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 September 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
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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 November 10, 1998
----- --------------------------------
Common stock, $50.00 par 159,618
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CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 30, 1998
PART I -- FINANCIAL INFORMATION Page
---------
<S> <C> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30, 1998 and
December 31, 1997. 1
Condensed consolidated statements of income for the three month
and nine month periods ended September 30, 1998 and 1997. 3
Condensed consolidated statements of stockholders' equity for the
nine month period ended September 30, 1998 and 1997. 4
Condensed consolidated statements of cash flows for the nine
month period ended September 30, 1998 and 1997. 5
Notes to condensed consolidated financial statements at September
30, 1998. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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. 12
- -------------------------------------------------------------------
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
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
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<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except per share data)
September 30, December 31,
1998 1997
--------------- -------------
<S> <C> <C>
ASSETS
- -----------------------------------------------------------
Cash and due from banks $ 23,434 19,397
Interest-bearing deposits with other banks 421 250
Securities:
Securities available for sale, at fair value 356 394
Securities held-to-maturity (fair value of $72,195 in 1998 70,851 70,987
--------------- -------------
and $71,284 in 1997)
Total securities 71,207 71,381
--------------- -------------
Loans:
Commercial, financial & agricultural 49,908 37,610
Commercial mortgage 82,483 81,035
Residential mortgage 77,485 87,786
Consumer-indirect 82,294 73,211
Consumer-other 14,587 15,245
Other 2,769 12,138
Loans held for sale 3,960 2,119
--------------- -------------
Total loans 313,486 309,144
Less: Allowance for loan losses (3,368) (3,153)
--------------- -------------
Loans - net 310,118 305,991
--------------- -------------
Premises and equipment - net 11,213 11,184
Accrued interest receivable 2,476 2,372
FHLB and FRB stock 3,548 3,118
Other assets 5,704 5,249
--------------- -------------
Total Assets $ 428,121 418,942
=============== =============
</TABLE>
(Continued)
Page 1
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<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited), continued
(Dollars in thousands, except per share data)
September 30, December 31,
1998 1997
--------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------
Deposits:
Non-interest bearing $ 64,496 73,297
Interest bearing 290,136 251,464
--------------- -------------
Total deposits 354,632 324,761
FHLB advances 28,149 50,667
Accrued interest payable and other liabilities 3,612 2,582
--------------- -------------
Total Liabilities 386,393 378,010
--------------- -------------
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 25,830 24,742
Treasury stock at cost (2,387 and 1,642 shares,
respectively) (797) (528)
Accumulated other comprehensive income 96 119
--------------- -------------
Total Stockholders' Equity 41,728 40,932
--------------- -------------
Total Liabilities and Stockholders' Equity $ 428,121 418,942
=============== =============
<FN>
See notes to condensed consolidated financial statements
</TABLE>
Page 2
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<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (unaudited)
(Dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
------------------- ----------------- ------- ------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 6,919 6,400 $20,035 18,501
Securities 1,017 915 3,006 2,933
Federal funds sold and other 8 11 46 13
------------------- ----------------- ------- ------
Total interest income 7,944 7,326 23,087 21,447
------------------- ----------------- ------- ------
Interest expense:
Deposits 2,773 2,388 7,797 7,125
Borrowings 363 448 1,501 919
------------------- ----------------- ------- ------
Total interest expense 3,136 2,836 9,298 8,044
------------------- ----------------- ------- ------
Net interest income 4,808 4,490 13,789 13,403
Provision for loan losses 212 260 641 725
------------------- ----------------- ------- ------
Net interest income after provision for loan losses 4,596 4,230 13,148 12,678
------------------- ----------------- ------- ------
Other income:
Service charges on deposit accounts 504 395 1,281 1,202
Trust 585 404 1,724 1,236
Other 523 74 1,401 542
------------------- ----------------- ------- ------
Total other income 1,612 873 4,406 2,980
------------------- ----------------- ------- ------
Operating expenses:
Salaries & employee benefits 2,716 2,346 7,395 6,694
