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, 2000
---------------
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
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(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 4, 2000
----- ---------------------------------
Common stock, $50.00 par 158,497
SAFE HARBOR STATEMENT
-----------------------
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: This report contains certain "forward-looking statements" intended to
qualify for 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
JUNE 30, 2000
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 2000
and December 31, 1999. 1
Condensed consolidated statements of income for the three and six
month periods ended June 30, 2000 and 1999. 3
Consolidated statements of stockholders' equity
for the six month periods ended June 30, 2000 and 1999. 4
Consolidated statements of cash flows for the six
month periods ended June 30, 2000 and 1999. 5
Notes to financial statements
at June 30, 2000. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
This information is incorporated by reference
in Part I, Item 2, Interest Rate Sensitivity and
--------------------------------
Asset/Liability Management Review 11
----------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS 16
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999 (unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
---------- -------------
Assets 2000 1999
------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Cash and due from banks $ 25,416 26,801
Interest-bearing deposits with other financial institutions 62 33
Securities:
- Available for sale, at fair value 718 528
- Held-to-maturity (fair value of $81,352 in 2000 and
$74,805 in 1999) 81,953 75,336
Loans:
Commercial, financial & agricultural 61,586 62,491
Commercial mortgage 176,599 141,255
Residential mortgage 75,690 69,862
Consumer-auto indirect 105,233 103,605
Consumer-other 18,110 18,561
Other 2,092 2,097
Loans held for sale 3,298 492
---------- -------------
Total loans 442,608 398,363
Less: Allowance for loan losses (4,586) (4,136)
---------- -------------
Loans - net 438,022 394,227
Premises and equipment - net 14,783 13,438
Accrued interest receivable 2,953 2,682
Federal Home Loan Bank stock and Federal Reserve Bank stock 2,998 3,548
Other assets 6,361 5,542
---------- -------------
Total Assets $ 573,266 522,135
========== =============
<FN>
(Continued)
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999 (unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
---------- -------------
Liabilities and Stockholders' Equity 2000 1999
---------------------------------------------------------- ---------- -------------
<S> <C> <C>
Deposits:
Demand
Non-interest bearing $ 76,096 74,630
Interest bearing 55,316 46,490
Savings and money market 173,770 156,108
Time deposits 202,153 177,062
---------- -------------
Total deposits 507,335 454,290
Borrowings 19,767 22,218
Accrued interest payable and other liabilities 2,943 3,150
---------- -------------
Total Liabilities $ 530,045 479,658
---------- -------------
Stockholders' Equity:
Common stock, $50 par value; 240,000 shares authorized;
162,208 shares issued in 2000 and 1999 8,110 8,110
Additional paid-in capital 8,508 8,506
Retained earnings 27,827 27,087
Treasury stock at cost (3,711 shares in 2000 and
3,725 in 1999) (1,343) (1,348)
Accumulated other comprehensive income 119 122
---------- -------------
Total Stockholders' Equity 43,221 42,477
---------- -------------
Total Liabilities and Stockholders' Equity $ 573,266 522,135
========== =============
<FN>
See notes to financial statements.
