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, 1999
--------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number: 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 October 31, 1999
----- -----------------------------------
Common stock, $50.00 par 158,327
This quarterly report contains certain "forward-looking statements" covered by
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. 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.
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 30, 1999
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at September 30, 1999
and December 31, 1998. 1
Condensed consolidated statements of income for the three
month and nine month periods ended September 30, 1999 and 1998. 3
Consolidated statements of stockholders' equity
for the nine month periods ended September 30, 1999 and 1998. 4
Consolidated statements of cash flows
for the nine month periods ended September 30, 1999 and 1998. 5
Notes to condensed consolidated financial statements
at September 30, 1999. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
This information is incorporated by reference
in Part I, Item 2, Interest Rate Sensitivity and
--------------------------------
Asset/Liability Management Review 11
----------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 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
EXHIBITS 18
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998 (Unaudited)
(in thousands, except share data)
September 30, December 31,
Assets 1999 1998
- ------------------------------------------------------------ --------------- -------------
<S> <C> <C>
Cash and due from banks $ 24,815 23,892
Interest-bearing deposits with other financial institutions 75 314
Securities:
- Available for sale, at fair value 533 437
- Held-to-maturity (fair value of $72,933 in 1999 and
$71,850 in 1998) 73,056 72,479
Loans:
Commercial, financial & agricultural 53,300 43,260
Commercial mortgage 119,227 83,771
Residential mortgage 70,263 76,130
Consumer-indirect 102,181 84,370
Consumer-other 18,125 17,753
Other 3,736 3,516
Loans held for sale 1,512 2,969
--------------- -------------
Total loans 368,344 311,769
Less: Allowance for loan losses (3,811) (3,283)
--------------- -------------
Loans - net 364,533 308,486
Premises and equipment - net 13,226 11,468
Accrued interest receivable 2,634 2,244
Federal Home Loan Bank stock and Federal Reserve Bank stock 3,548 3,548
Other assets 6,033 5,179
--------------- -------------
Total Assets $ 488,453 428,047
=============== =============
<FN>
(Continued)
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998 (Unaudited)
(in thousands, except share data)
September 30, December 31,
Liabilities and Stockholders' Equity 1999 1998
- ---------------------------------------------------------- --------------- -------------
<S> <C> <C>
Deposits:
Demand
Non-interest bearing $ 70,813 64,368
Interest bearing 43,800 56,877
Savings and money market 165,388 109,316
Time deposits 156,869 145,946
--------------- -------------
Total deposits 436,870 376,507
FHLB advances 6,025 7,142
Accrued interest payable and other liabilities 3,927 1,920
--------------- -------------
Total Liabilities $ 446,822 385,569
--------------- -------------
Stockholders' Equity:
Common stock, $50 par value; 240,000 shares authorized;
162,208 shares issued in 1999 and 1998 8,110 8,110
Additional paid in capital 8,489 8,489
Retained earnings 26,265 26,569
Treasury stock at cost (3,831 shares in 1999 and 2,479
shares in 1998) (1,375) (835)
Accumulated other comprehensive income 142 145
--------------- -------------
Total Stockholders' Equity 41,631 42,478
--------------- -------------
Total Liabilities and Stockholders' Equity $ 488,453 428,047
=============== =============
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three month and nine month periods ended September 30, 1999 and 1998
(Unaudited)
(in thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------ ----- ------- ------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $7,683 6,919 $20,847 20,035
Securities 931 1,017 2,818 3,006
Federal funds sold and other 47 8 205 46
------ ----- ------- ------
Total interest income 8,661 7,944 23,870 23,087
------ ----- ------- ------
Interest expense:
Deposits 3,203 2,773 9,165 7,797
Borrowings 169 363 344 1,501
------ ----- ------- ------
Total interest expense 3,372 3,136 9,509 9,298
------ ----- ------- ------
Net interest income 5,289 4,808 14,361 13,789
Provision for loan losses 330 212 826 641
------ ----- ------- ------
Net interest income after
provision for loan losses 4,959 4,596 13,535 13,148
------ ----- ------- ------
Other income:
Service charges on deposit accounts 668 504 1,770 1,281
Trust income 588 585 1,936 1,724
Net gain on sale of
