<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number: 2-94863
-------
CANANDAIGUA NATIONAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
New York 16-1234823
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
72 South Main Street, Canandaigua, New York 14424
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(716) 394-4260
--------------
Registrant's telephone number, including area code
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. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Class Outstanding at August 10, 1998
----- ------------------------------
Common stock, $50.00 par 160,481
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<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 30, 1998
PART I -- FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements 1
Condensed consolidated balance sheets at June 30, 1998 and December 31, 1997. 1
Condensed consolidated statements of income for the three month and six month periods ended June 30, 1998 and 1997. 3
Condensed consolidated statements of stockholders' equity for the six month period ended June 30, 1998 and 1997. 4
Condensed consolidated statements of cash flows for the six month period ended June 30, 1998 and 1997. 5
Notes to condensed consolidated financial statements at June 30, 1998. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Qualitative and Quantitative Disclosures about Market Risk
This information is incorporated by reference in Part I, Item 2,
Interest Rate Sensitivity and Asset/Liability Management Review. 10
----------------------------------------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except per share data)
June 30, December 31,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS $ 20,723 19,397
- ------------------------------------------------------------------------------- ---------- ------------
Cash and due from banks 259 250
Interest-bearing deposits with other banks
Securities: 432 394
Securities available for sale, at fair value 71,124 70,987
---------- -------------
Securities held-to-maturity (fair value of $71,850 in 1998 and $71,284 in 1997) 71,556 71,381
---------- -------------
Total securities
Loans: 51,443 37,610
Commercial, financial & agricultural 74,206 81,035
Commercial mortgage 80,539 87,786
Residential mortgage 74,106 73,211
Consumer-indirect 16,848 15,245
Consumer-other 6,279 12,138
Other 4,243 2,119
---------- -------------
Loans held for sale 307,664 309,144
Total loans (3,253) (3,153)
---------- -------------
Less: Allowance for loan losses 304,411 305,991
---------- -------------
Loans - net 11,030 11,184
Premises and equipment - net 2,232 2,372
Accrued interest receivable 3,548 3,118
FHLB and FRB stock 5,451 5,249
---------- -------------
Other assets $ 419,210 418,942
========== =============
Total Assets
</TABLE>
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<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited), continued
(Dollars in thousands, except per share data)
June 30, December 31,
1998 1997
---------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------
Deposits:
Non-interest bearing $ 65,830 73,297
Interest bearing 270,228 251,464
---------- -------------
Total deposits 336,058 324,761
FHLB advances 38,555 50,667
Accrued interest payable and other liabilities 2,756 2,582
---------- -------------
Total Liabilities 377,369 378,010
---------- -------------
Stockholders' Equity:
Common stock, $50 par value; 240,000 shares authorized;
162,208 issued and outstanding in 1998 and 1997 8,110 8,110
Additional paid-in-capital 8,489 8,489
Retained earnings 25,659 24,742
Treasury stock at cost (1,727 and 1,642 shares, respectively) (559) (528)
Accumulated other comprehensive income 142 119
---------- -------------
Total Stockholders' Equity 41,841 40,932
---------- -------------
Total Liabilities and Stockholders' Equity $ 419,210 418,942
========== =============
<FN>
See notes to condensed consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (unaudited)
(Dollars in thousands, except per share data)
Three months ended Six months ended
------------------ ------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 6,285 6,063 13,116 12,101
Securities 995 1,015 1,989 2,018
Federal funds sold and other 5 2 38 2
--------- -------- -------- --------
Total interest income 7,285 7,080 15,143 14,121
--------- -------- -------- --------
Interest expense:
Deposits 2,587 2,423 5,024 4,737
Borrowings 465 321 1,138 471
--------- -------- -------- --------
Total interest expense 3,052 2,744 6,162 5,208
--------- -------- -------- --------
Net interest income 4,233 4,336 8,981 8,913
Provision for loan losses 106 132 429 465
--------- -------- -------- --------
Net interest income after provision for loan losses 4,127 4,204 8,552 8,448
--------- -------- -------- --------
Other income:
Service charges on deposit accounts 693 408 1,004 807
Trust 628 450 1,139 832
Other 242 259 651 468
--------- -------- -------- --------
Total other income 1,563 1,117 2,794 2,107
--------- -------- -------- --------
Operating expenses:
Salaries & employee benefits 2,297 2,070 4,679 4,348
Occupancy 783 632 1,523 1,245
Stationery, supplies & postage 196 134 355 301
Other 1,059 943 2,014 1,526