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six month periods ended June 30, 2000 and 1999 (Unaudited)
(dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 9,252 6,748 $17,642 13,164
Securities 1,125 940 2,150 1,887
Other 45 83 47 158
------- ------ ------- -------
Total interest income 10,422 7,771 19,839 15,209
------- ------ ------- -------
Interest expense:
Deposits 4,261 3,033 7,943 5,962
Borrowings 390 95 803 175
------- ------ ------- -------
Total interest expense 4,651 3,128 8,746 6,137
------- ------ ------- -------
Net interest income 5,771 4,643 11,093 9,072
Provision for loan losses 308 446 558 496
------- ------ ------- -------
Net interest income after provision for
loan losses 5,463 4,197 10,535 8,576
------- ------ ------- -------
Other income:
Service charges on deposit accounts 786 602 1,514 1,102
Trust income 791 648 1,622 1,348
Net gain on sale of mortgage loans 2 33 3 76
Other operating income 562 571 982 1,041
------- ------ ------- -------
Total other income 2,141 1,854 4,121 3,567
------- ------ ------- -------
Operating expenses:
Salaries and employee benefits 3,518 3,146 7,077 6,139
Occupancy 1,162 935 2,217 1,771
Marketing and public relations 263 291 511 544
Office supplies, printing and postage 228 256 510 488
FDIC insurance 23 11 45 21
Other operating expenses 1,078 909 2,122 1,821
------- ------ ------- -------
Total operating expenses 6,272 5,548 12,482 10,784
------- ------ ------- -------
Income before income taxes 1,332 503 2,174 1,359
Income taxes 260 159 490 434
------- ------ ------- -------
Net income $ 1,072 $ 344 $ 1,684 $ 925
======= ====== ======= =======
Basic earnings per share $ 6.76 $ 2.16 $ 10.63 $ 5.80
======= ====== ======= =======
Diluted earnings per share $ 6.72 $ 2.15 $ 10.56 $ 5.79
======= ====== ======= =======
<FN>
See notes to 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, 2000 and 1999 (Unaudited)
(dollars in thousands, except per share data)
Accumulated
Additional Other
Common Paid in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
------------ ------- --------- --------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ 8,110 8,506 27,087 (1,348) 122 42,477
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of taxes of $4 - - - - (3) (3)
Net income - - 1,684 - - 1,684
-------
Total comprehensive
income 1,681
------------
Cash dividend - $5.95
per share - - (944) - - (944)
Sale of 14 shares
of treasury stock - 2 - 5 - 7
------------ ------- --------- --------- -------------- -------
Balance at June 30, 2000 8,110 8,508 27,827 (1,343) 119 43,221
============ ======= ========= ========= ============== =======
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
============ ======= ========= ========= ============== =======
<FN>
See notes to 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, 2000 and 1999 (Unaudited)
(dollars in thousands)
2000 1999
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,684 $ 925
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation, amortization and accretion 944 972
Provision for loan losses 558 496
Deferred income taxes (193) (132)
Originations of loans held for sale (30,220) (62,481)
Proceeds from sale of loans held for sale 27,414 62,491
Increase in accrued interest receivable
and other assets (966) (690)
Increase (decrease) in accrued interest payable and
other liabilities (207) 1,553
--------- ---------
Net cash provided (used) by operating activities (986) 3,134
--------- ---------
Cash flow from investing activities:
Sale of FHLB and FRB stock - net 550 -
Securities held to maturity:
Proceeds from maturities and calls 34,143 17,380
Purchases (40,706) (18,635)
Loans originated - net (41,547) (33,248)
Fixed asset purchases - net (2,459) (2,264)
Investment in minority owned entity (21) (158)
Proceeds from sale of other real estate 13 378
--------- ---------
Net cash used by investing activities (50,027) (36,547)
--------- ---------
Cash flow from financing activities:
Net increase in demand, savings and money
market deposits 27,954 23,245
Net increase (decrease) in time deposits 25,091 (5,659)
Proceeds from borrowings 270 15,800
Principal repayments on borrowings (2,721) (1,011)
Proceeds from sale of treasury stock 7 5
Purchase of treasury stock - (265)
Dividends paid (944) (918)
--------- ---------
Net cash provided by financing activities 49,657 31,197
--------- ---------
Net decrease in cash & cash equivalents (1,356) (2,216)
Cash & cash equivalents - beginning of period 26,834 24,206
--------- ---------
Cash & cash equivalents - end of period $ 25,478 $ 21,990
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,260 $ 6,123
========= =========
Income taxes $ 719 $ 126
========= =========
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 financial statements
</TABLE>
Page 5
<PAGE>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to 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, 1999 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 and six-month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. 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, 1999.
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 $5.95 per share dividend on common stock on
July 12, 2000, payable August 2, 2000 to shareholders of record July 12, 2000.
The Company also declared a semi-annual $5.95 per share dividend on common stock
on January 12, 2000, payable February 1, 2000 to shareholders of record January
12, 2000.