mortgages 4 55 80 77
Other operating income 546 468 1,366 1,324
------ ----- ------- ------
Total other income 1,806 1,612 5,152 4,406
------ ----- ------- ------
Operating expenses:
Salaries & employee benefits 3,473 2,716 9,612 7,395
Occupancy expense 969 773 2,740 2,296
FDIC insurance 11 9 32 29
Marketing and public relations 386 160 930 347
Office supplies, printing and
postage 231 222 719 577
Professional 40 40 248 151
Other operating expenses 764 775 2,156 2,471
------ ----- ------- ------
Total operating expenses 5,874 4,695 16,437 13,266
------ ----- ------- ------
Income before income taxes 891 1,513 2,250 4,288
Income taxes 287 459 721 1,434
------ ----- ------- ------
Net income $ 604 1,054 1,529 2,854
====== ===== ======= ======
Basic earnings per share $ 3.80 6.57 $ 9.60 17.79
====== ===== ======= ======
Diluted earnings per share $ 3.79 6.57 $ 9.58 17.79
====== ===== ======= ======
<FN>
See notes to condensed consolidated financial statements
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine month periods ended September 30, 1999 and 1998 (Unaudited)
(in thousands, except 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, 1999 $ 8,110 8,489 26,569 (835) 145 42,478
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of taxes of $1 - - - - (3) (3)
Net income - - 1,529 - - 1,529
-------
Total comprehensive
income 1,526
------------
Cash dividend - $11.50
per share - - (1,833) - - (1,833)
Purchase of 1,368 shares
of treasury stock - - - (545) - (545)
Sale of 16 shares
of treasury stock - - - 5 - 5
------------ ------- --------- --------- -------------- -------
Balance at September 30, 1999 8,110 8,489 26,265 (1,375) 142 41,631
============ ======= ========= ========= ============== =======
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 2,831
------------
Cash dividend - $11.00
per share - - (1,766) - - (1,766)
Purchase of 755 shares
of treasury stock - - - (272) - (272)
Sale of 10 shares
of treasury stock - - - 3 - 3
------------ ------- --------- --------- -------------- -------
Balance at September 30, 1998 8,110 8,489 25,830 (797) 142 41,728
------------ ------- --------- --------- -------------- -------
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine month periods ended September 30, 1999 and 1998 (Unaudited)
(in thousands)
1999 1998
--------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,529 2,854
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,513 1,439
Provision for loan losses 826 641
Deferred income taxes (332) (231)
Writedown of other real estate owned - 50
Originations of loans held for sale (91,230) (78,227)
Proceeds from sale of loans held for sale 92,686 76,386
Increase in accrued interest receivable
and other assets (777) (807)
Increase in accrued interest payable and
other liabilities 2,007 1,045
--------- --------
Net cash provided by operating activities 6,222 3,150
--------- --------
Cash flow from investing activities:
Purchase of FHLB stock - (430)
Securities held to maturity:
Proceeds from maturities and calls of securities 28,100 24,352
Purchases of securities (28,691) (24,073)
Loans originated, net (58,865) (2,927)
Fixed asset purchases, net (3,234) (1,477)
Investment in minority owned subsidiary (158) (762)
Proceeds from sale of other real estate 437 1,057
--------- --------
Net cash used by investing activities (62,411) (4,260)
--------- --------
Cash flow from financing activities:
Net increase in demand, savings and short-
term deposits 49,440 19,288
Net increase in time deposits 10,923 10,583
Proceeds from net overnight and term FHLB advances 400 (2,506)
Principal repayments on term FHLB advances (1,517) (20,012)
Proceeds from sale of treasury stock 5 3
Purchase of treasury stock (545) (272)
Dividends paid (1,833) (1,766)
--------- --------
Net cash provided by financing activities 56,873 5,318
--------- --------
Net increase in cash & cash equivalents 684 4,208
Cash & cash equivalents - beginning of period 24,206 19,647
--------- --------
Cash & cash equivalents - end of period $ 24,890 23,855
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,455 9,208
========= ========
Income taxes $ 126 1,462
========= ========
Supplemental disclosure of non-cash investing
Activity:
Additions to other real estate acquired through
foreclosure, net of loans to facilitate sales $ 536 -
========= ========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 5
<PAGE>
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, 1998 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, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. 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, 1998.
Amounts in prior periods' condensed consolidated financial statements are
reclassified whenever necessary to conform with the current year's presentation.
