UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(716) 394-4260
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at November 3, 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
SEPTEMBER 30, 2000
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at September 30, 2000
and December 31, 1999. 1
Condensed consolidated statements of income for the three and nine
month periods ended September 30, 2000 and 1999. 3
Consolidated statements of stockholders' equity
for the nine month periods ended September 30, 2000 and 1999. 4
Consolidated statements of cash flows for the nine
month periods ended September 30, 2000 and 1999. 5
Notes to financial statements
at September 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
September 30, 2000 and December 31, 1999 (unaudited)
(dollars in thousands, except share data)
September 30, December 31,
--------------- -------------
Assets 2000 1999
------------------------------------------------------------ --------------- -------------
<S> <C> <C>
Cash and due from banks $ 28,950 26,801
Interest-bearing deposits with other financial institutions 72 33
Securities:
- Available for sale, at fair value 951 528
- Held-to-maturity (fair value of $78,176 in 2000 and
$74,805 in 1999) 78,436 75,336
Loans:
Commercial, financial & agricultural 66,956 62,491
Commercial mortgage 186,972 141,255
Residential mortgage 79,306 69,862
Consumer-auto indirect 104,822 103,605
Consumer-other 15,358 18,561
Other 1,571 2,097
Loans held for sale 2,115 492
--------------- -------------
Total loans 457,100 398,363
Less: Allowance for loan losses (4,784) (4,136)
--------------- -------------
Loans - net 452,316 394,227
Premises and equipment - net 15,653 13,438
Accrued interest receivable 3,505 2,682
Federal Home Loan Bank stock and Federal Reserve Bank stock 3,007 3,548
Other assets 7,218 5,542
--------------- -------------
Total Assets $ 590,108 522,135
=============== =============
<FN>
(Continued)
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999 (unaudited)
(dollars in thousands, except share data)
September 30, December 31,
--------------- -------------
Liabilities and Stockholders' Equity 2000 1999
---------------------------------------------------------- --------------- -------------
<S> <C> <C>
Deposits:
Demand
Non-interest bearing $ 83,372 74,630
Interest bearing 50,606 46,490
Savings and money market 165,942 156,108
Time deposits 222,750 177,062
--------------- -------------
Total deposits 522,670 454,290
Borrowings 20,456 22,218
Accrued interest payable and other liabilities 3,255 3,150
--------------- -------------
Total Liabilities $ 546,381 479,658
--------------- -------------
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 28,298 27,087
Treasury stock at cost (3,711 shares in 2000 and
3,725 in 1999) (1,343) (1,348)
Accumulated other comprehensive income 154 122
--------------- -------------
Total Stockholders' Equity 43,727 42,477
--------------- -------------
Total Liabilities and Stockholders' Equity $ 590,108 522,135
=============== =============
<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 nine month periods ended September 30, 2000 and 1999
(Unaudited)
(dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 9,911 7,683 $27,553 20,847
Securities 1,048 931 3,198 2,818
Other 26 47 73 205
------- ------ ------- -------
Total interest income 10,985 8,661 30,824 23,870
------- ------ ------- -------
Interest expense:
Deposits 4,548 3,203 12,491 9,165
Borrowings 356 169 1,159 344
------- ------ ------- -------
Total interest expense 4,904 3,372 13,650 9,509
------- ------ ------- -------
Net interest income 6,081 5,289 17,174 14,361
Provision for loan losses 270 330 828 826
------- ------ ------- -------
Net interest income after provision for
loan losses 5,811 4,959 16,346 13,535
------- ------ ------- -------
Other income:
Service charges on deposit accounts 892 668 2,406 1,770
Trust income 806 588 2,428 1,936
Net gain on sale of mortgage loans 8 4 11 80
Other operating income 598 325 1,580 1,366
------- ------ ------- -------
Total other income 2,304 1,585 6,425 5,152
------- ------ ------- -------
Operating expenses:
Salaries and employee benefits 3,621 3,473 10,698 9,612
Occupancy 1,229 969 3,446 2,740
Marketing and public relations 162 386 673 930
Office supplies, printing and postage 223 231 733 719
FDIC insurance 12 11 57 32
Other operating expenses 1,107 583 3,229 2,404
------- ------ ------- -------
Total operating expenses 6,354 5,653 18,836 16,437
------- ------ ------- -------
Income before income taxes 1,761 891 3,935 2,250
Income taxes 347 287 837 721
------- ------ ------- -------
Net income $ 1,414 $ 604 $ 3,098 $ 1,529
======= ====== ======= =======
Basic earnings per share $ 8.92 $ 3.80 $ 19.55 $ 9.60
======= ====== ======= =======
Diluted earnings per share $ 8.87 $ 3.79 $ 19.43 $ 9.58
======= ====== ======= =======
<FN>
See notes to financial statements.