(3) Earnings Per Share
--------------------
Basic earnings per common share is calculated by dividing net income available
to common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share includes the maximum dilutive
effect of stock issueable upon conversion of stock options. Calculations for the
three and six month periods ended June 30, 2000 and 1999 follow (dollars in
thousands, except share data):
<TABLE>
<CAPTION>
For the three months ended June 30, 2000 1999
-------- -------
<S> <C> <C>
Basic Earnings Per Share:
Net income applicable to common shareholders $ 1,072 344
Weighted average common shares outstanding 158,495 159,245
-------- -------
Basic earnings per share: $ 6.76 2.16
======== =======
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 1,072 344
Weighted average common shares outstanding 158,495 159,245
Effect of assumed exercise of stock options 1,056 502
-------- -------
Total 159,551 159,747
-------- -------
Diluted earnings per share: $ 6.72 2.15
======== =======
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30, 2000 1999
-------- -------
<S> <C> <C>
Basic Earnings Per Share:
Net income applicable to common shareholders $ 1,684 925
Weighted average common shares outstanding 158,489 159,401
-------- -------
Basic earnings per share: $ 10.63 5.80
======== =======
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 1,684 925
Weighted average common shares outstanding 158,489 159,401
Effect of assumed exercise of stock options 1,010 251
-------- -------
Total 159,499 159,652
-------- -------
Diluted earnings per share: $ 10.56 5.79
======== =======
</TABLE>
(4) Stock Option Plan
-------------------
The Company's incentive stock option program for employees authorizes grants of
options to purchase up to 16,000 shares of common stock. At its March 2000
meeting, the Board of Directors granted, effective January 1, 2000, 1,486
non-qualified options to management under the Company's incentive compensation
plan for 1999's performance. The options were granted with an exercise price
equal to the estimated fair value of the common stock on the grant date. The
options are exerciseable at varying times up to sixteen years. The options are
fully vested and generally expire at the holder's retirement.
The Company applies the intrinsic value-based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its stock options in the condensed consolidated statement of
income. Had compensation cost been determined using the fair value at the grant
date for stock option awards, consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (dollars in thousands, except share data):
<TABLE>
<CAPTION>
For the six months ended June 30, 2000 1999
------ -----
<S> <C> <C>
Net income:
As reported $1,684 $ 925
Pro forma 1,552 689
Earnings per share:
As reported:
Basic $10.63 $5.80
Diluted 10.56 5.79
Pro forma:
Basic $ 9.79 $4.32
Diluted 9.72 4.31
</TABLE>
The weighted average fair value of options granted during 2000 and 1999 was
$122.56 and $71.21, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
Grant year 2000 1999
----------- -----------
<S> <C> <C>
Dividend yield 2.72% 3.09%
Risk free interest rate 6.45% 4.65%
Life 11.4 years 12.9 years
Volatility 14.39% 14.73%
</TABLE>
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
June 30, 2000
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, 1999
contained in the Company's Form 10-K and includes certain known trends, events
and uncertainties that are reasonably expected to have a material effect on the
Company's financial position or operating results.
Overview
--------
The Company continues to show positive financial developments from its
accelerated expansion into the Monroe County area, which includes these main
components (1) expansion of retail customer service delivery, (2) increase in
the number of commercial services staff, (3) expansion of Trust and Investment
services and (4) increasing brand awareness in the marketplace.
Comparing the six month period ended June 30, 2000 with the same period in 1999,
the Company showed a 24.2% increase in assets, 28.7% increase in deposits, 20.4%
increase in operating revenue (net interest income before provision plus other
income), and a 82.1% increase in net income. Trust assets under administration
grew during this same period by 31.5%.
At June 30, 2000 the Company had reached its year-end targets for earning asset
portfolios and total assets. As a result, the Company is focusing on enhancing
existing customer relationships though sales of deposit-based and fee income
products. Asset growth in the second half of 2000 is anticipated to be
substantially less than the preceding six months.