--------- -------- -------- --------
Total operating expenses 4,335 3,779 8,571 7,420
--------- -------- -------- --------
Income before income taxes 1,355 1,542 2,775 3,135
Provision for income taxes 566 287 975 857
--------- -------- -------- --------
Net income $ 789 1,255 1,800 2,278
========= ======== ======== ========
Basic earnings per share $ 4.92 7.79 11.21 14.12
========= ======== ======== ========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
For the six month period ended June 30, 1998 and 1997
(Dollars in thousands, except per share data)
Accumulated
Additional Other
Common Paid in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
------------ ------- --------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 8,110 8,489 24,742 (528) 119 40,932
Comprehensive income:
Change in unrealized
gain on securities
available-for-sale, net of
taxes of $15 - - - - 23 23
Net income - - 1,800 - - 1,800
------------ ------- --------- --------- ------------- -------
Total comprehensive income - - 1,800 - 23 1,823
------------ ------- --------- --------- ------------- -------
Cash dividend - $5.50 per share - - (883) - - (883)
Sale of 10 shares of treasury stock - - - 3 - 3
Purchase of 95 shares of treasury stock - - - (34) - (34)
------------ ------- --------- --------- ------------- -------
Balance at June 30, 1998 $ 8,110 8,489 25,659 (559) 142 41,841
============ ======= ========= ========= ============= =======
Balance at January 1, 1997 $ 8,110 8,489 22,616 (174) 78 39,119
Comprehensive income:
Change in unrealized
gain on securities
available-for-sale, net of
taxes of $18 - - - - 35 35
Net income - - 2,278 - - 2,278
------------ ------- --------- --------- ------------- -------
Total comprehensive income - - 2,278 - 35 2,313
------------ ------- --------- --------- ------------- -------
Cash dividend - $4.75 per share - - (768) - - (768)
Sale of 9 shares of treasury stock - - - 3 - 3
Purchase of 658 shares of treasury stock
- - - (213) - (213)
------------ ------- --------- --------- ------------- -------
Balance at June 30, 1997 $ 8,110 8,489 24,126 (384) 113 40,454
============ ======= ========= ========= ============= =======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
For the six month period ended June 30, 1998 and 1997
(Dollars in thousands, except per share data)
June 30,
-------------------
1998 1997
---------- --------
<S> <C> <C>
Cash flow from operating activities: $ 1,800 2,278
Net income
Adjustments to reconcile net income to
net cash from operating activities: 1,039 704
Depreciation and amortization (102) (70)
Accretion and amortization 429 469
Provision for loan losses (121) -
Deferred income taxes (11,586) (2,140)
Origination of loans held for sale 11,575 2,140
Proceeds from sale of loans held for sale 140 (278)
(Increase) decrease in accrued interest receivable (581) (1,221)
(Increase) in other assets 159 395
---------- --------
Increase in accrued interest payable and other liabilities 2,752 2,277
---------- --------
Net cash from operating activities
Cash flows from investing activities:
Securities held to maturity: 16,130 17,982
Proceeds from calls and maturities (16,165) (18,887)
Purchases (430) (1,198)
Purchase of FRB & FHLB stock 1,162 (28,804)
Loans made, net of principal payments (801) (1,421)
Fixed asset purchases, net 911 242
Proceeds from sale of other real estate (495) (555)
---------- --------
Investment in minority owned subsidiary 312 (32,641)
---------- --------
Net cash provided (used) by investing activities
Cash flows from financing activities: 4,046 13,679
Net increase in demand, savings and short term deposits 7,251 (5,534)
Proceeds from issuance of certificates of deposit net of matured certificates 7,900 22,788
Proceeds from FHLB advances (20,012) -
Principal repayments on FHLB advances 3 3
Proceeds from sale of treasury stock (34) (213)
Purchase of treasury stock (883) (768)
---------- --------
Dividends paid (1,729) 29,955
---------- --------
Net cash provided (used) by financing activities
1,335 (409)
Net increase (decrease) in cash & cash equivalents 19,647 19,173
---------- --------
Cash & cash equivalents - beginning of period $ 20,982 18,764
========== ========
Cash & cash equivalents-end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for: $ 6,147 5,229
========== ========
Interest
Supplemental disclosure of non-cash investing activity:
Additions to other real estate owned acquired through foreclosure, $ - 2,462
========== ========
net of loans to facilitate sales
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Basis of Presentation
-----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and with generally accepted accounting principles for interim
financial information. Such principles are applied on a basis consistent with
those reflected in the December 31, 1997 Form 10-K Report of the Company filed
with the Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Management has prepared the
financial information included herein without audit by independent certified
public accountants. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
Amounts in prior periods' consolidated financial statements are reclassified
whenever necessary to conform with the current year's presentation.