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine month periods ended September 30, 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 $22 - - - - 32 32
Net income - - 3,098 - - 3,098
-------
Total comprehensive
income 3,130
------------
Cash dividend - $11.90
per share - - (1,887) - - (1,887)
Sale of 14 shares
of treasury stock - 2 - 5 - 7
------------ ------- --------- --------- -------------- -------
Balance at September 30, 2000 8,110 8,508 28,298 (1,343) 154 43,727
============ ======= ========= ========= ============== =======
Balance at January 1, 1999 $ 8,110 8,489 26,569 (835) 145 42,478
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of taxes of $1 - - - - (3) (3)
Net income - - 1,529 - - 1,529
-------
Total comprehensive
income 1,526
------------
Cash dividend - $11.50
per share - - (1,833) - - (1,833)
Purchase of 1,368 shares
of treasury stock - - - (545) - (545)
Sale of 16 shares
of treasury stock - - - 5 - 5
------------ ------- --------- --------- -------------- -------
Balance at September 30, 1999 8,110 8,489 26,265 (1,375) 142 41,631
============ ======= ========= ========= ============== =======
<FN>
See notes to financial statements.
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine month periods ended September 30, 2000 and 1999 (Unaudited)
(dollars in thousands)
2000 1999
--------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 3,098 1,529
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation, amortization and accretion 1,536 1,513
Provision for loan losses 828 826
Deferred income taxes (305) (332)
Originations of loans held for sale (45,700) (91,230)
Proceeds from sale of loans held for sale 44,076 92,686
Increase in accrued interest receivable
and other assets (2,389) (777)
Increase in accrued interest payable and
other liabilities 105 2,007
--------- --------
Net cash provided by operating activities 1,249 6,222
--------- --------
Cash flow from investing activities:
Sale of FHLB and FRB stock - net 558 -
Securities held to maturity:
Proceeds from maturities and calls 48,304 28,100
Purchases (51,488) (28,691)
Loans originated - net (57,293) (58,865)
Fixed asset purchases - net (3,925) (3,234)
Investment in minority owned entity - (158)
Proceeds from sale of other real estate 45 437
--------- --------
Net cash used in investing activities (63,799) (62,411)
--------- --------
Cash flow from financing activities:
Net increase in demand, savings and money
market deposits 22,692 49,440
Net increase in time deposits 45,688 10,923
Proceeds from borrowings 8,270 400
Principal repayments on borrowings (10,032) (1,517)
Proceeds from sale of treasury stock 7 5
Purchase of treasury stock - (545)
Dividends paid (1,887) (1,833)
--------- --------
Net cash provided by financing activities 64,738 56,873
--------- --------
Net increase in cash & cash equivalents 2,188 684
Cash & cash equivalents - beginning of period 26,834 24,206
--------- --------
Cash & cash equivalents - end of period $ 29,022 24,890
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,320 9,455
========= ========
Income taxes $ 1,175 126
========= ========
Supplemental disclosure of non-cash investing
activity:
Additions to other real estate acquired through
foreclosure, net of loans to facilitate sales $ -- 536
========= ========
<FN>
See notes to 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 nine-month periods ended
September 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 nine month periods ended September 30, 2000 and 1999 follow (dollars
in thousands, except share data):
<TABLE>
<CAPTION>
For the three months ended September 30, 2000 1999
-------- -------
<S> <C> <C>
Basic Earnings Per Share:
Net income applicable to common shareholders $ 1,414 604
Weighted average common shares outstanding 158,497 158,941
-------- -------
Basic earnings per share: $ 8.92 3.80
======== =======
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 1,414 604
Weighted average common shares outstanding 158,497 158,941
Effect of assumed exercise of stock options 961 582
-------- -------
Total 159,458 159,523
-------- -------
Diluted earnings per share: $ 8.87 3.79
======== =======
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 2000 1999
-------- -------
<S> <C> <C>
Basic Earnings Per Share:
Net income applicable to common shareholders $ 3,098 1,529
Weighted average common shares outstanding 158,492 159,246
-------- -------
Basic earnings per share: $ 19.55 9.60
======== =======
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 3,098 1,529
Weighted average common shares outstanding 158,492 159,246