Occupancy 773 719 2,296 1,964
Stationery, supplies & postage 222 131 577 432
Other 984 680 2,998 2,206
------------------- ----------------- ------- ------
Total operating expenses 4,695 3,876 13,266 11,296
------------------- ----------------- ------- ------
Income before income taxes 1,513 1,227 4,288 4,362
Provision for income taxes 459 160 1,434 1,017
------------------- ----------------- ------- ------
Net income $ 1,054 1,067 $ 2,854 3,345
=================== ================= ======= ======
Basic earnings per share $ 6.57 6.64 $ 17.79 20.77
=================== ================= ======= ======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 3
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<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
For the nine month period ended September 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 - - 2,854 - - 2,854
------------ ------- --------- --------- -------------- -------
Total comprehensive
income - - 2,854 - (23) 2,831
------------ ------- --------- --------- -------------- -------
Cash dividend - $11.00 per
share - - (1,766) - - (1,766)
Sale of 10 shares of treasury stock - - - 3 - 3
Purchase of 755 shares of treasury stock - - - (272) - (272)
------------ ------- --------- --------- -------------- -------
Balance at September 30, 1998 $ 8,110 8,489 25,830 (797) 96 41,728
============ ======= ========= ========= ============== =======
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 $15 - - - - 35 35
Net income - - 3,345 - - 3,345
------------ ------- --------- --------- -------------- -------
Total comprehensive income - - 3,345 - 35 3,358
------------ ------- --------- --------- -------------- -------
Cash dividend - $10.00 per share - - (1,609) - - (1,609)
Sale of 139 shares of treasury stock - - (2) 44 - 42
Purchase of 1,161 shares of treasury stock
- - - (375) - (375)
------------ ------- --------- --------- -------------- -------
Balance at September 30, 1997 $ 8,110 8,489 24,350 (505) 113 40,557
============ ======= ========= ========= ============== =======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 4
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<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
For the nine month period ended September 30, 1998 and 1997
(Dollars in thousands, except per share data)
September 30,
---------------
1998 1997
--------------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,854 3,345
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,582 1,147
Accretion and amortization (143) (104)
Provision for loan losses 641 729
Writedown of other real estate owned 50 -
Deferred income taxes (231) -
Originations of loans held for sale (78,227) (22,416)
Proceeds from sale of loans held for sale 76,386 22,416
(Increase) decrease in accrued interest receivable (104) (56)
(Increase) in other assets (703) (1,287)
Increase in accrued interest payable and other liabilities 1,045 28
--------------- --------
Net cash from operating activities 3,150 3,802
--------------- --------
Cash flows from investing activities:
Securities held to maturity:
Proceeds from calls and maturities 24,352 29,955
Purchases (24,073) (30,126)
Purchase of FRB & FHLB stock (430) (1,074)
Loans made, net of principal payments (2,927) (36,499)
Fixed asset purchases, net (1,477) (2,543)
Proceeds from sale of other real estate 1,057 -
Investment in minority owned subsidiary (762) (678)
--------------- --------
Net cash used by investing activities (4,260) (40,965)
--------------- --------
Cash flows from financing activities:
Net increase in demand, savings and short term deposits 19,288 24,584
Proceeds from issuance of certificates of deposit net of matured certificates 10,583 123
Net overnight FHLB advances (10,406) 21,392
Proceeds from term FHLB advances 7,900 -
Principal repayments on term FHLB advances (20,012) -
Proceeds from sale of treasury stock 3 42
Purchase of treasury stock (272) (375)
Dividends paid (1,766) (1,609)
--------------- --------
Net cash provided by financing activities 5,318 44,157
--------------- --------
Net increase in cash & cash equivalents 4,208 6,994
Cash & cash equivalents - beginning of period 19,647 19,173
--------------- --------
Cash & cash equivalents-end of period $ 23,855 26,167
=============== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,208 8,078
=============== ========
Taxes $ 1,462 581
=============== ========
Supplemental disclosure of non-cash investing activity:
Additions to other real estate owned acquired through foreclosure,
net of loans to facilitate sales $ - 1,420
=============== ========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 5
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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 nine-month periods
ended September 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' condensed 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 or losses on the sale of its available-for-sale securities in the past
three years.
