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, 2001
---------------
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 1, 2001
----- ---------------------------------
Common stock, $50.00 par 158,737
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 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, 2001
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 2001
and December 31, 2000. 1
Condensed consolidated statements of income for the three and six
month periods ended June 30, 2001 and 2000. 3
Consolidated statements of stockholders' equity
for the six-month periods ended June 30, 2001 and 2000. 4
Consolidated statements of cash flows for the six-
month periods ended June 30, 2001 and 2000. 5
Notes to financial statements
at June 30, 2001. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
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 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBITS 17
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000 (unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
---------- -------------
Assets 2001 2000
------------------------------------------------------------ ---------- -------------
Cash and due from banks $ 29,253 28,157
Interest-bearing deposits with other financial institutions 14 97
Securities:
- Available for sale, at fair value 474 450
- Held-to-maturity (fair value of $106,530 in 2001 and
$80,881 in 2000) 105,302 80,492
Loans:
Commercial, financial & agricultural 74,441 65,324
Commercial mortgage 213,285 195,153
Residential mortgage 84,826 81,413
Consumer-auto indirect 91,380 93,746
Consumer-other 22,294 20,214
Other 952 1,833
Loans held for sale 6,788 2,288
---------- -------------
Total loans 493,966 459,971
Less: Allowance for loan losses (5,075) (4,712)
---------- -------------
Loans - net 488,891 455,259
Premises and equipment - net 16,713 15,949
Accrued interest receivable 3,165 3,371
Federal Home Loan Bank stock and Federal Reserve Bank stock 3,032 3,032
Other assets 9,219 7,930
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Total Assets $ 656,063 594,737
========== =============
(Continued)
Page 1
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000 (unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
---------- -------------
Liabilities and Stockholders' Equity 2001 2000
---------------------------------------------------------- ---------- -------------
Deposits:
Demand:
Non-interest bearing $ 91,900 87,201
Interest bearing 61,200 53,665
Savings and money market 206,229 162,975
Time deposits 217,096 229,672
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Total deposits 576,425 533,513
Borrowings 29,321 12,644
Accrued interest payable and other liabilities 4,380 4,311
---------- -------------
Total Liabilities $ 610,126 550,468
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Stockholders' Equity:
Common stock, $50 par value; 240,000 shares authorized;
162,208 shares issued in 2001 and 2000 8,110 8,110
Additional paid-in capital 8,532 8,532
Retained earnings 30,341 28,687
Treasury stock at cost (3,471 share in 2001 and
3,476 shares in 2000) (1,268) (1,268)
Accumulated other comprehensive income 222 208
---------- -------------
Total Stockholders' Equity 45,937 44,269
---------- -------------
Total Liabilities and Stockholders' Equity $ 656,063 594,737
========== =============
See notes to financial statements.
Page 2
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six month periods ended June 30, 2001 and 2000 (Unaudited)
(dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Interest income:
Loans, including fees $ 9,532 $ 9,194 $19,281 $17,526
Securities 1,212 1,125 2,367 2,150
Other 12 45 44 47
------- ------- ------- -------
Total interest income 10,756 10,364 21,692 19,723
------- ------- ------- -------
Interest expense:
Deposits 4,498 4,261 9,302 7,943
Borrowings 105 400 194 816
------- ------- ------- -------
Total interest expense 4,603 4,661 9,496 8,759
------- ------- ------- -------
Net interest income 6,153 5,703 12,196 10,964
Provision for loan losses 360 308 798 558
------- ------- ------- -------
Net interest income after provision for
loan losses 5,793 5,395 11,398 10,406
------- ------- ------- -------
Other income:
Service charges on deposit accounts 1,158 916 2,236 1,710
Trust income 898 790 1,911 1,622
Net gain on sale of mortgage loans 23 2 31 3
Other operating income 910 601 1,523 1,050
------- ------- ------- -------
Total other income 2,989 2,309 5,701 4,385
