UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 2, 1999
----- ---------------------------------
Common stock, $50.00 par 159,073
<PAGE>
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.
<PAGE>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 30, 1999
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 1999
and December 31, 1998. 1
Condensed consolidated statements of income for the three
month and six month periods ended June 30, 1999 and 1998. 3
Condensed consolidated statements of stockholders' equity
for the six month periods ended June 30, 1999 and 1998. 4
Condensed consolidated statements of cash flows
for the six month periods ended June 30, 1999 and 1998. 5
Notes to condensed consolidated financial statements
at June 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 12
----------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS 19
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998 (Unaudited)
(dollars in thousands, except per share amounts)
June 30, December 31,
Assets 1999 1998
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Cash and due from banks $ 21,884 23,892
Interest-bearing deposits with other financial institutions 106 314
Securities:
- Available for sale, at fair value 547 437
- Held-to-maturity (fair value of $73,629 in 1999 and
$71,850 in 1998) 73,678 72,479
Loans:
Commercial, financial & agricultural 49,995 43,260
Commercial mortgage 104,035 83,771
Residential mortgage 68,991 76,130
Consumer-indirect 94,141 84,370
Consumer-other 22,421 17,753
Other 1,562 3,516
Loans held for sale 2,959 2,969
---------- -------------
Total loans 344,104 311,769
Less: Allowance for loan losses (3,591) (3,283)
---------- -------------
Loans - net 340,513 308,486
Premises and equipment - net 12,771 11,468
Accrued interest receivable 2,265 2,244
Federal Home Loan Bank stock and Federal Reserve Bank stock 3,548 3,548
Other assets 6,395 5,179
---------- -------------
Total Assets $ 461,707 428,047
========== =============
<FN>
(Continued)
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998 (Unaudited)
(dollars in thousands, except per share amounts)
June 30, December 31,
----------
Liabilities and Stockholders' Equity 1999 1998
- ---------------------------------------------------------- ---------- -------------
<S> <C> <C>
Deposits:
Demand
Non-interest bearing $ 63,546 64,368
Interest bearing 70,357 56,877
Savings and money market 119,903 109,316
Time deposits 140,287 145,946
---------- -------------
Total deposits 394,093 376,507
FHLB advances 21,931 7,142
Accrued interest payable and other liabilities 3,473 1,920
---------- -------------
Total Liabilities $ 419,497 385,569
---------- -------------
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 26,576 26,569
Treasury stock at cost (3,135 shares in 1999 and 2,479
shares in 1998) (1,095) (835)
Accumulated other comprehensive income 130 145
---------- -------------
Total Stockholders' Equity 42,210 42,478
---------- -------------
Total Liabilities and Stockholders' Equity $ 461,707 428,047
========== =============
<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 six month periods ended June 30, 1999 and 1998
(Unaudited)
(dollars in thousands, except per share amounts)
Three months Six months
ended ended
June 30, June 30,
1999 1998 1999 1998
------ ----- ------- ------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $6,748 6,285 $13,164 13,116
Securities 940 995 1,887 1,989
Federal funds sold and other 83 5 158 38
------ ----- ------- ------
Total interest income 7,771 7,285 15,209 15,143
------ ----- ------- ------
Interest expense:
Deposits 3,033 2,587 5,962 5,024
Borrowings 95 465 175 1,138
------ ----- ------- ------
Total interest expense 3,128 3,052 6,137 6,162
------ ----- ------- ------
Net interest income 4,643 4,233 9,072 8,981
Provision for loan losses 446 106 496 429
------ ----- ------- ------
Net interest income after
provision for loan losses 4,197 4,127 8,576 8,552
------ ----- ------- ------
Other income:
Service charges on deposit accounts 602 466 1,102 777
Trust income 648 628 1,348 1,139
Net gain (loss) on sale of
mortgages 33 7 76 22
Other operating income 444 462 820 856
------ ----- ------- ------
Total other income 1,727 1,563 3,346 2,794
------ ----- ------- ------
Operating expenses:
Salaries & employee benefits 3,146 2,297 6,139 4,679
Occupancy expense 935 783 1,771 1,523
FDIC insurance 11 - 21 20
Marketing and public relations 291 112 544 187
Office supplies, printing and
postage 256 196 488 355
Professional 86 14 208 111
Other operating expenses 696 933 1,392 1,696
------ ----- ------- ------
Total operating expenses 5,421 4,335 10,563 8,571
