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 March 31, 1999
----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number: 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 May 4, 1999
----- ------------------------------
Common stock, $50.00 par 159,314
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
MARCH 31, 1999
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at March 31, 1999
and December 31, 1998. 1
Condensed consolidated statements of income for the three
month period ended March 31, 1999 and 1998. 3
Condensed consolidated statements of stockholders' equity
for the three month period ended March 31, 1999 and 1998. 4
Condensed consolidated statements of cash flows for the three
month period ended March 31, 1999 and 1998. 5
Notes to condensed consolidated financial statements
at March 31, 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 10
----------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBITS 17
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1998 (unaudited)
(dollars in thousands, except per share amounts)
March 31, December 31,
----------- -------------
Assets 1999 1998
- ------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Cash and due from banks $ 18,947 23,892
Interest-bearing deposits with other financial institutions 341 314
Federal funds sold 6,500 --
Securities:
- Available for sale, at fair value 406 437
- Held-to-maturity (fair value of $73,540 in 1999 and
$73,688 in 1998) 72,718 72,479
Loans:
Commercial, financial & agricultural 42,871 43,260
Commercial mortgage 89,497 83,771
Residential mortgage 72,186 76,130
Consumer-indirect 85,224 84,370
Consumer-other 17,904 17,753
Other 2,594 3,516
Loans held for sale 3,169 2,969
----------- -------------
Total loans 313,445 311,769
Less: Allowance for loan losses (3,298) (3,283)
----------- -------------
Loans - net 310,147 308,486
Premises and equipment - net 11,674 11,468
Accrued interest receivable 2,416 2,244
Federal Home Loan Bank stock and Federal Reserve Bank stock 3,548 3,548
Other assets 6,602 5,179
----------- -------------
Total Assets $ 432,759 428,047
=========== =============
<FN>
(Continued)
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1998 (unaudited)
(dollars in thousands, except per share amounts)
March 31, December 31,
----------- -------------
Liabilities and Stockholders' Equity 1999 1998
- ---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Deposits:
Demand
Non-interest bearing $ 57,265 64,368
Interest bearing 64,984 56,877
Savings and money market 107,610 109,316
Time deposits 153,142 145,946
----------- -------------
Total deposits 383,001 376,507
FHLB advances 4,837 7,142
Accrued interest payable and other liabilities 2,910 1,920
----------- -------------
Total Liabilities $ 390,748 385,569
----------- -------------
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 26,232 26,569
Treasury stock at cost (2,777 shares in 1999 and 1,713
shares in 1998) (947) (835)
Accumulated other comprehensive income 127 145
----------- -------------
Total Stockholders' Equity 42,011 42,478
----------- -------------
Total Liabilities and Stockholders' Equity $ 432,759 428,047
=========== =============
<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 periods ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands, except per share amounts)
1999 1998
------ -----
<S> <C> <C>
Interest income:
Loans, including fees $6,416 6,831
Securities 947 994
Other 75 33
------ -----
Total interest income 7,438 7,680
------ -----
Interest expense:
Deposits 2,929 2,437
Borrowings 80 673
------ -----
Total interest expense 3,009 3,110
------ -----
Net interest income 4,429 4,748
Provision for loan losses 50 323
------ -----
Net interest income after provision for loan losses 4,379 4,425
------ -----
Other income:
Service charges on deposit accounts 500 311
Trust income 700 511
Net gain (loss) on sale of mortgages 43 15
Other operating income 376 394
------ -----
Total other income 1,619 1,231
------ -----
Operating expenses:
Salaries & employee benefits 2,993 2,382
Occupancy expense 836 740
FDIC insurance 10 20
Marketing and public relations 253 75
Office supplies, printing and postage 232 159
Professional 122 97
Other operating expenses 696 763
------ -----
Total operating expenses 5,142 4,236
------ -----
Income before income taxes 856 1,420
Income taxes 275 409
------ -----
Net income $ 581 1,011
====== =====
Basic earnings per share $ 3.64 6.30
====== =====
Diluted earnings per share $ 3.54 6.30
====== =====
<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 three month periods ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands, except per share amounts)
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 $13 - - - - (18) (18)
Net income - - 581 - - 581
-------
Total comprehensive
Income 563
-------
Cash dividend - $5.75
per share - - (918) - - (918)
Purchase of 298 shares
of treasury stock - - - (112) - (112)
------------ ------- --------- --------- -------------- -------