Effect of assumed exercise of stock options 993 363
-------- -------
Total 159,485 159,609
-------- -------
Diluted earnings per share: $ 19.43 9.58
======== =======
</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. Effective January 1,
2000, 1,486 non-qualified options were granted 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 nine months ended September 30, 2000 1999
------ ------
<S> <C> <C>
Net income:
As reported $3,098 $1,529
Pro forma 2,966 1,294
Earnings per share:
As reported:
Basic $19.55 $ 9.60
Diluted 19.43 9.58
Pro forma:
Basic $18.71 $ 8.13
Diluted 18.60 8.11
</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>
(5) Accounting Pronouncement
-------------------------
FASB Statement No. 133, as amended, entitled "Accounting for Derivative
Instruments and Hedging Activities" is effective for the Company for fiscal
quarters beginning January 1, 2001. 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 Company holds no free-standing derivative
instruments at quarter end nor does it anticipate holding any at year-end.
Management does not anticipate that adoption of the new standard will have a
material effect on the Company's financial statements.
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
September 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 nine month period ended September 30, 2000 with the same period in
1999, the Company showed a 20.8% increase in assets, 19.6% increase in deposits,
20.9% increase in operating revenue (net interest income before provision plus
other income), and a 102.6% increase in net income. Trust assets under
administration grew during this same period by 29.9%.
As reported in the second quarter by June 30, 2000 the Company had reached its
year-end targets for earning asset portfolios and total assets. As a result,
the Company focused much of the third quarter activities on enhancing existing
customer relationships through sales of deposit-based and fee income products.
Annualized asset growth in the third quarter was 12.8% versus 22.4% in the first
half of the year.
Financial Condition and Results of Operations
--------------------------------------------------
Three months ended September 30, 2000
------------------------------------------
Assets grew in the third quarter, continuing the trend set in 1999, albeit at a
slower pace. As of September 30, 2000, total assets of the Company were $590.1
million, up from $573.3 million at June 30, 2000. Cash and equivalents increased
$4.5 million to $29.0 million, due to increased cash reserve requirements
associated with deposit growth and customer deposits made on the last day of the
quarter. Municipalities continued their reduction of deposits for seasonal cash
flow needs, resulting in a corresponding reduction in the Company's security
portfolio used to collateralize these deposits. Securities decreased $3.3
million to $79.4 million. Net loans increased $14.3 million to $452.3 million,
and all other assets rose $2.3 million to $29.4 million, reflective of earning
asset and branch network growth.
Total deposits at September 30, 2000 were $522.7 million and were up $15.3
million from June 30, 2000. The newest nine offices contributed $3.9 million of
the quarter's deposit growth. In addition, the Company sold $1.2 million of
nationally marketed time deposits. The growth in deposits was used to fund the
quarter's loan portfolio growth. Approximately half of the deposit growth during
the quarter came in non-interest bearing accounts with the rest coming from
interest-bearing accounts. For the same period borrowings (primarily from the
FHLB) were up $0.7 million to $20.5 million. Other liabilities increased by
$0.4 million to $3.3 million, largely due to income tax and compensation-related
accruals.
Net interest income increased $0.8 million or 15.0% for the quarter over the
same quarter in 1999. For the quarter ended September 30, 2000, average
interest earning assets, increased $97.7 million to $533.2 million from $435.5
million for the 1999 quarter. The yields on these assets were 8.24% and 7.96%,
respectively; the increase resulting from an overall rise in general interest
rates, following the Federal Reserve Board's rate increases during the last
Page 8
<PAGE>
fifteen months. For the same periods, average interest bearing liabilities
increased $88.0 million to $449.8 million from $361.8 million. Rates paid on
these liabilities were 4.36% and 3.73%, respectively, also reflecting rate
increases. This 35 basis point drop in interest spread had a $.2 million
negative impact on net interest income for the quarter ended September 30, 2000.