------- ------- ------- -------
Operating expenses:
Salaries and employee benefits 3,701 3,519 7,414 7,078
Occupancy 1,309 1,162 2,519 2,217
Marketing and public relations 266 229 441 461
Office supplies, printing and postage 249 228 520 510
FDIC insurance 1 23 50 45
Other operating expenses 1,183 1,211 2,437 2,306
------- ------- ------- -------
Total operating expenses 6,709 6,372 13,381 12,617
------- ------- ------- -------
Income before income taxes 2,073 1,332 3,718 2,174
Income taxes 618 260 1,104 490
------- ------- ------- -------
Net income $ 1,455 $ 1,072 $ 2,614 $ 1,684
======= ======= ======= =======
Basic earnings per share $ 9.17 $ 6.76 $ 16.47 $ 10.63
======= ======= ======= =======
Diluted earnings per share $ 9.10 $ 6.72 $ 16.36 $ 10.56
======= ======= ======= =======
See notes to financial statements
Page 3
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six month periods ended June 30, 2001 and 2000 (Unaudited)
(dollars in thousands, except per share data)
Accumulated
Additional Other
Common Paid in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
------------ ------- --------- --------- -------------- -------
Balance at January 1, 2001 $ 8,110 8,532 28,687 (1,268) 208 44,269
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of taxes of $10 - - - - 14 14
Net income - - 2,614 - - 2,614
-------
Total comprehensive
income 2,628
------------
Cash dividend - $6.05
per share - - (960) - - (960)
Sale of 5 shares
of treasury stock - - - - - -
------------ ------- --------- --------- -------------- -------
Balance at June 30, 2001 8,110 8,532 30,341 (1,268) 222 45,937
============ ======= ========= ========= ============== =======
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
============ ======= ========= ========= ============== =======
See notes to financial statements
Page 4
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six month periods ended June 30, 2001 and 2000 (Unaudited)
(dollars in thousands)
2001 2000
---------- ---------
Cash flow from operating activities:
Net income $ 2,614 $ 1,684
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation, amortization and accretion 728 945
Provision for loan losses 798 558
Deferred income taxes (106) (193)
Income from minority owned entities (33) -
Originations of loans held for sale (44,749) (30,220)
Proceeds from sale of loans held for sale 40,249 27,544
Increase in accrued interest receivable
and other assets (218) (964)
Increase (decrease) in accrued interest payable and
other liabilities 69 (216)
---------- ---------
Net cash used by operating activities (648) (862)
---------- ---------
Cash flow from investing activities:
Sale of FHLB stock - 550
Securities held to maturity:
Proceeds from maturities and calls 86,138 34,337
Purchases (110,438) (40,706)
Loans originated - net (29,930) (41,677)
Fixed asset purchases - net (1,927) (2,459)
Investment in minority owned entity and others (817) (216)
Cash received from sale of other real estate 6 13
---------- ---------
Net cash used by investing activities (56,968) (50,158)
---------- ---------
Cash flow from financing activities:
Net increase in demand, savings and money
market deposits 55,488 27,934
Net increase (decrease) in time deposits (12,576) 25,092
Proceeds from (repayments of) overnight borrowings 17,800 270
Principal repayments on long-term borrowings (1,123) (2,721)
Proceeds from sale of treasury stock - 7
Dividends paid (960) (944)
---------- ---------
Net cash provided by financing activities 58,629 49,638
---------- ---------
Net increase (decrease) in cash & cash equivalents 1,013 (1,382)
Cash & cash equivalents - beginning of period 28,254 26,834
---------- ---------
Cash & cash equivalents - end of period $ 29,267 $ 25,452
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,378 $ 8,260
========== =========
Income taxes $ 1,174 $ 719
========== =========
See notes to financial statements
Page 5
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, 2000 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, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. 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, 2000.
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 $6.05 per share dividend on common stock on
July 11, 2001, payable August 1, 2001 to shareholders of record July 11, 2001.
The Company also declared a semi-annual $6.05 per share dividend on common stock
on January 17, 2001, and paid February 1, 2001 to shareholders of record January
17, 2001.