(3) New Accounting Pronouncements
-------------------------------
FASB Statement No. 134 entitled "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued in October 1998. This statement requires
enterprises engaged in mortgage banking activities to classify mortgage-backed
securities and other beneficial interests retained after a securitization of
mortgage loans held for sale based on their ability and intent to sell or hold
those assets. While this statement is effective for the Company for the fiscal
quarter beginning January 1, 1999 and earlier adoption is permitted, the
statement is not expected to impact the Company, because it does not securitize
mortgage loans held for sale.
Page 6
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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 has not yet been evaluated.
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 September 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.
Page 7
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
September 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, as well as discussion regarding the "Year 2000 issue," 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
- --------
At September 30, 1998 the Company's assets reached a record $428 million. Total
assets increased $9.2 million or 2.2% in the first nine months of 1998. Loans
increased $4.1 million or 1.4% while securities decreased $.2 million or 0.1%.
During the same period, deposits increased $29.9 million or 9.2% and borrowings
(from the FHLB) decreased $22.5 million or 44.4%. Funds generated through
deposit inflows were used to increase loan originations and reduce FHLB
borrowings during the period.
Net income for the three-month period ended September 30, 1998 remained steady
at $1.1 million as compared to the same period in 1997. Basic earnings per
share decreased by $.07 or 1.0% over the same period, primarily due to a lower
tax rate for the first nine months of 1997. For the nine month period net income
declined $.5 million or 14.7% and basic earnings per share decreased by $2.99
or 14.4%. The decrease in net income for the nine month period was a result of a
significant legal expense reimbursement in 1997 relating one large credit and
one-time charges taken in the first half of 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 33% from 23% for the nine month period. For the
three and nine months ended September 30, 1998, net interest income increased
$.3 million or 7.1% and $.4 million or 2.9%, 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.
The quality of the Company's assets continued to improve with non-performing
loans less than 1% of total loans at September 30, 1998. The allowance for loan
losses exceeds the balance of nonperforming loans at the period end. Other real
estate owned also continues to decline. As a result of these trends the
provision for loan loss declined to $.6 versus $.7 for the nine-month periods
ended September 30, 1998 and 1997, respectively.
Page 8
<PAGE>
Financial Condition and Results of Operations
- --------------------------------------------------
As of September 30, 1998, total assets of the Company were $428.1 million, up
from $418.9 million at year end 1997. Cash and equivalents increased $4.2
million to $23.9 million. Securities showed a minor decrease of $.2 million to
$71.2 million. Net loans increased $4.1 million to $310.1 million, and all
other assets rose $1.0 million to $22.9 million. The growth in loans has come
in the second and third quarters of 1998, following a $10.0 million decline in
the first quarter. Although market interest rates continue to result in loan
portfolio payoffs and refinancings, the Company continues to encounter local
loan demand for commercial and residential mortgages, as well as indirect
automobile loans, and anticipates further portfolio loan growth into the fourth
quarter.
Total deposits at September 30, 1998 were $354.6 million and were up $29.8
million from December 31, 1997. For the same period borrowings from FHLB were
down $22.6 million to $28.1 million. Other liabilities increased by $1.0
million to $3.6 million. The decline in borrowings is a direct result of deposit
growth. Deposit growth since December 31, 1997 has come in all interest-bearing
types: interest-bearing demand up $7.8 million, savings and money market up $1.5
million and certificates of deposit up $17.1 million. Deposit growth is coming
from a number of sources, including the introduction of our Generations Gold
suite of accounts, our Business Choice Sweep account, our "CD Specials" and
non-interest bearing accounts. Historically, the Company's fourth quarter shows
some deposit runoff. Management anticipates the November opening of our Webster
Community Office will have somewhat of an offsetting effect on this historical
trend.