------ ----- ------- ------
Income before income taxes 503 1,355 1,359 2,775
Income taxes 159 566 434 975
------ ----- ------- ------
Net income $ 344 789 $ 925 1,800
====== ===== ======= ======
Basic earnings per share $ 2.16 4.92 $ 5.80 11.21
====== ===== ======= ======
Diluted earnings per share $ 2.15 4.92 $ 5.79 11.21
====== ===== ======= ======
<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 six month periods ended June 30, 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 $14 - - - - (15) (15)
Net income - - 925 - - 925
-------
Total comprehensive
income 910
------------
Cash dividend - $5.75
per share - - (918) - - (918)
Purchase of 672 shares
of treasury stock - - - (265) - (265)
Sale of 16 shares
of treasury stock - - - 5 - 5
------------ ------- --------- --------- -------------- -------
Balance at June 30, 1999 8,110 8,489 26,576 (1,095) 130 42,210
============ ======= ========= ========= ============== =======
Balance at January 1, 1998 $ 8,110 8,489 24,742 (528) 119 40,932
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of taxes of $15 - - - - 23 23
Net income - - 1,800 - - 1,800
-------
Total comprehensive
income 1,823
------------
Cash dividend - $5.50
per share - - (883) - - (883)
Purchase of 95 shares
of treasury stock - - - (34) - (34)
Sale of 10 shares
of treasury stock - - - 3 - 3
------------ ------- --------- --------- -------------- -------
Balance at June 30, 1998 8,110 8,489 25,659 (559) 142 41,841
------------ ------- --------- --------- -------------- -------
<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 six month periods ended June 30, 1999 and 1998 (Unaudited)
(dollars in thousands)
1999 1998
--------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 925 1,800
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 972 937
Provision for loan losses 496 429
Deferred income taxes (132) (121)
Originations of loans held for sale (62,481) (46,437)
Proceeds from sale of loans held for sale 62,491 46,426
(Increase) decrease in accrued interest receivable
and other assets (690) (441)
Increase in accrued interest payable and
other liabilities 1,553 159
--------- --------
Net cash provided by operating activities 3,134 2,752
--------- --------
Cash flow from investing activities:
Purchase of FHLB stock - (430)
Securities held to maturity:
Proceeds from maturities and calls of securities 17,380 16,130
Purchases of securities (18,635) (16,165)
Loans (originated) repaid, net (33,248) 1,162
Fixed asset purchases - net (2,264) (801)
Investment in minority owned subsidiary (158) (495)
Proceeds from sale of other real estate 378 911
--------- --------
Net cash provided (used) by investing activities (36,547) 312
--------- --------
Cash flow from financing activities:
Net increase in demand, savings and short-
term deposits 23,245 4,046
Net increase (decrease) in time deposits (5,659) 7,251
Proceeds from FHLB advances 15,800 7,900
Principal repayments on FHLB advances (1,011) (20,012)
Proceeds from sale of treasury stock 5 3
Purchase of treasury stock (265) (34)
Dividends paid (918) (883)
--------- --------
Net cash provided (used) by financing activities 31,197 (1,729)
--------- --------
Net increase (decrease) in cash & cash equivalents (2,216) 1,335
Cash & cash equivalents - beginning of period 24,206 19,647
--------- --------
Cash & cash equivalents - end of period $ 21,990 20,982
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,123 6,147
========= ========
Income taxes $ 126 1,009
========= ========
Supplemental disclosure of non-cash investing
Activity:
Additions to other real estate acquired through
foreclosure, net of loans to facilitate sales $ 715 -
========= ========
<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 six-month periods
ended June 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 paid 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 June 30, 1999
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shareholders $ 344 159,245 $ 2.16
======
Effect of assumed exercise of stock options - 502
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 344 159,747 $ 2.15
======
For the three months ended June 30, 1998
Basic earnings per share:
Net income applicable to common shareholders $ 789 160,493 $ 4.92
======
Effect of assumed exercise of stock options - -
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 789 160,493 $ 4.92
======
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
Net Average Per
Income Shares Share
------- ------- ------
For the six months ended June 30, 1999
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shareholders $ 925 159,401 $ 5.80
======
Effect of assumed exercise of stock options - 251