(2) Dividends Per Share
---------------------
On July 14, 1999 the Board of Directors declared a semi-annual $5.75 per share
dividend on common stock, payable August 2, 1999 to shareholders of record July
14, 1999. The Company declared a semi-annual $5.75 per share dividend on common
stock on January 13, 1999, payable February 1, 1999 to shareholders of record
January 13, 1999.
(3) Earnings Per Share
--------------------
Basic earnings per common share is calculated by dividing net income for the
period by the weighted average number of shares outstanding during the period.
Diluted earnings per share includes the maximum dilutive effect of stock options
issuable upon conversion of the options. The calculations of basic and diluted
earnings per share follow (income in thousands):
<TABLE>
<CAPTION>
Net Average Per
Income Shares Share
------- ------- ------
For the three months ended September 30, 1999
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shareholders $ 604 158,941 $ 3.80
======
Effect of assumed exercise of stock options - 582
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 604 159,523 $ 3.79
======
For the three months ended September 30, 1998
Basic earnings per share:
Net income applicable to common shareholders $ 1,054 160,356 $ 6.57
======
Effect of assumed exercise of stock options - -
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 1,054 160,356 $ 6.57
======
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
Net Average Per
Income Shares Share
------- ------- ------
For the nine months ended September 30, 1999
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shareholders $ 1,529 159,246 $ 9.60
======
Effect of assumed exercise of stock options - 363
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 1,529 159,609 $ 9.58
======
For the nine months ended September 30, 1998
Basic earnings per share:
Net income applicable to common shareholders $ 2,854 160,528 $17.79
======
Effect of assumed exercise of stock options - -
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 2,854 160,528 $17.79
======
</TABLE>
(4) Stock Option Plan
-------------------
The Company's incentive stock option program for employees authorizes grants of
options to purchase up to 16,000 shares of common stock. At its March 1999
meeting, the Board of directors granted, effective January 1, 1999, 4,571
non-qualified options to certain employees. 3,210 options were granted in
replacement of the future appreciation of previously granted Stock Appreciation
Rights and Phantom Stock Awards. The remaining options were granted to
management under the Company's incentive compensation plan for 1998's
performance. The options were granted with an exercise price equal to the
estimated fair value of the common stock on the grant date. The options are
exerciseable at times varying from five years to seventeen years. The options
are fully vested and have no set expiration date.
The Company applies APB Opinion No. 25 in accounting for its stock option plan,
and accordingly, no compensation cost has been recognized for its fixed-award
stock options in the condensed consolidated statement of income. Had
compensation cost been determined based on the fair value at the grant date of
the stock options using option valuation models consistent with the approach of
FASB Statement No. 123, the Company's net income and earnings per share for the
nine month period ended September 30, 1999 would have been reduced to the pro
forma amounts indicated below (net income in thousands):
Net income:
As reported $ 1,529
Pro forma $ 1,294
Earnings per share Basic Diluted
----- -------
As reported $ 9.60 $ 9.58
Pro forma $ 8.13 $ 8.11
The per share fair value of stock options granted during 1999 of $76.89, was
determined using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C>
Expected dividend yield 3.09%
Risk free interest rate 4.92%
Expected life 12.9 years
Volatility 14.73%
</TABLE>
Page 7
<PAGE>
(5) New Accounting Pronouncement
------------------------------
In June 1999 the Financial Accounting Standards Board deferred the effective
date of FASB Statement No. 133 entitled "Accounting for Derivative Instruments
and Hedging Activities" for one year. Statement No. 133 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's effective date was deferred
in June 1999 by FASB and is now effective for the Company for fiscal quarters
beginning January 1, 2001. Earlier adoption is still permitted. The Company
holds no free-standing derivative instruments at September 30, 1999 and
management does not anticipate that adoption of the new standard will have a
material effect on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
September 30, 1999
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, 1998
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.
Overview
- --------
The Company continued its expansion activities in the third quarter of 1999 with
the opening of the Honeoye Falls banking office on September 27. This is the
Company's fourth new office in the past twelve months. Two offices are
scheduled to open in the fourth quarter in Irondequoit and Perinton. While the
Company believes that it initiated the most rapid expansion into Monroe County
of its competitors, recently two banks opened new branches and one announced an
opening for the fourth quarter. Additionally, the County's largest credit union
continues to expand its branch network.