For the three months ending September 30, 1998, average interest earning assets,
increased $32.3 million to $388.1 million from $355.8 million at December 31,
1997. The yields on these assets were 8.19% and 8.35%, respectively; the
decline resulting from mortgage loan refinancings. For the same period, average
interest bearing liabilities increased $25.2 million to $310.2 million from
$285.0 at December 31, 1997. Rates paid on these liabilities were 4.04% and
3.94%, respectively. This 26 basis point drop in interest spread had a $.3
million negative impact on net interest income for the quarter ended September
30, 1998. In 1998 the Company's net interest margin has declined to 4.96% and
4.83% for the three and nine month periods ended September 30, 1998 versus 5.19%
for the year ended December 31, 1997. The declining trend on net interest
margin and spread showed some leveling off in the third quarter of 1998;
however, market reaction to the Federal Reserve Board's recent interest rate
cuts may result in furthering this trend. Refer to Interest Rate Sensitivity
and Asset / Liability Management Review section for a further discussion.
Other income for the quarter ended September 30, 1998 nearly doubled to $1.6
million over the same quarter in 1997. The increase was reflected in service
charges, attributed increased transaction volume and changes in account fee
structures; trust income, due to growth in assets under management; and other,
due to increased commissions at the Company's mortgage banking subsidiary - Home
Town Funding.
Operating expenses increased $.8 million for the quarter ended September 30,
1998 to $4.7 million versus $3.9 million for the 1997 second quarter, reflected
mostly in salaries and other operating expenses. The increase in both
categories for the period was due primarily to the Company's acquisition of Home
Town Funding in late 1997.
Capital Adequacy
- -----------------
Total stockholders' equity was $41.7 million at September 30, 1998, which
represents an increase of $.8 million or 1.9% from $40.9 million at December 31,
1997. Stockholders' equity increased by $2.9 million due to net income, but
was offset by $.02 million of unrealized losses on available for sale
securities, dividends of $1.8 million and net purchases of treasury stock of $.3
million for the nine month period ended September 30, 1998.
Page 9
<PAGE>
At September 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 September 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) $41,728 13.3%
Tier 1 capital (to risk weighted assets) $41,290 13.1%
Tier I capital (to average assets) $41,290 9.8%
Leverage ratio (Tier 1 capital to total assets less goodwill) $41,290 9.7%
</TABLE>
Dividends Per Share and Earnings Per Share
- ------------------------------------------------
Dividends paid to shareholder in 1998 increased to $11.00 per share or 10% over
1997. A semi-annual dividend of $5.50 was paid on February 1, 1998 and August
1, 1998. Comparative 1997 amounts were $4.75 in February and $5.25 in August,
totaling $10.00.
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 September 30,
1998, diluted earnings per share is not presented. The weighted average number
of common shares outstanding for the three month periods ended September 30,
1998 and 1997 were 160,356 and 160,639, respectively. The weighted average
number of common shares outstanding for the nine month periods ended September
30, 1998 and 1997 were 160,450 and 161,074, 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.
Allowance for Loan Losses and Non-Performing Assets
- ---------------------------------------------------------
Allowance for Loan Losses
- ----------------------------
<TABLE>
<CAPTION>
Changes in the allowance for loan losses for the nine month periods ended
September 30, 1998 and 1997 are as follows (dollars in thousands):
September 30,
---------------
1998 1997
--------------- ------
<S> <C> <C>
Balance at beginning of period $ 3,153 2,675
Provision for loan losses 641 725
Loans charged off (859) (605)
Recoveries on loan previously charged off 433 245
--------------- ------
Balance at end of period $ 3,368 3,040
=============== ======
Allowance as a percentage of total period end loans 1.07% 1.04%
=============== ======
Allowance as a percentage of non performing loans 109.7% 58.9%
=============== ======
</TABLE>
Page 10
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At September 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 $4.4 million at September 30, 1997. The average recorded investment in
impaired loans during the nine month periods ended September 30, 1998 and 1997
were approximately $2.6 million and $4.7 million, respectively. For those same
periods interest income recognized on impaired loans was not material.
Total non-performing loans decreased over the twelve month period by $2.8
million to $3.1 million at September 30, 1998 as compared to $5.9 million at
September 30, 1997. The decrease has come across all loan types - commercial,
residential real estate and consumer loans. Management attributes the decrease
to a combination of strict underwriting procedures, strong collection efforts
and a relatively stable economic cycle in the Company's market.