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 925 159,652 $ 5.79
======
For the six months ended June 30, 1998
Basic earnings per share:
Net income applicable to common shareholders $ 1,800 160,528 $11.21
======
Effect of assumed exercise of stock options - -
------- -------
Diluted earnings per share:
Income available for common shareholders and
assumed exercise of stock options $ 1,800 160,528 $11.21
======
</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 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 for the six month period ended June 30, 1999 would have been reduced to
the pro forma amounts indicated below (net income in thousands):
Net income:
As reported $ 925
Pro forma $ 689
Basic earnings per share
As reported $ 5.80
Pro forma $ 4.32
The per share weighted average 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. Management
anticipates adopting the provision of this statement in 2001, however its impact
has not yet been evaluated.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations June 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 - President's Letter to Shareholders
- --------------------------------------------------
"August 2, 1999
To Our Shareholders:
For the first half of 1999 I report earnings per share of $5.79 compared
with $11.21 for the previous year. Despite this performance being half of last
year's for the second quarter, year-over-year, it does reconcile to our budget
plan for 1999 as being pretty much on track. In my interim letter to
Shareholders of June 7, 1999, I detailed our progress regarding a number of
initiatives underway to take advantage of market opportunities. Of course, all
of these initiatives involve immediate expense with revenues planned to cycle in
six to nine months later as newly garnered business in the form of loans and
deposits takes hold.
Our Webster-Penfield location continues to grow in deposits at the rate of
$1 million a month. Our storefront in Chili opened on schedule in early June
which is a part of a plaza which will be our permanent home after we gain access
to the former M&T space in early December for the purposes of remodeling and
establishing our permanent home in Chili Center. Our office in Greece opened
in June on time and is being flooded with new business housed in a splendid and
unique facility that we all can be proud of. We move full speed ahead at our
Irondequoit location planning for a mid-August opening date. We have
identified our temporary and final sites in Honeoye Falls by securing agreements
with respect to both in mid-July. Finally, we have a letter of intent
regarding a facility in Perinton which will come to fruition in early fall
provided all parties follow through with their commitments.
Our dividend of $5.75 per share, declared in July of 1999, brings us to a
total of $11.50 per share for the entire year compared with $11.00 for 1998.
This represents yet another increase in our distributions to you, which is
reflective of our strong capital position and growing prospects.
Page 8
<PAGE>
As of last month our insurance unit was fully operational with five markets
to draw from allowing us to offer a full range of insurance coverages directly
entitling us to a full commission. The labyrinth was far more extensive than
just getting licensed. Finding markets and underwriters that would do business
with a "brand new agency" turned out to run against the traditions of the
insurance industry which would consider dealing only with existing agencies
--------
rather than "de novo" agencies. This completes the fourth leg of our
financial stool consisting of comprehensive financial services for individuals
whether they be growing families or businesses.
It is absolutely astonishing to me as I travel with our new and old loan
officers throughout our broadening marketplace, how welcomed we are as the
locally owned, full service financial institution which is, as well, a community
bank. We have just concluded a three day strategic planning session where all
our current initiatives were reviewed and a number of new initiatives discussed
with over two dozen of our key staff and officers whose job it is to execute our
Strategic Plan. I am indeed very impressed with those recently new to our
company in their enthusiasm and skill level which they bring to our expansion
plans. Each of them identified us and committed to come with us because they
saw something in our organization and reputation which they strongly identified
with and continue to be committed to. This is an endorsement of a sort which
we take pride in and which will be the base of our success.