Financial Condition and Results of Operations
--------------------------------------------------
Three months ended June 30, 2000
-------------------------------------
Assets grew in the second quarter, continuing the trend set in 1999. As of June
30, 2000, total assets of the Company were $573.3 million, up from $556.5
million at March 31, 2000. Cash and equivalents increased $0.3 million to $25.4
million, due to increased cash reserve requirements associated with deposit
growth. During the quarter, municipalities reduced their deposits for seasonal
cash flow needs, resulting in a corresponding reduction in the Company's
security portfolio used to collateralize these deposits. Securities decreased
$7.2 million to $82.3 million. Net loans increased $23.6 million to $438.0
million, and all other assets rose $0.1 million to $27.1 million, reflective of
earning asset and branch network growth.
Total deposits at June 30, 2000 were $507.3 million and were up $26.4 million
from June 30, 1999. The newest six offices contributed $15.5 million of the
quarter's deposit growth. In addition, the Company sold $10.0 million of
nationally marketed time deposits. The growth in deposits was used to fund the
quarter's loan portfolio growth. Overall deposit growth during the quarter came
almost entirely from interest-bearing accounts. Consumers are opting for higher
rate time deposits during this rising interest rate environment. For the same
period borrowings (primarily from the FHLB) were down $10.0 million to $19.8
million. Other liabilities decreased by $0.7 million to $2.9 million, largely
due to cash payouts on management's Phantom Stock and Stock Appreciation Rights.
Net interest income, accounting for nearly 25% of the Company's revenue,
increased $1.1 million or 24.3% for the quarter over the same quarter in 1999.
For the quarter ended June 30, 2000, average interest earning assets, increased
$115.4 million to $526.6 million from $411.2 million for the 1999 quarter. The
yields on these assets were 7.92% and 7.56%, respectively; the increase
resulting from an overall rise in general interest rates, following the Federal
Reserve Board's rate increases during the last twelve months. For the same
periods, average interest bearing liabilities increased $107.0 million to $447.8
million from $340.8. Rates
Page 8
<PAGE>
paid on these liabilities were 4.15% and 3.67%, respectively, also reflecting
rate increases. This 12 basis point drop in interest spread had a $.1 million
negative impact on net interest income for the quarter ended June 30, 2000. The
growth in interest earnings assets and interest bearing liabilities had a $1.2
million positive impact on net interest income. In the second quarter of 2000
the Company's net interest margin declined to 4.38% from 4.52% for the same
quarter in 1999. This declining trend in net interest margin is expected to
continue through 2000 as market interest rate increases will drive up the
Company's funding costs faster than its asset yields. 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, 2000 increased $.3 million to $2.1
million over the same quarter in 1999. The increase was reflected in service
charges-attributed to increased transaction volume and the number of customer
accounts and trust income-attributed to growth in assets under management. Net
gain on the sale of mortgage loans and other operating income declined for 2000
as a result of a reduction in mortgage banking operations due to the rising
interest rate environment compared to 1999. Considering the increasing interest
rate environment, management anticipates lower mortgage banking income in 2000
than in 1999.
Operating expenses increased $0.8 million for the quarter ended June 30, 2000 to
$6.3 million versus $5.5 million for the 1999 second quarter. The increase came
in nearly all expense categories, reflecting growth in customers, employees and
banking offices.
The Company's quarterly effective tax rate was 19.5% in 2000 versus 31.6% in
1999. The reduction in the tax rate is due to an increase in non-taxable
investment income from a larger average portfolio balance ($48.2 million in 2000
versus $39.7 million in 1999)
Six months ended June 30, 2000
-----------------------------------
Assets grew in the first half of 2000 by $51.1 million. Cash and equivalents
decreased $1.4 million to $25.5 million, resulting from the Company's reduced
holdings following its cash reserve buildup for the century date changeover.
Securities increased $6.8 million to $82.7 million to allow for
collateralization of municipal deposits. Net loans increased $43.8 million to
$438.0 million, and all other assets rose $1.9 million to $27.1 million.
Total deposits at June 30, 2000 were up $53.0 million from December 31, 1999.
The newest six offices contributed $22.5 million of the year's deposit growth.
In addition, the Company sold $23.8 million of nationally marketed time
deposits. For the same period borrowings (primarily from the FHLB) were down
$2.5 million. Other liabilities decreased by $0.2 million. The increase in
deposits was used to fund loan and investment growth.