Financial Condition and Results of Operations
- --------------------------------------------------
Three months ended September 30, 1999
- ------------------------------------------
Asset growth during the third quarter of 1999 increased significantly as the
Company's expansion into the Rochester market took hold. As of September 30,
1999, total assets of the Company were $488.5 million, up from $461.7 million at
June 30, 1999. Cash and cash equivalents increased $2.9 million to $24.9
million. Securities showed a minor decrease of $0.6 million to $73.6 million.
Net loans increased $24.0 million to $364.5 million, and all other assets rose
$.4 million to $25.4 million.
Total deposits at September 30, 1999 were $436.9 million and were up $42.8
million from June 30, 1999. Our four newest community banking offices in
Webster/Penfield, Greece, Chili and Honeoye Falls accounted for $15.7 million of
the quarter's deposit growth. Deposit growth is coming across all products,
particularly the "Generations Gold" suite of accounts, "Business Choice Sweep"
account, and "Grand Opening CD Specials". Due to the strong deposit growth,
borrowings from FHLB were reduced $15.9 million to $6.0 million in the quarter.
Other liabilities increased by $.4 million to $3.9 million.
Page 8
<PAGE>
The quality of the Company's assets continued to improve during the quarter with
non-performing loans less than 0.5% of total loans at September 30, 1999 as
compared to the same period in 1998. Other real estate owned was $0.3 million
lower than at June 30, 1999 due to the Bank's liquidation of one commercial real
estate property. As a result of the loan portfolio's growth the provision for
loan loss increased to $0.3 million for the quarter versus $0.2 million for the
same quarter of 1998.
Net income for the three-month period ended September 30, 1999 was consistent
with management's projections at $.6 million as compared to $1.1 million for the
same period in 1998. Basic earnings per share decreased by $2.77 or 42.2% from
the same period and fully diluted earnings per share decreased by $2.78 or
42.3%. For the three months ended September 30, 1999, net interest income
increased $.5 million or 10.0% from the same period in 1998, reflecting the
growth in the loan portfolio, offset by their reduced yields following heavy
repricing activity and a 75 basis point prime rate drop in late 1998. Major
banks increased their prime rate 50 basis points during the quarter to 8.25%,
reflecting the Federal Open Market Committee's 50 basis point increase in the
target federal funds rate during the same period.
Average interest earning assets for the three months ended September 30, 1999
increased $24.3 million from June 30, 1999 and $47.4 million from September 30,
1998. The yields on these assets were 7.96%, 7.56% and 8.19%, respectively; the
year-on-year decline resulting from loan refinancings due to 1998's declining
interest rate environment. Average interest bearing liabilities for the same
periods increased $21.0 million and $51.6 million, respectively. Rates paid on
these liabilities during the same three periods were 3.73%, 3.67% and 4.04%,
respectively. The 8 basis point reduction in interest spread for the September
30, 1999 versus September 30, 1998 quarters is reflective of both asset and
liability yield reductions and the $4.2 million increase in interest bearing
liabilities over interest earning assets. In the third quarter of 1999 the
Company's net interest margin rose to 4.86% from 4.52% at June 30, 1999 and down
from 4.96% at September 30, 1998. The declining trend in net interest margin
seen during 1997 and most of 1998 seems to be showing some leveling off,
particularly as the Company reduces its higher cost FHLB borrowings. However,
interest spread and margin are not anticipated to rise to pre-1998 levels as the
Company further expands into the highly competitive Monroe County region. Refer
to Interest Rate Sensitivity and Asset / Liability Management Review section for
a further discussion of interest rate risk management.
Other income for the quarter ended September 30, 1999 increased $.2 million to
$1.8 million over the same quarter in 1998. The increase was reflected in
service charges, attributed increased transaction volume and changes in account
fee structures, and trust income, attributed due to growth in assets under
management. Other operating income increased on growth in mortgage banking
related activities.
Operating expenses increased $1.2 million for the quarter to $5.9 million versus
$4.7 million for the 1998 third quarter. These increases came in nearly all
expense categories, reflecting growth in customers, employees and banking
offices. Marketing and public relations increased over 140% as a result of the
Company's television campaign begun in February 1999.