My report would not be complete without mentioning Congress which, at the
beginning of July, passed a financial reform bill in both houses. Now the
mischief begins as the two bills are reconciled in conference committees
throughout the summer. We are fortunate that the major pieces of our financial
plan have been placed in motion and, therefore, by definition are
"grandfathered" regardless of what may transpire in the lobbies of Congress.
We are in the 9th year of an economic expansion. The stock market
continues to out perform even the most seasoned expectations. The
international situation seems to have quieted as the Balkan crisis has passed
and the rest of the world goes through the usual adjustments required of any set
of economies adapting and adjusting to their new circumstances. Our prospects,
however, remain bright as our loan pipeline is filled to the top and, if booked
in a timely fashion during the next quarter, will propel our financial
projections to an on-budget performance by the end of the year as planned.
Even if there are time delays, our prospects remain bright for our expansion and
growth into the next century.
Summer greetings to all!
Very truly yours,
/s/ George W. Hamlin, IV
Financial Condition and Results of Operations
- --------------------------------------------------
Three months ended June 30, 1999
- -------------------------------------
Asset growth during the second quarter of 1999 increased significantly as the
Company's expansion into the Rochester market took hold. As of June 30, 1999,
total assets of the Company were $461.7 million, up from $432.8 million at March
31, 1999. Cash and equivalents increased $2.7 million to $22.0 million.
Securities showed a minor increase of $1.1 million to $74.2 million. Loan
growth for the quarter exceeded deposit inflows resulting in the liquidation of
federal funds during the quarter. Net loans increased $30.4 million to $340.5
million, and all other assets rose $.7 million to $25.0 million.
Total deposits at June 30, 1999 were $394.1 million and were up $11.1 million
from March 31, 1999. Our newest community banking offices in Webster/Penfield,
Greece and Chili accounted for $6.7 million of the quarter's deposit growth.
Deposit growth is coming from a number of sources, including the Generations
Gold suite of accounts, Business Choice Sweep account, demand deposits and "CD
Specials". Time deposit balances declined mostly due to reductions in municipal
accounts. For the same period borrowings from FHLB were up $17.1 million to
$21.9 million as loan growth outpaced deposit growth. Other liabilities
increased by $.5 million to $3.5 million.
Page 9
<PAGE>
The quality of the Company's assets continued to improve during the quarter with
non-performing loans less than 1% of total loans at June 30, 1999. Other real
estate owned was $.4 million higher than at March 31, 1999 due to the Bank's
foreclosure on a commercial real estate loan formerly classified as
non-performing. As a result of the loan portfolio's growth the provision for
loan loss increased to $.4 million for the quarter versus $.05 million for the
first quarter of 1999.
Net income for the three-month period ended June 30, 1999 was consistent with
management's projections at $.3 million as compared to $.8 million for the same
period in 1998. Basic earnings per share decreased by $2.76 or 56.1% from the
same period and fully diluted earnings per share decreased by $2.77 or 56.2%.
For the three months ended June 30, 1999, net interest
income increased $.4 million or 9.7% 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.
For the three months ending June 30, 1999, average interest earning assets,
increased $18.0 from March 31, 1999 and $34.3 million from June 30, 1998.
However, the yields on these assets were 7.56%, 7.57% and 7.73%, respectively,
the decline resulting from loan refinancings due to 1998's declining interest
rate environment. For the same periods, average interest bearing liabilities
increased $14.2 million and $36.3 million. Rates paid on these liabilities
during the same three periods were 3.67%, 3.69% and 4.01%, respectively. This
17 basis point increase in interest spread for the June 30, 1999 versus June 30,
1998 quarters is reflective of both asset and liability yield reductions. In
the second quarter of 1999 the Company's net interest margin rose to 4.52% from
4.51% at March 31, 1999 and 4.49% at June 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 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 June 30, 1999 increased $.1 million to $1.7
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 $1.1 million for the quarter to $5.4 million versus
$4.3 million for the 1998 second 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 1999.