Net interest income grew $2.0 million or 22.3% to $11.1 million for first six
months of 2000 versus the same period in 1999. For the six months ended June
30, 2000, average interest earning assets, increased $105.3 million to $507.4
million from $402.1 million for the 1999 first half. The yields on these assets
were 7.82% and 7.56%, respectively. For the same periods, average interest
bearing liabilities increased $97.8 million to $431.5 million from $333.7
million. Rates paid on these liabilities were 4.05% and 3.68%. This 11 basis
point drop in interest spread had a $.1 million negative impact on net interest
income for the six months ended June 30, 2000. The growth in interest earnings
assets and interest bearing liabilities had a $2.1 million positive impact on
net interest income. In the first half of 2000 the Company's net interest
margin declined to 4.37% from 4.51% for the same half in 1999.
Other income for the six months ended June 30, 2000 increased $0.6 million over
the same period in 1999. The increase was reflected in service
charges-attributed to increased transaction volume and the number of customer
accounts and trust income-attributed to growth in assets under management. Net
gain on the sale of mortgage loans and other operating income declined for 2000
as a result of a reduction in mortgage banking operations due to the rising
interest rate environment compared to 1999.
Page 9
<PAGE>
Operating expenses increased $1.7 million for the six months ended June 30, 2000
to $12.5 million versus $10.8 million for the 1999 first half. The increase
came in nearly all expense categories, reflecting growth in customers, employees
and banking offices.
Over the past several years, the Company's operating efficiency (as measured by
the efficiency ratio has declined. For the six months ended June 30, 2000 this
ratio was 82.0% compared to peers with a ratio in the 50% to 60% range. In an
effort to address the Company's high efficiency ratio and enhance customer value
and shareholder value, the Company has contracted with a consultants to assist
in improving efficiency and operating practices. This project is expected to
last through the remainder of the year. Management anticipates the financial
benefits of this project will take hold in 2001.
The Company's effective tax rate was 22.5% in 2000 versus 31.9% in 1999. The
reduction in the tax rate is due to an increase in the non-taxable investment
income from a larger average portfolio balance ($47.1 million in 2000 versus
$39.0 million in 1999)
Liquidity
---------
The Board of Directors has set general liquidity standards for the Bank to meet
which can be summarized 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, 2000 the Company used $1.3 million in cash and equivalents
versus $2.2 million for the same period in 1999. The overall decrease in cash
and equivalents in 2000 is related to a reduction in built-up cash reserves
associated with the century date change. The Company held excess currency for
the benefit of its customers.
Net cash used in operating activities was $1.0 million in 2000. In the first
half of 1999 the Company generated $3.1 million from operating activities. Both
the largest source and use of operating cash in 2000 and 1999 were mortgage
banking activity. However, activity in 2000 was less than half of 1999's,
reflective of a slow down in the mortgage banking business.
Cash used by investing activities increased in 2000 to $50.0 million from $36.5
million in 1999. The increase in investing activities came from a combination
of investment and loan growth. The Company's fixed asset investing activities
continued as future offices are under renovation.
Cash provided by financing activities was $49.6 million in 2000 versus of $31.2
million in 1999. Deposits continue to be the Company's main source of
financing, with borrowings contributing a lesser amount.
The Company has two primary sources of non-customer (wholesale) liquidity: the
Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New
York. At June 30, 2000 residential mortgage loans with a carrying value of
approximately $43.4 million were pledged as collateral for the Bank's $23.6
million advances and letters of credit from the Federal Home Loan Bank.
Approximately $13.4 million was available for additional borrowing. Indirect
automobile loans with a carrying value of approximately $101.0 million were
pledged as collateral for a $80.8 million line of credit from the Federal
Reserve Bank of New York.
Secondarily, the Company has a liquidity source through the sale of its time
deposits in the national brokered market. This source is used from time to time
to manage both liquidity and interest rate risk as conditions may require.
Nationally marketed time deposits stood at $33 million at June 30, 2000 versus
$13 million at June 30, 1999.