(2) Comprehensive Income
---------------------
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Comprehensive income
includes a company's reported net income adjusted for items that are currently
accounted for as direct entries to stockholders' equity, such as the mark to
market adjustment on securities available for sale. The Company's only sources
of comprehensive income are net income and changes in unrealized gains (losses),
net of taxes, on available-for-sale securities. Accumulated other comprehensive
income represents the net unrealized gains or losses on securities available for
sale as of the balance sheet date. The adoption of this statement resulted in no
reclassification of prior period amounts, because the Company has not realized
any gains on the sale of its available-for-sale securities in the past three
years.
(3) New Accounting Pronouncements
-------------------------------
FASB Statement No. 133 entitled "Accounting for Derivative Instruments and
Hedging Activities" was issued in June 1998. This statement establishes
comprehensive accounting and reporting requirements for derivative instruments
and hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for gains and losses resulting from changes in fair
value of the derivative instrument depends on the intended use of the derivative
and the type of risk being hedged. The statement is effective for the Company
for fiscal quarters beginning January 1, 2000. Earlier adoption is permitted.
Management anticipates adopting the provision of this statement in 2000, however
its impact of which has not yet been evaluated.
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FASB Statement No. 132 entitled "Employers' Disclosures about Pensions and Other
Post Retirement Benefits" was issued in February 1998. This statement revises
employers' disclosures about pension and other post retirement benefit plans.
It does not change the measurement or recognition of these plans. The statement
is effective for the Company's December 31, 1998 year end financial reporting
and will not impact the Company's financial position or results of operations as
the Company does not sponsor any plans covered by this statement.
FASB Statement No. 131 entitled "Disclosures about Segments of an Enterprise and
Related Information" was issued in June 1997. This Statement is effective for
the Company beginning with its year end December 31, 1998 financial statements.
The statement establishes standards for the way public companies report
information about operating segments in their annual financial statements and
requires that those companies report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products, services,
geographic areas and major customers. This statement may increase the Company's
financial disclosures but will have no impact on operating results.
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
June 30, 1998
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements. Management's discussion and analysis supplements
management's discussion and analysis for the year ended December 31, 1997
contained in the Company's Form 10-K and includes certain known trends, events
and uncertainties that are reasonably expected to have a material effect on the
Company's financial position or operating results.
Forward-looking Statements
- ---------------------------
When used or incorporated by reference in the Company's disclosure documents,
the words "anticipate," "estimate," "expect," "project," "target," "goal" and
similar expressions are intended to identify forward-looking statements within
the meaning of Section 27A of the Securities Act. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including, but not limited to (1) economic conditions, (2) real estate market,
and (3) interest rates. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, expected or projected.
These forward looking statements speak only as of the date of the document. The
Company expressly disclaims any obligation or undertaking to publicly release
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectation with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
Overview
- --------
Total assets increased $.3 million or .1% in the first six months of 1998.