The Company's effective tax rate for the quarter ended June 30, 1999 declined to
31.6% from 41.8% for the same period of 1998. The second quarter of 1998 showed
a higher than normal effective rate for the Company due to the recognition of
non-deductible permanent differences.
Six months ended June 30, 1999
- -----------------------------------
Total assets of the Company were $461.7 million, up from $428.0 million at
December 31, 1998. Cash and equivalents decreased $2.2 million to $22.0 million.
Securities showed a minor increase of $1.3 million to $74.2 million. Net loans
increased $32.0 million to $340.5 million, and all other assets rose $2.5
million to $25.0 million.
Total deposits were up $17.6 million from December 31, 1998, with
Webster/Penfield, Greece and Chili accounting for $10.5 million of the year's
deposit growth. For the first six months of 1999 borrowings from FHLB were up
$14.8 million to $21.9 million as loan growth outpaced deposit growth. Other
liabilities increased by $1.5 million to $3.5 million.
Page 10
<PAGE>
Net income for the six-month period ended June 30, 1999 was consistent with
management's projections at $.9 million as compared to $1.8 million for the same
period in 1998. Basic earnings per share decreased by $5.41 or 48.3% from the
same period and fully diluted earnings per share decreased by $5.42 or 49.3%.
For the six months ended June 30, 1999, net interest income increased $.1
million or 1.0% from the same period in 1998, reflecting the growth in the loan
portfolio, offset by their reduced yields.
For the six months ending June 30, 1999, average interest earning assets,
increased $25.1 million to $402.2 from $377.1 million for the six months ended
June 30, 1998. However the yields on these assets were 7.56% and 8.03%,
respectively. For the six months ended June 30, 1999, average interest bearing
liabilities increased $27.1 million as compared to the comparable prior year
period Rates paid on these liabilities were 3.68% and 4.02%, respectively. This
13 basis point drop in interest spread for the June 30, 1999 versus June 30,
1998 six-month periods had a $.7 million negative impact on net interest income
for the six months and was made up by volume growth. In the first half of 1999
the Company's net interest margin declined to 4.51% from 4.76% at June 30, 1998.
Other income for the six months ended June 30, 1999 increased $.5 million to
$3.3 million over the same period in 1998. The increase was reflected in
service charges and trust income.
Operating expenses increased $2.0 million for the six months to $10.6 million
versus $8.6 million for the 1998. 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 six-months ended June 30, 1999 declined
to 31.9% from 35.1% for the same period of 1998. The first half of 1998 showed
a higher than normal 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 six
months ended June 30, 1999 the Company used $2.2 million in cash and equivalents
versus generating $1.3 million for the same period in 1998.
Net cash from operating activities was $3.1 million in 1999 as compared to $2.8
million in 1998. Both the largest source and use of operating cash in 1999 and
1998 was mortgage banking activity.
$36.5 million in cash was used in 1999 for investing activities (investments,
loans and fixed assets) as opposed to being a minor source in 1998, primarily as
a result of loan payoffs.
Financing activities provided cash of $31.2 million in 1999 versus using cash of
$1.7 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 $21.9
million outstanding at June 30, 1999 the Company had additional borrowing
capacity from the FHLB of $20.1 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 for the remainder 1999
is expected to come from these two sources as well as customer deposits as the
Company expands into Monroe County.
Page 11
<PAGE>
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. In late June 1999 the Federal Reserve Board (FRB)
raised its target for the Federal Funds rate 1/4%, which was immediately
followed by a 1/4% rise in Wall Street Banks' prime rate. Some financial
analysts believe the FRB will raise rates again before year-end by another 1/4%
to 1/2%. Management estimates that such increases would have minimal impact on
the Company's net interest margin.
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.