The Company's effective tax rate for the quarter ended September 30, 1999
increased to 32.2% from 30.3% for the same period of 1998. The third quarter of
1999 showed a higher than normal effective rate for the Company due to a $51
thousand reduction in the value of net deferred tax assets following New York
State's tax law change. The Company's marginal New York State tax rate will
fall from 9.0% in 1999 to $7.5% in 2003. Under the provisions of SFAS No. 109,
the Company must recognize the full effect of tax law changes in the quarter of
the legislative enactment.
Nine months ended September 30, 1999
- -----------------------------------------
Total assets of the Company were $488.5 million, up from $428.0 million at
December 31, 1998. Cash and cash equivalents increased $0.7 million to $24.9
million. Securities showed a minor increase of $0.7 million to $73.6 million.
Net loans increased $56.0 million to $364.5 million, and all other assets rose
$3.0 million to $25.4 million.
Page 9
<PAGE>
Total deposits were up $60.4 million from December 31, 1998, with the four new
offices accounting for $26.3 million of the year's deposit growth. For the
first nine months of 1999 borrowings from FHLB were down $1.1 million to $6.0
million as deposit growth outpaced loan growth. Other liabilities increased by
$2.0 million to $3.9 million.
Net income for the nine-month period ended September 30, 1999 was consistent
with management's projections at $1.5 million as compared to $2.9 million for
the same period in 1998. Basic earnings per share decreased by $8.19 or 46.0%
from the same period and diluted earnings per share decreased by $8.21 or 46.1%.
For the nine months ended September 30, 1999, net interest income increased $.6
million or 4.1% from the same period in 1998, reflecting the growth in the loan
portfolio, offset by their reduced yields.
For the nine months ending September 30, 1999, average interest earning assets,
increased $32.5 million to $413.3 million from $380.8 million for the nine
months ended September 30, 1998. However the yields on these assets were 7.70%
and 8.08%, respectively. For the nine months ended September 30, 1999, average
interest bearing liabilities increased $35.3 million as compared to the
comparable prior year period. Rates paid on these liabilities were 3.70% and
4.03%, respectively. This 5 basis point drop in interest spread for the
September 30, 1999 versus September 30, 1998 nine-month periods had a $.7
million negative impact on net interest income and was made up by volume growth.
Through the first three quarters of 1999 the Company's net interest margin
declined to 4.63% from 4.83% for the nine months ended September 30, 1998.
Other income for the nine months ended September 30, 1999 increased $.8 million
to $5.2 million over the same period in 1998. The increase was reflected in
service charges and trust income.
Operating expenses increased $3.1 million for the nine months to $16.4 million
versus $13.3 million for the 1998 period. These increases came primarily in
salaries and benefits, occupancy, marketing and public relations, and supplies,
printing and postage, reflecting growth in customers, employees and banking
offices.
The Company's effective tax rate for the nine-months ended September 30, 1999
declined to 32.0% from 33.4% for the same period of 1998. The first three
quarters of 1998 showed a higher effective rate for the Company due to the
recognition of non-deductible permanent differences.
Liquidity
- ---------
Liquidity is defined as the ability to generate adequate amounts of cash to meet
the demand 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, 1999 the Company generated $0.7 million in cash and
cash equivalents versus generating $4.2 million for the same period in 1998.
Net cash from operating activities was $6.2 million in 1999 as compared to $3.2
million in 1998. Both the largest source and use of operating cash in 1999 and
1998 was mortgage banking activity.
Due to strong loan demand and bank office expansion in 1999 $62.4 million in
cash was used for investing activities (investments, loans and fixed assets) as
opposed to a use of $ 4.3 million in 1998.
Financing activities provided $56.9 million of cash in 1999 versus $5.3 million
in 1998. In both periods, net deposit growth provided the bulk of the cash, yet
in 1999 this was used to fund loans, while in 1998 the cash was used to repay
FHLB advances.
FHLB advances remain an important liquidity source for the Company. With $6.0
million outstanding at September 30, 1999 the Company had additional borrowing
capacity from the FHLB of $36.0 million. Secondarily, the Company opened a
liquidity source in 1998 through the sale of its CD's in the national brokered
market, which remains available in 1999. Cash for growth
Page 10
<PAGE>
for the remainder 1999 is expected to come from these two sources as well as
customer deposits as the Company expands into Monroe County.
As part of its year 2000 contingency planning, the Company established a $79
million credit facility with the Federal Reserve Bank of New York. If needed,
these funds will be used to provide cash and lines of credit to the Bank's
customers during the century date change. The facility is collateralized with
$98.5 million of the Company's indirect automobile loans.