Balance at March 31, 1999 8,110 8,489 26,232 (947) 127 42,011
============ ======= ========= ========= ============== =======
Balance at January 1, 1998 $ 8,110 8,489 24,742 (528) 119 40,932
Comprehensive income:
Net income - - 1,011 - - 1,011
-------
Total comprehensive
Income 1,011
-------
Cash dividend - $5.50
per share - - (883) - - (883)
Purchase of 71 shares
of treasury stock - - - (25) - (25)
------------ ------- --------- --------- -------------- -------
Balance at March 31, 1998 8,110 8,489 24,870 (553) 119 41,035
------------ ------- --------- --------- -------------- -------
<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 three month periods ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands)
1999 1998
--------- -------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 581 1,011
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 472 404
Provision for loan losses 50 323
Deferred income taxes (44) -
Originations of loans held for sale (24,711) (8,023)
Proceeds from sale of loans held for sale 24,510 8,092
(Increase) decrease in accrued interest receivable
and other assets (1,113) (1,288)
Increase (decrease) in accrued interest payable and
other liabilities 990 (185)
--------- -------
Net cash provided by operating activities 735 334
--------- -------
Cash flow from investing activities:
Purchase of FHLB stock - (430)
Securities held to maturity:
Proceeds from maturities and calls of securities 10,767 10,522
Purchases of securities (11,000) (9,991)
Loans (originated) repaid, net (1,629) 10,079
Fixed asset purchases - net (680) (385)
Investment in minority owned subsidiary - (75)
Proceeds from sale of other real estate 198 853
--------- -------
Net cash provided (used) by investing activities (2,344) 10,573
--------- -------
Cash flow from financing activities:
Net increase (decrease) in demand, savings and short-
term deposits (702) (8,860)
Proceeds from time of deposit net
of payments on maturing deposits 7,196 8,638
Principal repayments on FHLB advances (2,305) (5,606)
Purchase of treasury stock (112) (25)
Dividends paid (918) (883)
--------- -------
Net cash provided (used) by financing activities 3,159 (6,736)
--------- -------
Net increase (decrease) in cash & cash equivalents 1,550 (4,171)
Cash & cash equivalents - beginning of period 24,206 19,647
--------- -------
Cash & cash equivalents - end of period $ 25,756 23,818
========= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,934 4,780
========= =======
Income taxes $ 61 631
========= =======
Supplemental disclosure of non-cash investing
Activity:
Additions to other real estate acquired through
foreclosure, net of loans to facilitate sales $ 119 -
========= =======
<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 period ended March 31,
1999 is 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
---------------------
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 by the
weighted average number of shares outstanding during the period. Diluted
earnings per share includes the maximum dilutive effect of stock options
issueable 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 March 31, 1999
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shareholders $ 581 159,559 $ 3.64
Effect of assumed exercise of stock options - 4,571 -
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 581 164,130 $ 3.54
For the three months ended March 31, 1998
Basic earnings per share:
Net income applicable to common shareholders $ 1,011 160,565 $ 6.30
Effect of assumed exercise of stock options - - -
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 1,011 160,565 $ 6.30
</TABLE>
Page 6
<PAGE>
(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 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 at 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 stock options
in the condensed consolidated statement of income. Had compensation cost been
determined on the fair value at the grant date for this award, consistent with
the method of FASB Statement No. 123, the Company's net income and earnings per
share at March 31, 1999 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
(net income in thousands)
<S> <C>
Net income:
As reported $ 581
Pro forma $ 360
Basic earnings per share
As reported $3.64
Pro forma $2.19
</TABLE>
The per share weighted average fair value of stock options granted during 1999
of $71.21, 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 4.65%
Expected life 12.9 years
Volatility 14.73%
</TABLE>
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
March 31, 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
- --------
During the first quarter of 1999 the Company began implementing its accelerated
expansion into the Monroe County area following the announced acquisition of one
of its most significant market competitors. The Company's 1999 plan includes
three main components (1) expand retail customer service delivery, (2) expand
commercial service staff, and (3) increase brand awareness in the marketplace.