Loans decreased $1.5 million or .5% while securities increased $.2 million or
0.1%. During the same period, deposits increased $11.3 million or 3.5% and
borrowings (from the FHLB) decreased $12.1 million or 23.9%. Funds generated
through loan paydowns and deposit inflows were used to reduce FHLB borrowings
during the period.
Net income for the three-month period ended June 30, 1998 declined $.5 million
or 37.1% as compared to the same period in 1997. Basic earnings per share
decreased by $2.87 or 36.9% over the same period. For the six month period net
income declined $.5 million or 21.0% and basic earnings per share decreased by
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$2.91 or 20.3%. The decrease in net income for both the three and six month
periods was a result of a significant expense reimbursement in 1997 relating one
large credit and one-time charges in 1998 related to the completion of the
Company's core banking system conversion. Also a portion of the increased
operating expenses was derived from one of the Company's mortgage banking
subsidiaries, which was not acquired until late 1997; and, the Company's
effective tax rate increased to 35% from 27% for the six month period. For the
three and six months ended June 30, 1998, net interest income increased $.1
million or 1.8% and $.1 million or 1.2%, respectively over the same periods in
1997 and is reflective of the growth in interest income from the Company's
indirect automobile loan portfolio offset by the growth in interest expense from
FHLB borrowings during the same period.
Results of Operations
- -----------------------
As of June 30, 1998, total assets of the Company were $419.2 million, up from
$418.9 million at year end 1997. Securities showed a minor increase of $.2
million to $71.6 million. Net loans decreased $1.6 million to $304.4 million,
other assets rose $.2 million to $5.6 million, and cash and due from banks
increased $1.1 million to $20.7 million. The decline in loans is primarily
related to payoffs and refinancings of mortgage loans held in portfolio and is a
reaction to the continued low interest rate environment for residential mortgage
loans.
Total deposits at June 30, 1998 were $336.1 million and were up $11.3 million
from December 31, 1997. For the same period borrowings from FHLB were down $12.1
million to $38.6 million. Other liabilities increased by $.2 million to $2.8
million. The decline in borrowings is a direct result of flat loan demand and an
increase in time deposits.
For the three months ending June 30, 1998, average interest earning assets,
increased $21.1 million to $376.9 million from $355.8 million at December 31,
1997. The yields on these assets were 7.73% and 8.35%, respectively; the
decline resulting from mortgage loan refinancings. For the same period, average
interest bearing liabilities increased $19.5 million to $304.5 million from
$285.0 at December 31, 1997. Rates paid on these liabilities were 4.01% and
3.94%, respectively. This 69 basis point drop in interest spread had a $.6
million negative impact on net interest income for the quarter ended June 30,
1998. In 1998 the Company's net interest margin declined to 4.49% and 4.76% for
the three and six month periods ended June 30, 1998 versus 5.19% for the year
ended December 31, 1997. If market rates continue to remain low, management
expects further erosion of both the interest rate margin and spread as a result
of loan refinancings. Management anticipates no significant change in the
Company's cost of funds.
Other income for the quarter ended June 30, 1998 was $1.6 million, an increase
of $.4 million or 39.9% over the same quarter in 1997. The increase was
reflected both in trust income, due to growth in assets under management, and
service charges attributed increased transaction volume.
Operating expenses increased $.6 million for the quarter ended June 30, 1998 to
$4.3 million versus $3.8 million for the 1997 second quarter, reflected mostly
in other operating expenses. The increase in this category for the period was
due to the Company's acquisition of Home Town Funding in late 1997 and
additional costs associated with the successful completion of the Company's core
banking system conversion.
