1999.
The level of capital for Codorus Valley 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 institution are as follows: tier I risk-based capital, 6
percent; total risk-based capital, 10 percent; and tier I leverage ratio, 5
percent.
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CODORUS VALLEY BANCORP, INC.
At the state level, the Pennsylvania Department of Banking uses a leverage
ratio guideline of 6 percent. Codorus Valley's and PeoplesBank's capital
amounts and classification are also subject to qualitative judgments by
regulators. The table below depicts capital ratios for Codorus Valley and
PeoplesBank on June 30, 2000, and December 31, 1999.
Capital Ratios
Codorus Valley
Consolidated PeoplesBank
6/30/00 12/31/99 6/30/00 12/31/99
Tier I risk-based capital 11.5 11.2 9.6 9.2
Total risk-based capital 12.3 12.1 10.5 10.1
Tier I leverage 9.3 9.3 7.7 7.6
Capital investments made in earlier periods, as described in previous SEC
filings, and future investments will impact current and future earnings and
capital growth. Possible future investments may be made for expanding the
community office franchise, technology, and acquisition of 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.
On July 11, 2000, the board declared a quarterly cash dividend of $.12
cents per share, payable August 8, 2000, to shareholders of record July 25,
2000. This follows a $.11 cents per share cash dividend paid in May and
February, 2000. Additionally, a 5 percent stock dividend was paid on June
23, 2000.
In February 1999, Codorus Valley 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 Codorus Valley's
then outstanding common stock. Purchases are authorized periodically when
market conditions warrant, and are expected to be funded from operations
using available retained capital. As of June 30, 2000, Codorus Valley had
purchased 80,322 shares of its common stock for approximately $1,421,000,
all of which were reissued to partially satisfy the payment of stock
dividends.
The weighted average number of shares of common stock outstanding, adjusted
for stock dividends paid in June 2000, was approximately 2,390,507 shares
for the six month period ended June 30, 2000, and 2,451,421 for the same
period in 1999.
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<PAGE>
CODORUS VALLEY BANCORP, INC.
RISK MANAGEMENT
Nonperforming assets
Table 1 of this report provides a summary of nonperforming assets and past
due loans, and related ratios. The paragraphs below explain the changes
within each classification for June 30, 2000, compared to December 31,
1999.
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, Codorus Valley recognizes interest income on a
cash basis for impaired loans. On June 30, 2000, the impaired loan
portfolio was $3,631,000, reflecting a $1,739,000 or 92 percent increase
since year-end 1999. The increase since year end was caused primarily by
the addition of two unrelated commercial loan accounts during the second
quarter. One account amounted to $1,171,000, the other was $593,000, both
accounts appear adequately collateralized. On June 30, 2000, the impaired
loan portfolio was comprised of twenty-eight unrelated accounts, primarily
commercial loan relationships, ranging in size from $7,000 to $1,171,000.
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.
Other real estate owned (OREO), net of allowance, totaled $1,220,000 on
June 30, 2000, representing a $165,000 or 12 percent decrease from
December, 31, 1999. The decrease was due to the liquidation of several
acquired assets. On June 30, 2000, the OREO portfolio included real estate
assets from four former commercial loan relationships. The highest value
property has a carrying value of $986,000, which accounts for 81 percent of
the OREO portfolio. Management believes that the net realizable value of
this property is greater than its carrying value based on an 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. On June 30, 2000, the
OREO allowance was $20,000. For the first six months of 2000, a $22,000
loss provision was recorded to reflect a loss on the decline in fair value.
Comparatively, a $15,000 loss provision was deemed necessary for the same
period in 1999. Efforts to liquidate OREO are proceeding as quickly as
potential buyers can be located and legal constraints permit.
On June 30, 2000, loans past due 90 days or more and still accruing
interest totalled $62,000, compared to $13,000 on December 31, 1999.
Generally, loans in the past due category are adequately collateralized and
in the process of collection.
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CODORUS VALLEY BANCORP, INC.