Page 12
<PAGE>
As of June 30, 1999 all capital adequacy requirements were met. Also, as of
June 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. 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 six-month periods ended June
30, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------
1999 1998
---------- -------
<S> <C> <C>
Balance at beginning of period $ 3,283 3,153
Provision for loan losses 496 429
Loans charged off (461) (637)
Recoveries on loan previously charged off 273 308
---------- -------
Balance at end of period $ 3,591 $3,253
========== =======
Allowance as a percentage of total period end loans 1.04% 1.06%
========== =======
Allowance as a percentage of non-performing loans 255.2% 100.9%
========== =======
</TABLE>
At June 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 $1.8
million at June 30, 1998. The average recorded investment in impaired loans
during the six month periods ended June 30, 1999 and 1998 were approximately
$1.7 million and $3.0 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 $1.8
million to $1.4 million at June 30, 1999 as compared to $3.2 million at June 30,
1998. The decrease has come from commercial loans. Management attributes the
decrease to a combination of strict underwriting procedures, strong collection
efforts and a relatively stable economic cycle in the Company's market.
Other real estate owned consists of four parcels of property, all commercial,
for $2.0 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 four properties in 1999.
Page 13
<PAGE>
Non-Performing Assets
- ----------------------
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
June 30,
------------------
1999 1998
---------- ------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 13 429
Real estate-commercial 86 135
Real estate-residential 43 73
Consumer 86 29
---------- ------
Total past due 90 days or more and
accruing 228 666
---------- ------
Loans in non-accrual status
Commercial, financial & agricultural 625 611
Real estate-commercial 180 1,519
Real estate-residential 374 427
Consumer - -
---------- ------
Total non-accrual loans 1,179 2,557
---------- ------
Total non-performing loans 1,407 3,223
---------- ------
Other real estate owned
Commercial 2,008 1,601
Residential - -
---------- ------
Total other real estate owned 2,008 1,601
---------- ------
Total non-performing assets $ 3,415 4,824
========== ======
Non performing loans to total loans period end 0.41% 1.05%
========== ======
Non performing assets to total loans and
other real estate at period end 0.99% 1.56%
========== ======
<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 14
<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.
Significant 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 June 30, 1999 the Company had substantially completed all of the above
phases of its year 2000 compliance plan. All material year 2000 compliance items
were completed by June 30, 1999. Substantially all mission-critical systems
were validated by year-end 1998. Validation testing on a few non-critical
systems remains. 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 was 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 15
<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 an important
technology project. They view these efforts as opportunities for technological
advancement, which will ultimately increase customer value.
Page 16
<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 17
<PAGE>
SIGNATURES
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANANDAIGUA NATIONAL CORPORATION
----------------------------------
(Registrant)
August 12, 1999 /s/ George W. Hamlin, IV
--------------- ------------------------
Date George W. Hamlin, IV, President
August 12, 1999 /s/ Gregory S. MacKay
--------------- ---------------------
Date Gregory S. MacKay, Treasurer
Page 18
<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 19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CAPTION>
<S>
<C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 21,884
<INT-BEARING-DEPOSITS> 106
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 547
<INVESTMENTS-CARRYING> 73,678
<INVESTMENTS-MARKET> 73,629
<LOANS> 344,104
<ALLOWANCE> 3,591
<TOTAL-ASSETS> 461,707
<DEPOSITS> 394,093
<SHORT-TERM> 18,624
<LIABILITIES-OTHER> 3,473
<LONG-TERM> 3,307
<COMMON> 8,110
0
0
<OTHER-SE> 34,100
<TOTAL-LIABILITIES-AND-EQUITY> 461,707
<INTEREST-LOAN> 13,164
<INTEREST-INVEST> 1,887
<INTEREST-OTHER> 158
<INTEREST-TOTAL> 15,209
<INTEREST-DEPOSIT> 5,962
<INTEREST-EXPENSE> 175
<INTEREST-INCOME-NET> 9,072
<LOAN-LOSSES> 496
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,563
<INCOME-PRETAX> 1,359
<INCOME-PRE-EXTRAORDINARY> 434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 925
<EPS-BASIC> 5.80
<EPS-DILUTED> 5.79
<YIELD-ACTUAL> 7.56
<LOANS-NON> 1,179
<LOANS-PAST> 228
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,283
<CHARGE-OFFS> 461
<RECOVERIES> 273
<ALLOWANCE-CLOSE> 3,591
<ALLOWANCE-DOMESTIC> 3,591
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