For the remainder of 2000, financing for growth is expected to come from both
customer and wholesale sources. Customer deposit growth is mainly expected to
come from Monroe County sources.
Page 10
<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 is composed of members of 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 and brokered time deposits.
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 over a twelve month period. 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.
There has been no significant change in the Company's interest rate risk profile
since December 31, 1999. However, net interest earnings projections reflect a
decline when applying the expected rising interest rate environment as of June
30, 2000.
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
this measurement since December 31, 1999.
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. Quantitative measures established by regulation
to ensure capital adequacy require the Company and Bank to maintain minimum
amounts and ratios.
Page 11
<PAGE>
As of June 30, 2000, 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. However, the Bank's asset
growth in 2000 is anticipated to exceed its capital formation, which will result
in a continuing trend towards declining capital ratios. Management will closely
monitor capital levels at the Bank.
<PAGE>
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, 2000 and 1999 follow (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
2000 1999
---------- ------
<S> <C> <C>
Balance at beginning of period $ 4,136 3,283
Provision for loan losses 558 496
Loans charged off (420) (461)
Recoveries on loan previously charged off 312 273
---------- ------
Balance at end of period $ 4,586 3,591
========== ======
Allowance as a percentage of total period end loans 1.04% 1.04%
========== ======
Allowance as a percentage of non performing loans 111.3% 255.2%
========== ======
</TABLE>
The increase in the provision for loan losses from first half of 1999 to the
first half of 2000 is related to the growth in the loan portfolio. During the
first half of 1999, the loan portfolio increased $32.3 million, while in the
first half of 2000, the loan portfolio increased $44.2 million.
At June 30, 2000, the recorded investment in loans that are considered impaired
totaled $3.2 million as compared to $1.6 million at December 31, 1999 and $1.2
million at June 30, 2000. The average recorded investment in impaired loans
during the six month periods ended June 30, 2000 and 1999 were approximately
$2.5 million and $1.7 million, respectively. For those same periods interest
income recognized on impaired loans was not material.
Total non-performing loans increased over the twelve month period by $2.7
million to $4.1 million at June 30, 2000 as compared to $1.4 million at June 30,
1999. The increase has come primarily from commercial real estate loans and
mainly attributable to two relationships. The borrowers' loans are fully
secured by real estate. Management expects these loans will be brought to
performing status or liquidated by the borrower. Total non-performing loans
stand at less than 1% of the total loan portfolio at June 30, 2000 and 1999.
At June 30, 2000, other real estate owned consisted of three commercial real
estate parcels, totaling $1.6 million. This compares to four commercial real
estate parcels totaling $2.0 million at June 30, 2000. Management continues
efforts to liquidate these assets.
Page 12
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
June 30,
-------------------
2000 1999
---------- -------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ - $ 13
Real estate-commercial 786 86
Real estate-residential - 43
Consumer 116 86
---------- -------
Total past due 90 days or more and
accruing 902 228
---------- -------
Loans in non-accrual status
Commercial, financial & agricultural 935 625
Real estate-commercial 1,919 180
Real estate-residential 365 374
---------- -------
Total non-accrual loans 3,219 1,179
---------- -------
Total non-performing loans 4,121 1,407
---------- -------
Other real estate owned - commercial 1,638 2,008
---------- -------
Total non-performing assets $ 5,759 $3,415
========== =======
Non performing loans to total period-end loans 0.93% 0.41%
========== =======
Non performing assets to total period-end
loans and other real estate 1.28% 0.99%
========== =======
<FN>
The Company has no restructured loans.
</TABLE>
Page 13
<PAGE>
PART II -- OTHER INFORMATION
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a)Exhibits
(3.i.) Certificate of Incorporation, of the Registrant, as amended
(3.ii.) By-laws of the Registrant, as amended
(27) Financial Data Schedule
(a) Reports on Form 8-K
None
Page 14
<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 11, 2000 /s/ George W. Hamlin, IV
--------------- ------------------------
Date George W. Hamlin, IV, President
August 11, 2000 /s/ Gregory S. MacKay
--------------- ---------------------
Date Gregory S. MacKay, Treasurer
Page 15
<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 16
<PAGE>