Interest Rate Sensitivity and Asset / Liability Management Review
- -------------------------------------------------------------------------
(Item 3 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 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 one 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.
Management also uses the static gap analysis to identify and manage the
Company's interest rate risk profile. Interest sensitivity gap ("gap")
analysis measures the difference between the assets and liabilities repricing or
maturing within specific time periods. There has been no significant change in
the Company's interest rate risk profile since December 31, 1998.
Capital Resources
- ------------------
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under
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<PAGE>
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
The Company's assets have grown at an annualized rate of 19% in 1999, while
stockholder's equity has been reduced by 3%. For several years, management has
been growing the balance sheet, while moderating the growth of equity to
leverage shareholders' investment. Through peer and other analyses management
determined sustained balance sheet growth to be in the best interest of
shareholders, customers, the community and employees. This plan, by design, has
resulted in declining capital ratios. While the Bank and the Company are
adequately capitalized, their capital ratios are anticipated to continue
declining due to balance sheet growth.
As of September 30, 1999 all capital adequacy requirements were met. Also, as
of September 30, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain certain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the following table.
<TABLE>
<CAPTION>
To Be Well-
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
--------------- --------------- ---------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999
Total Capital (to risk weighted assets) $39,813 10.7% $29,767 8.0% $37,208 10.0%
Tier 1 Capital (to risk weighted assets) $36,002 9.7% $14,883 4.0% $22,325 6.0%
Tier 1 Capital (to average assets) $36,002 7.6% $18,992 4.0% $23,740 5.0%
As of December 31, 1998
Total Capital (to risk weighted assets) $39,956 13.0% $24,620 8.0% $30,776 10.0%
Tier 1 Capital (to risk weighted assets) $36,564 11.9% $12,310 4.0% $18,465 6.0%
Tier 1 Capital (to average assets) $36,564 8.6% $16,977 4.0% $21,221 5.0%
</TABLE>
Allowance for Loan Losses and Non-Performing Assets
- ---------------------------------------------------------
Allowance for Loan Losses
- ----------------------------
Changes in the allowance for loan losses for the nine-month periods ended
September 30, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1999 1998
--------------- -------
<S> <C> <C>
Balance at beginning of period $ 3,283 3,153
Provision for loan losses 826 641
Loans charged off (693) (859)
Recoveries on loan previously charged off 395 433
--------------- -------
Balance at end of period $ 3,811 $3,368
=============== =======
</TABLE>
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<PAGE>
Allowance as a percentage of total period end loans 1.03% 1.06%
===== =====
Allowance as a percentage of non-performing loans 329.7% 109.7%
====== ======
At September 30, 1999, the recorded investment in loans that are considered
impaired totaled $1.2 million as compared to $2.1 million at December 31, 1998
and $2.6 million at September 30, 1998. The average recorded investment in
impaired loans during the nine month periods ended September 30, 1999 and 1998
were approximately $1.6 million and $2.6 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 $1.9
million to $1.2 million at September 30, 1999 as compared to $3.1 million at
September 30, 1998. The decrease has come from commercial loans and real estate
secured 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. However, in October 1999, one $800
thousand commercial real estate loan was placed on non-accrual status due to the
borrowers' delinquent principal payments.
Other real estate owned consists of three parcels of property, all commercial,
for $1.7 million. The increase in other real estate owned from the same period
in 1998 is a result of the addition of two properties in 1999, net liquidations
of five properties in 1999.
Non-Performing Assets
- ----------------------
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
September 30,
-----------------------
1999 1998
--------------- ------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 19 245
Real estate-commercial - 108
Real estate-residential - 111
Consumer 71 51
--------------- ------
Total past due 90 days or more and
accruing 90 515
--------------- ------
Loans in non-accrual status
Commercial, financial & agricultural 623 1,440
Real estate-commercial 180 753
Real estate-residential 263 362
Consumer - -
--------------- ------
Total non-accrual loans 1,066 2,555
--------------- ------
Total non-performing loans 1,156 3,070
--------------- ------
Other real estate owned
Commercial 1,742 1,383
Residential - -
--------------- ------
Total other real estate owned 1,742 1,383
--------------- ------
Total non-performing assets $ 2,898 4,453
=============== ======
Non performing loans to total loans period end 0.31% 0.98%
=============== ======
Non performing assets to total loans and
other real estate at period end 0.78% 1.41%
=============== ======
<FN>
The Company has no restructured loans.