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Allowance for Loan Losses and Non-Performing Assets
- ---------------------------------------------------------
Allowance for Loan Losses
- ----------------------------
<TABLE>
<CAPTION>
Changes in the allowance for loan losses for the six month periods ended June
30, 1998 and 1997 are as follows (dollars in thousands):
June 30, June 30,
1998 1997
---------- ---------
<S> <C> <C>
Balance at beginning of period $ 3,153 2,675
Provision for loan losses 429 465
Loans charged off (637) (374)
Recoveries on loan previously charged off 308 184
---------- ---------
Balance at end of period $ 3,253 2,950
========== =========
Allowance as a percentage of total period end loans 1.06% 1.04%
========== =========
Allowance as a percentage of non performing loans 100.9% 58.9%
========== =========
</TABLE>
At June 30, 1998, the recorded investment in loans that are considered impaired
totaled $2.6 million as compared to $3.1 million at December 31, 1997 and $5.0
million at June 30, 1997. The average recorded investment in impaired loans
during the periods then ended was approximately $3.0 million and $8.7 million,
respectively. For the six months ended June 30, 1998 and 1997 interest income
recognized on impaired loans was not material.
Total non-performing loans decreased by $1.8 million to $3.2 million at June 30,
1998 as compared to $5.0 million at June 30, 1997. A major portion of the
decrease was contributed by a $3.4 million reduction in non accrual commercial
real estate through the Company's successful workout in mid 1997 of one large
credit. Loans 90 days or more past due and accruing have increased to $.6
million at June 30, 1998 from June 30, 1997. However, since these loans
continue to accrue interest, because management considers principal and interest
on these loans fully collectible, management considers this trend positive in
light of the reduction in total non-performing loans.
Other real estate owned consists of seven parcels of property, all commercial,
for $1.6 million. The decline in other real estate owned from the same period in
1997 is a result of the Company's foreclosure on $ 2.1 million in real estate
assets in May 1997 offset by the liquidation of portions of this and other
properties.
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Non-Performing Assets
- ----------------------
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
June 30, June 30,
1998 1997
---------- ---------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 429 -
Real estate-commercial 135 -
Real estate-residential 73 -
Consumer 29 48
---------- ---------
Total past due 90 days or more and accruing 666 48
---------- ---------
Loans in non-accrual status
Commercial, financial & agricultural 611 1,672
Real estate-commercial 1,519 2,708
Real estate-residential 427 511
Consumer - 73
---------- ---------
Total non-accrual loans 2,557 4,964
---------- ---------
Total non-performing loans 3,223 5,012
---------- ---------
Other real estate owned
Commercial 1,601 3,158
Residential - 202
---------- ---------
Total other real estate owned 1,601 3,360
---------- ---------
Total non-performing assets $ 4,824 8,372
========== =========
Non performing loans to total period end loan 1.05% 1.77%
========== =========
Non performing assets to total period end loans and other real estate 1.56% 2.92%
========== =========
</TABLE>
The Company has no restructured loans.
Liquidity
- ---------
Liquidity is defined as the ability to generate adequate amounts of cash to meet
the demand for cash from depositors who wish to withdraw funds, borrowers who
require funds, and capital expansion. Liquidity is produced by cash flows from
operating, investing, and financing activities of the Company.
For the six months ended June 30, 1998, net cash from operating activities was
$2.8 million as compared to $2.3 million for the same period in 1997. The
increase of $.5 million was primarily caused by a decrease in net income, offset
by a lower increase in other assets than in 1997
Cash provided by investing activities was $.3 million versus cash used of $32.6
million for the six months ended June 30, 1998 and 1997, respectively. The loan
portfolio decreased by $1.2 million for the first six months of 1998 as compared
to an increase of $28.8 million for the same period in 1997. The substantial
increase in 1997 came from the growth in the indirect automobile loan portfolio.
Net purchases of
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securities amounted to .5 million in 1998 as compared to net purchases of $2.1
million in 1997. These changes, as well as reductions in fixed asset purchases
and higher liquidations of other real estate, provided the cash flow from
investing activities for 1998 as opposed to the use of cash in 1997.
Cash used by financing activities was $1.7 million in 1998 versus cash provided
of $29.9 million in 1997. Major components contributing to this change were a
net increase of $11.3 million in deposits in 1998 versus $8.1 million in 1997
and net repayment of FHLB advances of $12.1 million in 1998 versus borrowing of
$22.8 million in 1997.