Other real estate owned consists of five parcels of property, all commercial,
for $1.4 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. While other real estate owned has trended downward during 1998,
the Company did foreclose on one commercial real estate property in October,
resulting in an addition of $263,000; however, total other real estate owned
remains below December 31, 1997's.
Non-Performing Assets
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
September 30,
---------------
1998 1997
--------------- ------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 245 264
Real estate-commercial 108 652
Real estate-residential 111 359
Consumer 51 202
--------------- ------
Total past due 90 days or more and accruing 515 1,477
--------------- ------
Loans in non-accrual status
Commercial, financial & agricultural 1,440 1,333
Real estate-commercial 753 2,327
Real estate-residential 362 700
Consumer - 85
--------------- ------
Total non-accrual loans 2,555 4,445
--------------- ------
Total non-performing loans 3,070 5,922
--------------- ------
Other real estate owned
Commercial 1,383 2,560
Residential - -
--------------- ------
Total other real estate owned 1,383 2,560
--------------- ------
Total non-performing assets $ 4,453 8,482
=============== ======
Non performing loans to total period end loan 0.98% 1.77%
=============== ======
Non performing assets to total period end loans and other real estate 1.41% 2.92%
=============== ======
</TABLE>
The Company has no restructured loans.
Page 11
<PAGE>
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 nine months ended September 30, 1998, net cash from operating activities
was $3.2 million as compared to $3.8 million for the same period in 1997. The
decrease of $.4 million was primarily caused by a decrease in net income.
Cash used by investing activities was $4.3 million versus $40.9 million for the
nine months ended September 30, 1998 and 1997, respectively. The reduction in
cash used in investing activities is primarily attributed to slower indirect
automobile loan growth relative to 1997.
Cash provided by financing activities was $5.3 million in 1998 versus of $44.2
million in 1997. Major components contributing to this change were a net
increase of $29.8 million in deposits in 1998 versus $24.7 million in 1997 and
net repayment of FHLB advances of $22.5 million in 1998 versus borrowing of
$21.4 million in 1997.
At September 30, 1998 the Company had additional borrowing capacity from the
FHLB of at least $12 million.
Interest Rate Sensitivity and Asset / Liability Management Review
- -------------------------------------------------------------------------
(Quantitative and Qualitative Disclosures about Market Risk)
- ------------------------------------------------------------------
Recently the Federal Reserve Board lowered the federal funds rate (the rate on
interbank borrowings) twice to 5.00% from 5.50%. In reaction to these
reductions, major Wall Street banks lowered their prime rate. On October 30,
1998 the Bank lowered its prime rate 40 basis points to 8.29%. To partially
offset the anticipated lower interest income, the Bank also lowered rates
between 15 to 25 basis points on interest checking, savings and insured money
market ,as well as short-term CD's were lowered. The combined effect of these
actions are expected to cost the Company less than $100,000 per year.