The growth in interest earnings assets and interest bearing liabilities had a
$1.0 million positive impact on net interest income. In the third quarter of
2000 the Company's net interest margin declined to 4.56% from 4.86% for the same
quarter in 1999. This declining trend in net interest margin is expected to
continue through 2000 as recent 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 September 30, 2000 increased $.7 million to
$2.3 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 increased slightly. Other
operating income increased for 2000 as a result of growth in miscellaneous
services and fees, offset by a reduction in mortgage banking operating income
due to the rising interest rate environment compared to 1999. Considering the
increasing interest rate environment, management anticipates lower mortgage
banking operating income for the whole of 2000 as compared to 1999.
Operating expenses increased $0.7 million for the quarter ended September 30,
2000 to $6.4 million versus $5.7 million for the 1999 second quarter. The
increase came in nearly all expense categories, reflecting growth in customers,
employees and banking offices. Included in operating expenses for the third
quarter of 2000 was $0.1 million in severance costs related to the Company's
efficiency improvement program (discussed below.)
The Company's quarterly effective tax rate was 19.7% in 2000 versus 32.2% in
1999. The reduction in the tax rate is due to an increase in non-taxable
investment income from a larger average portfolio balance ($46.1 million in 2000
versus $41.3 million in 1999)
Nine months ended September 30, 2000
-----------------------------------------
Assets grew in the first three quarters of 2000 by $68.0 million. Cash and
equivalents increased $2.2 million to $29.0 million, due to increased cash
reserve requirements associated with deposit growth and customer deposits made
on the last day of the quarter. Securities increased $3.5 million to $79.4
million to allow for collateralization of municipal deposits. Net loans
increased $58.1 million to $452.3 million, and all other assets rose $4.2
million to $29.4 million.
Total deposits at September 30, 2000 were up $68.4 million from December 31,
1999. The newest nine offices contributed $26.4 million of the year's deposit
growth. In addition, the Company sold $25.0 million of nationally marketed time
deposits. For the same period borrowings (primarily from the FHLB) were down
$1.8 million. Other liabilities increased by $0.1 million. The increase in
deposits was used to fund loan and investment growth.
Net interest income grew $2.8 million or 19.6% to $17.2 million for first nine
months of 2000 versus the same period in 1999. For the nine months ended
September 30, 2000, average interest earning assets, increased $102.8 million to
$516.0 million from $413.2 million for the 1999 first half. The yields on these
assets were 7.96% and 7.70%, respectively. For the same periods, average
interest bearing liabilities increased $94.5 million to $437.6 million from
$343.1 million. Rates paid on these liabilities were 4.16% and 3.70%. This 20
basis point drop in interest spread had a $.3 million negative impact on net
interest income for the nine months ended September 30, 2000. The growth in
interest earnings assets and interest bearing liabilities had a $3.1 million
positive impact on net interest income. In the first nine months of 2000 the
Company's net interest margin declined to 4.44% from 4.63% for the same nine
months in 1999.
Page 9
<PAGE>
Other income for the nine months ended September 30, 2000 increased $1.3 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 declined for 2000 as a result of a reduction
in loan sales to the secondary market. Other operating income increased for 2000
increased as a result of growth in miscellaneous services and fees, offset by a
reduction in mortgage banking operating income due to the rising interest rate
environment compared to 1999.
Operating expenses increased $2.4 million for the nine months ended September
30, 2000 to $18.8 million versus $16.4 million for the first three quarter of
1999. 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 worsened. For the nine months ended September 30, 2000
this ratio was 82.7% 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 consultant 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 begin to take hold in 2001. As noted
above, the Company incurred employee severance expenses in the third quarter.
Management believes additional severance and other one-time expenses related to
this project will be incurred in the fourth quarter. However, the amount cannot
be reasonably estimated at this time.