At June 30, 1998 the Company had additional borrowing capacity from the FHLB of
at least $8 million.
Interest Rate Sensitivity and Asset / Liability Management Review
- -------------------------------------------------------------------------
(Quantitative and Qualitative Disclosures about Market Risk)
- ------------------------------------------------------------------
The Company realizes income principally from the differential or spread between
the interest earned on loans, investments and other interest-earnings assets and
the interest paid on deposits and borrowings. Loan volumes and yields, as well
as the volume of and rates on investments, deposits and borrowings, are affected
by market interest rates. Additionally, because of the terms and conditions of
many of the Company's loan documents and deposit accounts, a change in interest
rates could also affect the projected maturities of the loan portfolio and/or
the deposit base, which could alter the Company's sensitivity to future changes
in interest rates. Accordingly, management considers interest rate risk to be
the Company's most significant market risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board approved policy limits while taking into
consideration, among other factors, the Company's overall credit, operating
income, operating cost, and capital profile. The Company's Asset/Liability
Committee (ALCO), which includes senior management and reports to the Board of
Directors, monitors and manages interest rate risk to maintain an acceptable
level of change to net interest income as a result of changes in interest rates.
Management of the Company's interest rate risk, requires the selection of
appropriate techniques and instruments to be utilized after considering the
benefits, costs and risk associated with available alternatives. Since the
Company does not utilize derivative instruments, management's techniques usually
consider one or more of the following: (1) interest rates offered on products,
(2) maturity terms offered on products, (3) types of products offered, and (4)
products available to the Company in the wholesale market such as advances from
the FHLB.
The Company uses an interest margin simulation model as its primary method to
identify and manage its interest rate risk profile. The model is based on
expected cash flows and repricing characteristics for all financial instruments
and incorporates market-based assumptions regarding the impact of changing
interest rates on
these financial instruments. Assumptions based on the historical behavior of
deposit rates and balances in relation to changes in interest rates are also
incorporated into the model. These assumptions are inherently uncertain and, as
a result, the model cannot precisely measure net interest income or precisely
predict the impact of fluctuations in interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
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Using the aforementioned simulation model, net earnings projections reflect
continued growth in net income when applying the declining interest rate
environment as of June 30, 1998 ("Base Case"). The table below, which shows the
Company's estimated net earnings sensitivity profile as of June 30, 1998,
assumes no changes in the operating environment, but assumes interest rates
increase/decrease immediately (rate shock) and remain unchanged thereafter. The
table indicates the estimated impact on net income under the various interest
rate scenarios as a percentage of Base Case earnings projections.
<TABLE>
<CAPTION>
Estimated Percentage Estimated Percentage
Changes in Change in Future Change in Future
Interest Rates Net Income Net Income
Basis points 12 Months 24 Months
- -------------- -------------------- --------------------
<S> <C> <C>
Base Case - -
+200 (8.08)% (6.46)%
+100 (5.41) (4.59)
- -100 4.75 3.94
- -200 7.74 6.11
</TABLE>
A secondary method used to identify and manage the Company's interest rate risk
profile is the static gap analysis. Interest sensitivity gap ("gap") analysis
measures the difference between the assets and liabilities repricing or maturing
within specific time periods. An asset-sensitive position indicates that there
are more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a favorable
impact on net interest income in periods of rising interest rates and a negative
impact in periods of falling rates. A liability-sensitive position would
generally imply a negative impact on net interest income in periods of rising
rates and a positive impact in periods of falling rates.
The following table presents an analysis of the Company's interest
rate-sensitivity gap position at June 30, 1998. All interest-earning assets and
interest-bearing liabilities are shown based on the earlier of their contractual
maturity or repricing date adjusted by forecasted prepayment and decay rates.
Asset prepayment and liability decay rates are selected after considering the
current rate environment, industry prepayment and decay rates and the Company's
historical experience. It should also be noted that the interest rate
sensitivity levels shown in the table could be changed by external factors such
as loan prepayments or by factors controllable by the Company such as asset
sales.