Using a simulation model (discussed in prior filings), net earnings projections
reflect continued growth in net interest income when applying the declining
interest rate environment as of September 30, 1998 ("Base Case"). The table
below, which shows the Company's estimated net earnings sensitivity profile as
of September 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>
Changes in Interest Estimated Percen-
Rates tage Change in
(basis points) Future Net Income
-------------------- --------------------
12 Months 24 Months
-------------------- --------------------
<S> <C> <C>
Base Case -- --
+200 (9.56)% (7.37) %
+100 (6.27) (5.18)
-100 5.56 4.45
-200 9.28 7.09
</TABLE>
Page 12
<PAGE>
A secondary method used to identify and manage the Company's interest rate risk
profile is the static gap analysis. The following table presents an analysis of
the Company's interest rate-sensitivity gap position at September 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.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gap
September 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 -- 421 -- -- 421
Securities 7,390 20,378 34,886 12,101 74,755
Loans 83,769 4,789 152,797 72,131 313,486
-------------------------- --------- -------- ------- -------
Total interest-earnings assets 91,159 25,588 187,683 84,232 388,662
-------------------------- --------- -------- ------- -------
Interest-bearing liabilities:
NOW accounts 48,360 -- -- -- 48,360
Money market 53,508 -- -- -- 53,508
Savings 64,097 -- -- -- 64,097
Certificates of deposits 53,179 37,772 33,220 -- 124,171
FHLB advances 23,300 1,524 2,520 805 28,149
-------------------------- --------- -------- ------- -------
Total interest-bearing
liabilities 242,444 39,296 35,740 805 318,285
-------------------------- --------- -------- ------- -------
Interest rate sensitivity gap (151,285) (13,708) 151,943 83,427 70,377
========================== ========= ======== ======= =======
Cumulative gap (151,285) (164,993) (13,050) 70,377
========================== ========= ======== =======
Cumulative gap as percent of total
assets (35.3%) (38.5%) (3.0%) 16.4%
========================== ========= ======== =======
</TABLE>
As of September 30, 1998, the Company's three-month gap is a negative $151.3
million, which is $4 million less than one year ago. While interest-earning
assets in this period have increased $6.0 million, interest-bearing liabilities
have only risen $2.0 million. FHLB advances are down $8.7 million and deposits
rose $10.7 million.
The 12 month cumulative gap is a negative $165.0 million down from a year ago's
negative $168.0 million, again due primarily to reduced FHLB borrowings overall
and extending their maturities. However, the cumulative gap as a percent of
total assets has declined to 38.5% at September 30, 1998 from 41.2% at September
30, 1997.
Page 13
<PAGE>
The period gaps continue to be positive in the 1 to 5 year range and forward.
As part of the Company's active asset liability management, the Company sold, in
October 1998, $10 million of nationally brokered certificates of deposit with
maturities ranging from two to three years. (These are not reflected in the
table above). The Company is also considering pursuing a means to market a
subordinated debenture issuance.
Year 2000
- ----------
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. The
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, which includes the following:
1. Awareness Phase
2. Assessment Phase
3. Renovation Phase
4. Validation Phase
5. Implementation Phase
The Company has segregated its systems into two main categories: (1) Mission
Critical and (2) Other. Mission Critical systems are those systems (hardware
and software) that are vital to the successful continuance of the Canandaigua
National Bank and Trust's core banking and trust operations. Other systems are
those used by the Company and its related non-bank subsidiaries that are
considered non-mission critical.
A comprehensive review to identify the systems affected by the year 2000 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
Bank'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. In the opinion of management our "opportunity
cost" from 1996 through 2000 approximates $3.0 million and is based upon an
estimate of the time for internal staff to complete testing and remediation
efforts multiplied by an estimated hourly rate. Out-of-pocket costs for testing
and other services are estimated at no more than $300,000, most of which will be
expended in 1999.
As of September 30, 1998, for Mission Critical systems, the Company has
completed steps 1 and 2 and is currently on steps 3 and 4 (Renovation and
Validation Phases) of our Y2K Compliance Plan with a goal of completing these
phases by December 31, 1998. 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.
While deemed remote by management, if the Company's systems were to cease
processing due to a year 2000 failure, any interruption would likely be
short-lived. And because substantially all of our income and expenses are
earned (paid) on an accrual basis, any anticipated direct losses which may
result from a year 2000 related system failure would not be expected to be
material over the long term. The Company
Page 14
<PAGE>
can continue to earn (and pay) interest in the event of an operating disruption.
The Company assesses its worst case Year 2000 scenarios to include: (1) material
credit losses due to Year 2000 failures adversely
affecting its commercial banking customer base and (2) liquidity strain
resulting from potential disruption of the financial markets stemming from
significant Year 2000 failures.
Because of these potential risks, the Company has developed and is implementing
the following plans:
The Company has prepared a business continuity plan for its Bank operations to
consider the impact of Year 2000. The plan will include, at a minimum:
1. Identification of responsible individual or team, and key personnel
required for business resumption.
2. Development of a recovery plan for each core business process.
3. Creation of a master list of customer, clients, suppliers, institutions
that share data.