Throughout the quarter the Company also began hiring and training to staff the
new offices in Greece, Irondequoit and Chili, expected to open in the second and
third quarters. This follows on the opening of the Webster office in 1998's
fourth quarter. In February the Company hired four commercial lending officers
and expanded its credit administration staff. Also in that month, the Company
began its brand awareness campaign with a series of television commercials that
are expected to continue throughout the year.
These plans come as a result of the Company's strategic planning process that
began in 1995 with Vision 2010 - Convenience, Technology, Superior Service,
Community Focus, Shareholder Return, and New Products.
As discussed at the Company's March shareholders' meeting, the costs for this
expansion precede the income generated. Through detailed planning and analysis,
management estimates these initiatives will reduce 1999's earnings per share
more than 15% from projections excluding these plans. However, these
initiatives are also expected to breakeven by their third year, and, by year
five, increase earnings per share 20% from projections excluding these plans.
At March 31, 1999 the Company's assets grew further to a record $433 million.
Total assets increased $4.7 million or 1.1% in the first quarter of 1999. Loans
increased $1.7 million or 0.5% while securities increased $.2 million or 0.3%.
During the same period, deposits increased $6.5 million or 1.9% and borrowings
(from the FHLB) decreased $2.3 million or 32.3%. Funds generated through deposit
inflows were used to increase loan originations, reduce FHLB borrowings and sell
federal funds.
Net income for the three-month period ended March 31, 1999 was consistent with
management's projections at $.6 million as compared to $1.0 million for the same
period in 1998. Basic earnings per share decreased by $2.66 or 42.2% from the
same period and fully diluted earnings per share decreased by $2.76 or 43.8%.
For the three months ended March 31, 1999, net interest income decreased $.3
million or 6.7% from the same period in 1998 and is reflective of the reduced
yields on earning assets following heavy repricing activity and a 75 basis point
prime rate drop in 1998.
The quality of the Company's assets continued to improve with non-performing
loans less than 1% of total loans at March 31, 1999. The allowance for loan
losses exceeds the balance of nonperforming loans at the period end. Other real
estate owned was $.1 million lower than the same period in 1998. As a result of
these trends the provision for loan loss declined to $.05 million versus $.3
million for the three-month periods ended March 31, 1999 and 1998, respectively.
Page 8
<PAGE>
Financial Condition and Results of Operations
- --------------------------------------------------
Asset growth during the first quarter of 1999 was slow and is consistent with
1998's trend. As of March 31, 1999, total assets of the Company were $432.8
million, up from $428.0 million at year end 1998. Cash and equivalents decreased
$4.9 million to $18.9 million. Securities showed a minor increase of $.2
million to $73.1 million. Excess liquidity of $6.5 million was sold in the form
of federal funds. Net loans increased $1.7 million to $310.1 million, and all
other assets rose $1.3 million to $23.7 million. As was the case in 1998, most
of the growth in the loan portfolio is anticipated to come in the second and
third quarters of 1999.
Total deposits at March 31, 1999 were $383.0 million and were up $6.5 million
from December 31, 1998. The Webster office contributed over half of the
quarter's deposit growth with $3.8 million in new balances. For the same period
borrowings from FHLB were down $2.3 million to $4.8 million. Other liabilities
increased by $1.0 million to $2.9 million. The decline in borrowings is a direct
result of deposit growth. Deposit growth in 1999 has come in interest-bearing
demand - up $8.1 million and time deposits - up $7.2 million. Deposit growth is
coming from a number of sources, including the Generations Gold suite of
accounts, Business Choice Sweep account, and "CD Specials". Non-interest
bearing demand and savings balances declined mostly due to the timing of
customer's tax payments at year end.