On June 30, 2000, management had not identified any potential problem
loans, as defined by the Securities and Exchange Commission. However,
management was monitoring loans of approximately $9.5 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 $7.5
million on December 31, 1999.
Allowance for loan losses
Table 2, Analysis of Allowance for Loan Losses depicts a $1,946,000
allowance on June 30, 2000, which was 0.94 percent of total loans. The
current period allowance declined below 1999 due to an increase in loan
charge-offs in the second quarter of 2000. Of the total net charge-offs
during the current period, $107,000 was attributable to one commercial
account. The provision expense for the current six-month period was
$69,000, compared to $150,000 for the same period in 1999. Based on a
recent evaluation of potential loan losses and the current portfolio,
management believes that the allowance is adequate to support losses
inherent in the loan portfolio on June 30, 2000.
Liquidity
Management believes that Codorus Valley=s liquidity is adequate. Principal
funding sources include maturing investment securities, the ability to
borrow from the Federal Home Loan Bank of Pittsburgh and other sources, and
deposit growth.
The loan-to-deposit ratio was approximately 85 percent on June 30, 2000,
and 87 percent on December 31, 1999. In the period ahead the loan-to-
deposit ratio could increase due to competitive forces which may constrain
deposit growth. By necessity, short-term and long-term borrowings will play
an increasingly important role in funding.
Market risk management
In the normal course of conducting business, Codorus Valley 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. An asset-liability management
committee comprised of members of senior management and an outside director
manages interest rate risk. 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, 1999.
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CODORUS VALLEY BANCORP, INC.
Other risks
Periodically, federal and state legislators propose legislation that could
result in additional regulation of, or restrictions on, the business of
Codorus Valley and its subsidiaries. Other than as discussed below,
management cannot predict whether such legislation will be adopted or, if
adopted, how the legislation would affect the business of Codorus Valley
and its subsidiaries.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act of 1999, which is also known as the Financial Services
Modernization Act. The act repeals Depression-era banking laws and permits
banks, insurance companies and securities firms to engage in each other=s
businessess after complying with certain conditions and regulations. The
act grants to community banks the power to enter new financial markets as a
matter of right that larger institutions have managed to do on an ad hoc
basis. At this time, Codorus Valley has no plans to pursue these additional
possibilities. Management does not believe that the Financial Services
Modernization Act will have an immediate material effect on Codorus
Valley=s operations. However, the act may result in increased competition
from larger financial services companies, many of who have substantially
more financial resources than Codorus Valley, and now may offer banking
services in addition to insurance and brokerage services.
Management is not aware of any other specific recommendations by regulatory
authorities or proposed legislation which, if implemented, would have a
material adverse effect upon the liquidity, capital resources, or results
of operations. Although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the
future may have, a negative impact on Codorus Valley=s results of
operations.
Other information
Barry A. Keller, Chairman of the Board of Directors of PeoplesBank,
recently announced his resignation for purposes of retirement, effective
August 22, 2000. Mr. Keller will conclude a distinguished career that began
as director of Peoples Bank of Glen Rock in 1977.
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CODORUS VALLEY BANCORP, INC.