Page 12
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gap
June 30, 1998
(Dollars in thousands)
Maturity/Repricing Period
--------------------------
Within 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
-------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits and
federal funds sold -- 259 -- -- 259
Securities 7,643 18,768 37,387 11,306 75,104
Loans 90,432 5,015 149,147 63,070 307,664
--------- --------- -------- ------- -------
Total interest-earnings assets 98,075 24,042 186,534 74,376 383,027
--------- --------- -------- ------- -------
Interest-bearing liabilities:
NOW accounts 38,870 -- -- -- 38,870
Money market 45,546 -- -- -- 45,546
Savings 64,973 -- -- -- 64,973
Certificates of deposits 51,354 35,534 33,951 -- 120,839
FHLB advances 34,200 1,024 2,520 811 38,555
--------- --------- -------- ------- -------
Total interest-bearing liabilities 234,943 36,558 36,471 811 308,783
--------- --------- -------- ------- -------
Interest rate sensitivity gap (136,868) (12,516) 150,063 73,565 74,244
========= ========= ======== ======= =======
Cumulative gap (136,868) (149,384) 679 74,244
========= ========= ======== =======
Cumulative gap as percent of total assets (32.6%) (35.6%) .2% 17.7%
========= ========= ======== =======
</TABLE>
As of June 30, 1998, the Company's three-month gap is a negative $136.9 million,
which is $40 million higher than one year ago. While interest-earning assets in
this period have declined $2.4 million, interest-bearing liabilities have risen
$14.1 million. FHLB advances are up $1 million and deposits rose $13.1 million.
The 12 month cumulative gap is a negative $149.3 million up from a year ago's
negative $137.6 million, again due primarily to the FHLB borrowings. However,
the gap as a percent of total assets has remained steady at 35%.
The period and cumulative gaps continue to be positive in the 1 to 5 year range
and forward.
As part of the Company's active asset liability management, management has
identified a program of brokered certificate of deposit sales and is pursuing
its establishment. The Company is also considering pursuing a means to market a
subordinated debenture issuance.
Capital Adequacy
- -----------------
Total stockholders' equity was $41.8 million at June 30, 1998, which represents
an increase of $.1 million or 2.2% from $40.9 million at December 31, 1997.
Stockholders' equity increased by $1.8 million due to
Page 13
<PAGE>
net income and $.02 million from increased unrealized gains on available for
sale securities, but was offset by dividends of $.9 million and net purchases of
treasury stock of $.03 million for the six month period ended June 30, 1998.
At June 30, 1998 the Company and its banking subsidiary exceeded the minimum
regulatory guidelines for all capital ratios (Tier 1 - 4% and Total Risk-Based
Capital - 8%). The Company and Bank also exceeded the minimum regulatory
guideline for leverage ratio of 5% for "well-capitalized" institutions. The
table below illustrates the Corporation's regulatory capital ratios at June 30,
1998, under current requirements. The Bank's ratios do not differ materially
from the Company's. (dollars in thousands):
<TABLE>
<CAPTION>
Amount Ratio
------- ------
<S> <C> <C>
Total capital (to risk weighted assets) $41,841 12.9%
Tier 1 capital (to risk weighted assets) $41,503 12.8%
Tier I capital (to average assets) $41,503 10.1%
Leverage ratio (Tier 1 capital to total assets less goodwill) $41,503 9.9%
</TABLE>
The ratios above are indicative of the Corporation's strong capital position.
Dividends Per Share and Earnings Per Share
- ------------------------------------------------
No dividends were paid in the quarters ended June 30, 1998 and 1997. A
semi-annual dividend of $5.50 was paid February 1, 1998 versus $4.75 in 1997.
Basic earnings per common share is based upon the weighted average number of
common shares and equivalents (stock options) outstanding during the period.
Since there are no potentially dilutive securities outstanding at June 30, 1998,
diluted earnings per share is not presented. The weighted average number of
common shares outstanding for the three month periods ended June 30, 1998 and
1997 were 160,493 and 161,146, respectively. The weighted average number of
common shares outstanding for the six month periods ended June 30, 1998 and 1997
were 160,528 and 161,297, respectively. Net income used in the calculation of
basic earnings per share is net income shown on the condensed consolidated
statements of income for the respective periods.