For the three months ending March 31, 1999, average interest earning assets,
increased $9.6 million to $393.1 million from $383.8 million for the year ended
December 31, 1998. The yields on these assets were 7.57% and 8.04%,
respectively; the decline resulting from loan refinancings due to 1998's
declining interest rate environment. For the same periods, average interest
bearing liabilities increased $15.7 million to $326.6 million from $310.9 for
the year ended December 31, 1998. Rates paid on these liabilities were 3.69%
and 4.00%, respectively. This 16 basis point drop in interest spread had a $.3
million negative impact on net interest income for the quarter ended March 31,
1999. In the first quarter of 1999 the Company's net interest margin declined
to 4.51% from 4.80% for the year ended December 31, 1998. This declining trend
in net interest margin and spread showed some leveling off following the last
prime rate drop in November 1998. However, interest spread and margin are
anticipated to drop further as the Company 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 March 31, 1999 increased $.4 million to $1.6
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, due to growth in assets under management.
Operating expenses increased $.9 million for the quarter ended March 31, 1999 to
$5.1 million versus $4.2 million for the 1998 first quarter. These increases
came in nearly all expense categories, reflecting growth in customers, employees
and banking offices. Marketing and public relations increased over 200% as a
result of the Company's television campaign begun in February.
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 three
months ended December 31, 1999 the Company generated $1.6 million in cash and
equivalents versus using $4.2 million for the same period in 1998.
Net cash from operating activities was $.7 million in 1999 as compared to $.4
million in 1998. Both the largest source and use of operating cash in 1999 and
1998 was mortgage banking activity. However, activity in 1999 was three times
that in 1998.
Page 9
<PAGE>
Cash was used in 1999 for investing activities (investments, loans and fixed
assets) as opposed to being a source in 1998 as a result of loan payoffs.
Financing activities provided cash of $3.2 million in 1999 versus using cash of
$6.7 million in 1998. In both periods, net time deposit growth provided the
bulk of the cash, yet in 1999 this was used to fund loans and sell federal
funds, while in 1998 the cash was used to pay demand deposits and repay FHLB
advances.
FHLB advances remain an important liquidity source for the Company. With $4.8
million outstanding at March 31, 1999 the Company had additional borrowing
capacity from the FHLB of $37.2 million. Secondarily, the Company opened a
liquidity source in 1998 through the sale of its CD's in the national brokered
market. Cash for growth in 1999 is expected to come from these two sources as
well as customer deposits as the Company expands into Monroe County.
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 policy limits while taking into
consideration, among other factors, the Company's overall credit, operating
income, operating cost, and capital profile. The Company's Asset/Liability
Committee (ALCO), which includes senior management and reports to the Board of
Directors, monitors and manages interest rate risk to maintain an acceptable
level of change to net interest income as a result of changes in interest rates.
Management of the Company's interest rate risk, requires the selection of
appropriate techniques and instruments to be utilized after considering the
benefits, costs and risk associated with available alternatives. Since the
Company does not utilize derivative instruments, management's techniques usually
consider one or more of the following: (1) interest rates offered on products,
(2) maturity terms offered on products, (3) types of products offered, and (4)
products available to the Company in the wholesale market such as advances from
the FHLB.
The Company uses an interest margin simulation model as 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.
Page 10
<PAGE>
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 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.
As of March 31, 1999 all capital adequacy requirements were met. Also, as of
March 31, 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. There are no conditions or events since that
notification that management believes have changed the Bank's category.
Allowance for Loan Losses and Non-Performing Assets
- ---------------------------------------------------------
Allowance for Loan Losses
- ----------------------------
Changes in the allowance for loan losses for the three month periods ended March
31, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------
1999 1998
----------- -------
<S> <C> <C>
Balance at beginning of period $ 3,283 3,153
Provision for loan losses 50 323
Loans charged off (204) (419)
Recoveries on loan previously charged off 169 111
----------- -------
Balance at end of period $ 3,298 $3,168
=========== =======
Allowance as a percentage of total period end loans 1.05% 1.06%
=========== =======
Allowance as a percentage of non performing loans 149.6% 83.9%
=========== =======
</TABLE>
At March 31, 1999, the recorded investment in loans that are considered impaired
totaled $1.9 million as compared to $2.1 million at December 31, 1998 and $3.2
million at March 31, 1998. The average recorded investment in impaired loans
during the three month periods ended March 31, 1999 and 1998 were approximately
$2.0 million and $3.2 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 $1.6
million to $2.2 million at March 31, 1999 as compared to $3.8 million at March
31, 1998. The decrease has come across all commercial loans and residential real
estate. 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 six parcels of property, all commercial, for
$1.6 million. The decline in other real estate owned from the same period in
1998 is a result of net liquidations of properties.