Table 1 - Nonperforming Assets and Past Due Loans
June 30, December 31,
(dollars in thousands) 2000 1999
------ ------
Impaired loans (1) $3,631 $1,892
Other real estate owned, net(2) 1,220 1,385
------ ------
Total nonperforming assets $4,851 $3,277
====== ======
Accruing loans that are contractually past
due 90 days or more as to principal or
interest $62 $13
Ratios:
Impaired loans as a % of
total period-end loans 1.76% .91%
Nonperforming assets as a % of total
period-end loans and other real estate
owned, net of reserve 2.33% 1.57%
Nonperforming assets as a % of
total period-end stockholders' equity 18.53% 12.92%
Allowance for loan losses as a
multiple of impaired loans .5x 1.1x
Interest not recognized on impaired loans at period-end: (3)
------------------------------------------------------------
Contractual interest due $274 $240
Interest revenue recognized 29 49
---- ----
Interest not recognized in operations $245 $191
==== ====
(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) 2000 1999
------ ------
Balance-January 1, $2,023 $1,865
Provision charged to operating expense 69 150
Loans charged off:
Commercial 138 2
Real estate-mortgage 15 0
Consumer 13 2
------ ------
Total loans charged off 166 4
Recoveries:
Commercial 13 6
Real estate-mortgage 0 0
Consumer 7 4
------ ------
Total recoveries 20 10
------ ------
Net chargeoffs(recoveries) 146 (6)
Balance-June 30, $1,946 $2,021
====== ======
Ratios:
Net charge-offs (annualized) to average
total loans .14% .00%
Allowance for loan losses to total loans
at period-end .94% .99%
Allowance for loan losses to impaired loans
and loans past due 90 days or more 52.7% 84.9%
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the market risk strategy as discussed
at "Item 7A: Quantitative and Qualitative Disclosures About Market Risk,"
pages 9 and 10 of Codorus Valley=s annual Form 10K for the year ended
December 31, 1999. (SEC file number 000-15536, of Form 10-K.)
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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 or its subsidiaries are a
party or to which their property is subject, which, if determined adversely
to the Corporation or its subsidiaries, would be material in relation to
the Corporation's or its subsidiaries financial condition. There are no
proceedings pending other than ordinary routine litigation incident to the
business of the Corporation or its subsidiaries. In addition, no material
proceedings are pending or are known to be threatened or contemplated
against the Corporation or its subsidiaries by government authorities.
Item 2. Changes in securities and use of proceeds - nothing to report.
Item 3. Defaults by the company on its senior securities - nothing to
report.
Item 4. Results of votes of security holders -
(a) An annual meeting of shareholders was held on May 16, 2000, at
9:00am, Codorus Valley Corporate Center, 105 Leader Heights Road,
York, Pennsylvania.
(b), (c) Three matters were voted on at the May 16, 2000, meeting as
follows:
(1) Three directors were re-elected:
Votes Votes
Term cast Against or
Re-elected Expires For Withheld*
---------- ------- ----- ---------
Class A:
Rodney L. Krebs 2003 1,891,236 56,763
Dallas L. Smith 2003 1,923,984 24,015
George A. Trout D.D.S. 2003 1,921,017 26,982
*includes broker nonvotes.
Directors whose term continued after the meeting:
-------------------------------------------------
Term Expires
Class B: ------------
M. Carol Druck 2001
Barry A. Keller 2001
Donald H. Warner 2001
Class C:
D. Reed Anderson, Esq. 2002
MacGregor S. Jones 2002
Larry J. Miller 2002
(2) The shareholders approved and adopted the Codorus Valley
Bancorp, Inc. 2000 Stock Incentive Plan. Votes were cast as
follows: 1,793,353 for, 117,772 against, 36,874 abstentions, and
no broker non-votes.
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CODORUS VALLEY BANCORP, INC.
PART II - OTHER INFORMATION, continued
Item 4. Results of votes of security holders, continued -
(3) The shareholders ratified the selection of Ernst & Young LLP
as the independent auditors for the 2000 fiscal year. Votes were
cast as follows: 1,859,574 for, 78,101 against, 10,324
abstentions and no broker nonvotes.
Item 5. Other information -
Nothing to report.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits-The following exhibit is being filed as part of this
Report:
Exhibit No. Description
27 Financial Data Schedule as of June 30, 2000.
(b) Reports on Form 8-K-
None.
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CODORUS VALLEY BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly authorized this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Codorus Valley Bancorp, Inc.
(Registrant)
August 8, 2000 /s/ Larry J. Miller
Date ---------------------
Larry J. Miller,
President & CEO
(principal executive officer)
August 8, 2000 /s/ Jann A. Weaver
Date ---------------------
Jann A. Weaver,
Treasurer & Assistant Secretary
(principal financial and accounting officer)
24