</TABLE>
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<PAGE>
Year 2000
- ----------
The Company began reviewing its year 2000 conversion needs in 1995 and
established a Year 2000 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 (Y2K)
issue was completed in 1997 and an implementation plan was compiled and
executed. The Company has completed all of the above phases of its year 2000
compliance plan.
The Company has not spent material amounts with outside contractors. Therefore,
costs do not represent any material incremental costs, but rather represent the
redeployment of existing technology resources. In the opinion of management the
"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 no more than $300,000, most of which were
expended in 1999.
If the Company's systems were to cease processing due to a year 2000 failure,
management believes any interruption would be short-lived. 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 includes, among other items:
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, and institutions.
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 was successfully performed
during the second quarter of 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'
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<PAGE>
plans and procedures for remediating their year 2000 risk. This review is
carried out in the context of the Bank's initial underwriting process for new
requests, annual loan review process for existing relationships, and quarterly
for all problem loans and relationships which are
internally rated medium or high risk for Y2K. To assist in this evaluation
process, borrowers have completed a bank prepared Y2K assessment questionnaire.
The Bank has reviewed a majority of its commercial loan customers and has
classified the entire loan portfolio in a "low-medium-high" risk rating system.
Using this system, management assessed the Bank's risk of loan loss. Through
this assessment process, the Company has allocated a specific level of their
loan loss reserve for medium and high risk rated credits. However, this
allocation for year 2000 risk has not resulted in a material increase in the
Bank's allowance for loan loss. "
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
successfully completed testing with each of these vendors.
The Company's Year 2000 efforts constitute an important technology project.
Management views these efforts as opportunities for technological advancement,
which will ultimately increase customer service and shareholder value.
Page 15
<PAGE>
PART II -- OTHER INFORMATION
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Item 1. Legal proceedings
None
Item 2. Changes in securities and use of proceeds
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
(3.i.) Certificate of Incorporation, of the Registrant, as amended
(3.ii.) By-laws of the Registrant, as amended
(27) Financial Data Schedule
(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)
November 12, 1999 /s/ George W. Hamlin, IV
----------------- ------------------------
Date George W. Hamlin, IV, President
November 12, 1999 /s/ Gregory S. MacKay
----------------- ---------------------
Date Gregory S. MacKay, Treasurer
Page 17
<PAGE>
INDEX OF EXHIBITS
Exhibit
(3.i.) Certificate of Incorporation, of the Exhibit A on Form 10-K
Registrant, as amended for the year ended
December
31, 1994
(3.ii.) By-laws of the Registrant, Exhibits B on Form 10-K
as amended for the year ended
December 31, 1994
(27) Financial Data Schedule
Page 18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CAPTION>
<S>
<C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 24,815
<INT-BEARING-DEPOSITS> 75
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 533
<INVESTMENTS-CARRYING> 73,056
<INVESTMENTS-MARKET> 72,933
<LOANS> 368,344
<ALLOWANCE> 3,811
<TOTAL-ASSETS> 488,453
<DEPOSITS> 436,870
<SHORT-TERM> 2,700
<LIABILITIES-OTHER> 3,927
<LONG-TERM> 3,325
<COMMON> 8,110
0
0
<OTHER-SE> 33,521
<TOTAL-LIABILITIES-AND-EQUITY> 448,453
<INTEREST-LOAN> 20,847
<INTEREST-INVEST> 2,818
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 23,870
<INTEREST-DEPOSIT> 9,165
<INTEREST-EXPENSE> 9,509
<INTEREST-INCOME-NET> 14,361
<LOAN-LOSSES> 826
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,437
<INCOME-PRETAX> 2,250
<INCOME-PRE-EXTRAORDINARY> 1,529
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,529
<EPS-BASIC> 9.60
<EPS-DILUTED> 9.58
<YIELD-ACTUAL> 7.70
<LOANS-NON> 1,066
<LOANS-PAST> 90
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,283
<CHARGE-OFFS> 693
<RECOVERIES> 395
<ALLOWANCE-CLOSE> 3,811
<ALLOWANCE-DOMESTIC> 3,811
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