The Company's effective tax rate was 21.3% in 2000 versus 32.0% 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 ($46.8 million in 2000 versus
$39.8 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 nine
months ended September 30, 2000 the Company generated $2.2 million in cash and
equivalents versus generating $0.7 million for the same period in 1999. The
overall increase in cash and equivalents in 2000 is related to increases in
customer deposits and related reserves.
Net cash provided by operating activities was $1.2 million in 2000. In the
first three quarters of 1999 the Company generated $6.2 million from operating
activities. Both the largest source and use of operating cash in 2000 and 1999
were from mortgage banking activity. However, activity in 2000 was half of
1999's, reflective of a slow down in the mortgage banking business.
Cash used by investing activities increased in 2000 to $63.8 million from $62.4
million in 1999. The increase in investing activities came from a combination
of investment and fixed assets growth. The Company's fixed asset investing
activities continued as future offices are under renovation. Loan growth was
relatively consistent with 1999.
Cash provided by financing activities was $64.7 million in 2000 versus of $56.9
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 September 30, 2000 residential mortgage loans with a carrying value of
approximately $39.2 million were pledged as collateral for the Bank's $24.3
million advances and letters of credit from the Federal Home Loan Bank.
Approximately $10.7 million was available for additional borrowing. Indirect
automobile loans with a carrying value of approximately $97.1 million were
pledged as collateral for a $77.7 million line of credit from the Federal
Reserve Bank of New York.
Page 10
<PAGE>
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 $35.0 million at September 30, 2000
versus $9.8 million at September 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.
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
September 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.
Page 11
<PAGE>
Capital Resources
------------------
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors. Quantitative measures established by regulation
to ensure capital adequacy require the Company and Bank to maintain minimum
amounts and ratios.
As of September 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 nine-month periods ended
September 30, 2000 and 1999 follow (dollars in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------
2000 1999
--------- ------
<S> <C> <C>
Balance at beginning of period $ 4,136 3,283
Provision for loan losses 828 826
Loans charged off (596) (693)
Recoveries on loans previously charged off 416 395
--------- ------
Balance at end of period $ 4,784 3,811
========= ======
Allowance as a percentage of total period end loans 1.05% 1.03%
========= ======
Allowance as a percentage of non performing loans 128.6% 329.7%
========= ======
</TABLE>
There was no significant change in the provision for loan losses for the first
nine months of 2000 or 1999. Each period's provision amounts are reflective of
the growth in the loan portfolio.
At September 30, 2000, the recorded investment in loans that are considered
impaired totaled $3.1 million as compared to $1.6 million at December 31, 1999
and $1.2 million at September 30, 1999. The average recorded investment in
impaired loans during the nine month periods ended September 30, 2000 and 1999
was approximately $2.7 million and $1.6 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 $2.5
million to $3.7 million at September 30, 2000 as compared to $1.2 million at
September 30, 1999. The increase has come primarily from commercial real estate
loans and mainly attributable to two relationships. The borrowers' loans are
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 September 30, 2000 and
1999.
Page 12
At September 30, 2000, other real estate owned consisted of three commercial
real estate parcels, totaling $1.6 million. This compares to three commercial
real estate parcels totaling $1.7 million at September 30, 1999. Management
continues efforts to liquidate these assets.
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
Non-Performing Assets
(Dollars in thousands)
September 30,
------------------
2000 1999
--------- -------
<S> <C> <C>
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 266 $ 13
Real estate-commercial 40 19
Real estate-residential 114 -
Consumer 176 71
--------- -------
Total past due 90 days or more and
accruing 596 90
--------- -------
Loans in non-accrual status
Commercial, financial & agricultural 963 623
Real estate-commercial 1,897 180
Real estate-residential 262 263
--------- -------
Total non-accrual loans 3,122 1,066
--------- -------
Total non-performing loans 3,718 1,156
--------- -------
Other real estate owned - commercial 1,606 1,742
--------- -------
Total non-performing assets $ 5,324 $2,898
========= =======
Non performing loans to total period-end loans 0.81% 0.31%
========= =======
Non performing assets to total period-end
loans and other real estate 1.16% 0.78%
========= =======
<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)
November 10, 2000 /s/ George W. Hamlin, IV
----------------- ------------------------
Date George W. Hamlin, IV, President
November 10, 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>