Page 11
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
March 31,
-------------------
1999 1998
----------- ------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 40 272
Real estate-commercial 93 203
Real estate-residential 23 18
Consumer 133 44
----------- ------
Total past due 90 days or more and
accruing 289 537
----------- ------
Loans in non-accrual status
Commercial, financial & agricultural 1,326 1,151
Real estate-commercial 240 1,390
Real estate-residential 350 698
Consumer - -
----------- ------
Total non-accrual loans 1,916 3,239
----------- ------
Total non-performing loans 2,205 3,776
----------- ------
Other real estate owned
Commercial 1,563 1,652
Residential - 7
----------- ------
Total other real estate owned 1,563 1,659
----------- ------
Total non-performing assets $ 3,768 5,435
=========== ======
Non performing loans to total period end loan 0.70% 1.26%
=========== ======
Non performing assets to total period end
loans and other real estate 1.17% 1.73%
=========== ======
<FN>
The Company has no restructured loans.
</TABLE>
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.
Page 12
<PAGE>
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 March 31, 1999 the Company had substantially completed all of the above
phases of its year 2000 compliance plan. Management expects all material year
2000 compliance items will be resolved no later than the second quarter of 1999.
Substantially all mission-critical systems were validated by year-end 1998. The
Company still has validation testing to complete on some non-critical systems.
Following validation, these systems will be implemented.
All of the remaining systems to be validated and 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.
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 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
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' 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
Page 13
<PAGE>
for completion by borrowers. The Bank has 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 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
completed testing with each of these vendors.
Management believes the Company's Year 2000 efforts constitute and important
technology project. They view these efforts as opportunities for technological
advancement, which will ultimately increase customer value.
Page 14
<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
(a) The annual meeting of stockholders of Canandaigua National
Corporation was held on March 10, 1999 for the following purpose:
Four directors were elected for a three-year term and
votes were cast as follows:
Votes
-------
Name For Withheld Abstain Against
- ----- ------- -------- ------- -------
Frank H. Hamlin 88,353 13,926 0 0
Stephen D. Hamlin 102,079 200 0 0
James S. Fralick 102,079 200 0 0
Daniel P. Fuller 102,079 200 0 0
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 15
<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)
May 13, 1999 /s/ George W. Hamlin, IV
------------ ------------------------
Date George W. Hamlin, IV, President
May 13, 1999 /s/ Gregory S. MacKay
------------ ---------------------
Date Gregory S. MacKay, Treasurer
Page 16
<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
December 31, 1994
(27) Financial Data Schedule
Page 17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 18,947
<INT-BEARING-DEPOSITS> 341
<FED-FUNDS-SOLD> 6,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 406
<INVESTMENTS-CARRYING> 72,718
<INVESTMENTS-MARKET> 73,540
<LOANS> 313,445
<ALLOWANCE> 3,298
<TOTAL-ASSETS> 432,759
<DEPOSITS> 383,001
<SHORT-TERM> 1,524
<LIABILITIES-OTHER> 2,910
<LONG-TERM> 3,313
<COMMON> 8,110
0
0
<OTHER-SE> 33,901
<TOTAL-LIABILITIES-AND-EQUITY> 432,759
<INTEREST-LOAN> 6,416
<INTEREST-INVEST> 947
<INTEREST-OTHER> 75
<INTEREST-TOTAL> 7,438
<INTEREST-DEPOSIT> 2,929
<INTEREST-EXPENSE> 80
<INTEREST-INCOME-NET> 4,429
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,142
<INCOME-PRETAX> 856
<INCOME-PRE-EXTRAORDINARY> 581
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 581
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 3.54
<YIELD-ACTUAL> 7.57
<LOANS-NON> 1,916
<LOANS-PAST> 289
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,283
<CHARGE-OFFS> 204
<RECOVERIES> 169
<ALLOWANCE-CLOSE> 3,298
<ALLOWANCE-DOMESTIC> 3,298
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