(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, 2001 and 2000 follow (dollars in
thousands, except share data):
For the three months ended June 30, 2001 2000
-------- --------
Basic Earnings Per Share:
Net income applicable to common shareholders $ 1,455 $ 1,072
Weighted average common shares outstanding 158,734 158,495
-------- --------
Basic earnings per share: $ 9.17 $ 6.76
======== ========
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 1,455 $ 1,072
Weighted average common shares outstanding 158,734 158,495
Effect of assumed exercise of stock options 1,076 1,056
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Total 159,810 159,551
-------- --------
Diluted earnings per share: $ 9.10 $ 6.72
======== ========
Page 6
(3) Earnings Per Share (continued)
---------------------------------
For the six months ended June 30, 2001 2000
-------- -------
Basic Earnings Per Share:
Net income applicable to common shareholders $ 2,614 1,684
Weighted average common shares outstanding 158,733 158,489
-------- -------
Basic earnings per share: $ 16.47 10.63
======== =======
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 2,614 1,684
Weighted average common shares outstanding 158,733 158,489
Effect of assumed exercise of stock options 1,019 1,010
-------- -------
Total 159,752 159,499
-------- -------
Diluted earnings per share: $ 16.36 10.56
======== =======
(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. In 2001, the Board of
Directors granted, 2,393 non-qualified options to management under the Company's
incentive compensation plan for 2000's performance. The options were granted
with an exercise price equal to the estimated fair value of the common stock on
the grant date. The options are exerciseable at times varying from five years
to fifteen years. The options are fully vested and have no set expiration date.
The Company applies APB Opinion No. 25 in accounting for its stock option plan,
and accordingly, no compensation cost has been recognized for its fixed-award
stock options in the condensed consolidated statement of income. Had
compensation cost been determined based on the fair value at the grant date of
the stock options using valuation models consistent with the approach of SFAS
No. 123, the Company's net income and earnings per share for the year-to-date
periods in 2001 and 2000 would have been reduced to the pro forma amounts
indicated below (net income in thousands):
For the six months ended June 30, 2001 2000
------ ------
Net income:
As reported $2,614 $1,684
Pro forma 2,449 1,552
Earnings per share:
As reported:
Basic $16.47 $10.63
Diluted 16.36 10.56
Pro forma:
Basic $15.43 $ 9.79
Diluted 15.33 9.72
The weighted average fair value of options granted during 2001 and 2000 was
$97.52 and $122.56, 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:
Grant year 2001 2000
----------- -----------
Dividend yield 2.61% 2.72%
Risk free interest rate 4.92% 6.45%
Life 10.4 years 11.4 years
Volatility 13.81% 14.39%
Page 7
(5) Contract Termination Costs
----------------------------
During the three and six months ended June 30, 2001, the Company paid $0.03
million and $0.06 million, respectively, from the contract termination liability
accrued in the fourth quarter of 2000 related to the realignment of the
Company's credit card activity. The balance of the liability at June 30, 2001
was $0.4 million and is expected to be fully paid in 2001.
(6) Impact of Accounting Standard Adoption
------------------------------------------
The Company implemented the provisions of FASB Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended, on January 1, 2001.
This Statement establishes comprehensive accounting and reporting requirements
for derivative instruments and hedging activities. The Company holds no
freestanding derivative instruments; therefore the adoption of the new standard
had no effect on the Company's financial condition or results of operations.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
June 30, 2001
The following is management's discussion and analysis of 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, 2000 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's assets grew to $656.1 million at the end of the first half of
2001. This represents a 10.3% increase over year-end 2000 and a 14.5% increase
over the June 30, 2000 balance. Net income grew 55.2% to $2.6 million for the
first six months of 2001 compared to $1.7 million for the same period of 2000.
These results are on budget and are reflective of the growth in earning assets,
offset by a only a 6.1% growth in operating expenses year-on-year.
Financial Condition and Results of Operations
--------------------------------------------------
Three months ended June 30, 2001
-------------------------------------
As of June 30, 2001, total assets of the Company were $656.1 million, up from
$621.7 million at March 31, 2001. Cash and equivalents increased $2.5 million to
$29.3 million, due to increased cash reserve requirements associated with
deposit growth. During the quarter, municipalities continued to increase their
deposits, resulting in a corresponding increase in the Company's security
portfolio used to collateralize these deposits. Securities increased $5.1
million to $105.8 million. Net loans increased $25.9 million to $488.9 million,
and all other assets rose $0.1 million to $32.1 million, reflective of earning
asset and branch network growth.