4. An inventory of machines, documents, electronic files required for
resumption.
5. Identification of a location for business resumption.
6. Creation of printouts of warehoused (in-process) transactions.
7. Use of manual processing procedures if necessary.
8. Training of key personnel to implement plan.
Testing of the Business Resumption Contingency Plans will be performed during
1999.
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 Bank is addressing its exposure to its
commercial loan customers by reviewing customers' plans and procedures
for remediating their year 2000 risk. This review is carried out in the context
of the Bank's annual loan review process, which includes a Y2K assessment
questionnaire for completion by borrowers. By September 30, 1998 the Bank had
reviewed a majority of its commercial loan customers and had classified the
entire loan portfolio in a "high-medium-low Y2K risk" rating system. Using this
system, management assessed the Bank's risk of loan loss. Through this
assessment process the Company has concluded that no special provision for loan
loss is necessary at this time to address the Y2K risk.
The Company's most important third party vendors are the Federal Reserve Bank of
New York (Fedline), NYCE, and NYACH. Each of these vendors plays a role in the
payment exchange system, such as check clearing, ATM processing and ACH
postings. A failure of any or all of these vendors to carry out their functions
would result in a delay in posting customer transactions. The Company has
established testing dates with each of these vendors. For some, testing has
already started.
Page 15
<PAGE>
<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
At its regular monthly meeting in September 1998, the Board of Directors elected
James S. Fralick a director of the Company. Mr. Fralick is 56 years old and is
an adjunct professor of economics at the University of Rochester's Simon School
and Syracuse University's Maxwell School. Mr. Fralick is also president of
Willow Point Economics, LLC - a consulting firm producing economic analysis and
market strategy for large institutional money managers and traders as well as
individual investors. From 1993 to January 1998 he was Principal and Director
of European Economic Research at Morgan Stanley and Co. Mr. Fralick has also
served as the senior economist to the Board of Governors of the Federal Reserve
System.
Also at its regular monthly meeting in November 1998, the Board of Directors
elected Richard P. Miller, Jr. a director of the Company. Mr. Miller is 55
years old and is the Senior Vice President and Chief Operating Officer of the
University of Rochester. Mr. Miller has been an employee of the University of
Rochester since 1987.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 16
<PAGE>
<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.
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION
- -------------------------------------
(Registrant)
<S> <C>
November 13, 1998 /s/ George W. Hamlin, IV
- ------------------------------------- -------------------------------
Date George W. Hamlin, IV, President
November 13, 1998 /s/ Gregory S. MacKay
- ------------------------------------- -------------------------------
Date Gregory S. MacKay, Treasurer
</TABLE>
Page 17
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CAPTION>
<S>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 23,434
<INT-BEARING-DEPOSITS> 421
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 356
<INVESTMENTS-CARRYING> 70,851
<INVESTMENTS-MARKET> 72,195
<LOANS> 313,486
<ALLOWANCE> 3,368
<TOTAL-ASSETS> 428,121
<DEPOSITS> 354,632
<SHORT-TERM> 24,924
<LIABILITIES-OTHER> 3,612
<LONG-TERM> 3,225
<COMMON> 8,110
0
0
<OTHER-SE> 33,618
<TOTAL-LIABILITIES-AND-EQUITY> 428,121
<INTEREST-LOAN> 20,035
<INTEREST-INVEST> 3,006
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 23,087
<INTEREST-DEPOSIT> 7,797
<INTEREST-EXPENSE> 9,298
<INTEREST-INCOME-NET> 13,789
<LOAN-LOSSES> 641
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,266
<INCOME-PRETAX> 4,288
<INCOME-PRE-EXTRAORDINARY> 2,854
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,854
<EPS-PRIMARY> 17.79
<EPS-DILUTED> 17.79
<YIELD-ACTUAL> 8.08
<LOANS-NON> 2,555
<LOANS-PAST> 515
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,153
<CHARGE-OFFS> 859
<RECOVERIES> 433
<ALLOWANCE-CLOSE> 3,368
<ALLOWANCE-DOMESTIC> 3,368
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