Year 2000
- ----------
Like other companies, many of the Company's computer programs and other
applications were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields will not work
properly with dates from the year 2000 and beyond. The Company began reviewing
its year 2000 conversion needs in 1996 and has a project committee that meets to
review the status of the conversion. A comprehensive review to identify the
systems affected by this issue was completed in 1997 and an implementation plan
was compiled and is currently being executed. As a result of the procedures
already completed, the Company expects to upgrade existing systems or replace
some systems altogether. Considerable progress has been made, including the
replacement/conversion of the Company's core operating systems. It is
anticipated that all remaining projects will be completed by internal staff. The
Company does not expect to spend any significant amounts with outside
contractors. Therefore, costs do not represent any material incremental costs,
but rather will represent the redeployment of existing technology resources. The
remaining systems to be converted/replaced are vendor-supplied, and most vendors
have provided the Company with certification or a delivery commitment letter.
The Company presently believes that with the conversion to new systems, and
vendor delivery of millennium-compliant systems, all material year 2000
compliance issues will be resolved no later than the first quarter of 1999.
Page 14
<PAGE>
A committee continues to direct the Company's Year 2000 activities under the
framework of the Federal Financial Institutions Examination Council's (FFIEC)
Five Step Program. As of June 30, 1998 the Testing and Contingency Plan Phase
of our Y2K Compliance Plan has begun with a goal of completing these phases by
December 31, 1998.
The Company is also subject, either directly or indirectly, to the year 2000
issue with respect to external parties, particularly commercial loan customers
and transaction processing parties. The Company is addressing its exposure to
its commercial loan customers by reviewing customer's plans and procedures
for remediating their year 2000 risk. This review is carried out in the context
of the Company's annual loan review process. With respect to transaction
processing parties, the Company is monitoring their remediation efforts through
periodic communication. As these parties begin their testing phase, the
Company will be involved in testing its own systems against the remediated
systems.
Page 15
<PAGE>
PART II -- OTHER INFORMATION
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 16
<PAGE>
SIGNATURES
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
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.
CANANDAIGUA NATIONAL CORPORATION
----------------------------------
(Registrant)
August 15, 1998 /s/ George W. Hamlin, IV
--------------- ------------------------
Date George W. Hamlin, IV, President
August 15, 1998 /s/ Gregory S. MacKay
--------------- ---------------------
Date Gregory S. MacKay, Treasurer
Page 17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 20,723
<INT-BEARING-DEPOSITS> 259
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 432
<INVESTMENTS-CARRYING> 71,124
<INVESTMENTS-MARKET> 71,850
<LOANS> 307,664
<ALLOWANCE> 3,253
<TOTAL-ASSETS> 419,210
<DEPOSITS> 336,058
<SHORT-TERM> 34,700
<LIABILITIES-OTHER> 2,756
<LONG-TERM> 3,855
<COMMON> 8,110
0
0
<OTHER-SE> 33,731
<TOTAL-LIABILITIES-AND-EQUITY> 419,210
<INTEREST-LOAN> 13,116
<INTEREST-INVEST> 1,989
<INTEREST-OTHER> 38
<INTEREST-TOTAL> 15,143
<INTEREST-DEPOSIT> 5,024
<INTEREST-EXPENSE> 6,162
<INTEREST-INCOME-NET> 8,981
<LOAN-LOSSES> 429
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,571
<INCOME-PRETAX> 2,775
<INCOME-PRE-EXTRAORDINARY> 2,775
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,800
<EPS-PRIMARY> 11.21
<EPS-DILUTED> 11.21
<YIELD-ACTUAL> 8.03
<LOANS-NON> 2,557
<LOANS-PAST> 666
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,153
<CHARGE-OFFS> 637
<RECOVERIES> 308
<ALLOWANCE-CLOSE> 3,253
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