Total deposits at June 30, 2001 were $576.4 million and were up $12.8 million
from March 31, 2001. The newest eight offices contributed $14.9 million of the
quarter's deposit growth, while the remaining offices showed a modest $0.9
million increase. Additionally, $3.0 million of nationally marketed time
deposits matured during the quarter. Due to the local deposit growth,
management did not renew these time deposits, but management does anticipate
selling some nationally marketed time deposits in the third quarter of 2001. 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. Many municipalities shifted balances from time deposits to money
market accounts following the Company's introduction of a new deposit account.
For the quarter, borrowings (primarily from the FHLB) were up $20.1 million to
$29.3 million; used to fund loan growth. Other liabilities increased by $0.1
million to $4.4 million, largely due to bonus and retirement accruals.
Net interest income, accounting for 67% of the Company's revenue, increased $0.5
million or 7.9% for the quarter over the same quarter in 2000. For the quarter
ended June 30, 2001, average interest earning assets increased $56.6 million to
$583.2 million from $526.6 million for the 2000 quarter. The yields on these
assets were 7.38% and 7.87%, respectively; the decrease resulting from an
overall decline in general interest rates, following the Federal Reserve Board's
275 basis point rate reduction since the beginning of 2001. For the same
periods, average interest bearing liabilities increased $48.1 million to $495.9
million from $447.8 million. Rates paid on these liabilities were 3.71% and
4.16%, respectively, also reflecting rate decreases. The resulting 4 basis
point drop in interest spread had a $.1 million negative impact on net interest
income for the quarter ended June 30, 2001. The growth in interest earnings
assets and interest bearing liabilities had a $0.6 million positive impact on
net interest income. In the second quarter of 2001 the Company's net interest
margin declined
Page 9
to 4.22% from 4.33% for the same quarter in 2000. This declining trend in net
interest margin is expected to continue through 2001 as declining market
interest rates are expected to impact earning assets more than interest-bearing
liabilities. 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, 2001 increased $ 0.7 million to $3.0
million over the same quarter in 2000. The increase was reflected in all major
categories: service charges-attributed to increased transaction volume, fees and
the number of customer accounts; trust income-attributed to growth in assets
under management; net gain on the sale of mortgage loans and other operating
income-attributed to increased mortgage banking originations, reflective of
higher mortgage refinancing activity due to the lower rate environment.
Operating expenses increased $0.3 million or 5.3% for the quarter ended June 30,
2001 to $6.7 million versus $6.4 million for the 2000 second quarter. This
modest increase compares favorably to year-on-year asset growth of 14.5%. While
increases came in nearly all expense categories, the results of 2000's efforts
to control expense growth are now being realized in 2001. Management believes
expenses will continue to increase throughout the year, but at a slower rate
than asset growth.
The Company's quarterly effective tax rate was 29.8% in 2001 versus 19.6% in
2000. The increase in the effective tax rate is due to a decrease in
non-taxable income as a percent of total pre-tax income. In 2001, non-taxable
income accounted for 20.3% of pre-tax income, while in 2000, non-taxable income
accounted for 37.1% of pre-tax income. Management anticipates the effective tax
rate will remain near 30% for the rest of 2001.
Six months ended June 30, 2001
-----------------------------------
Total assets of the Company grew $61.3 million or 10.3% for the first half of
2001. Cash and equivalents decreased $1.0 million to $29.3 million. Securities
increased $24.8 million to $105.8 million to allow for collateralization of
municipal deposits. Net loans increased $33.6 million to $488.9 million on
strong commercial and mortgage demand, and all other assets rose $1.8 million to
$32.1 million.
Total deposits at June 30, 2001 were $576.4 million and were up $42.9 million
from December 31, 2000. A substantial portion of the deposit growth came from
municipalities. The Company is marketing its financial services to local
governments in its newly expanded Monroe County market as well as expanding
existing relationships in Ontario County. For the same period, borrowings
(primarily from the FHLB) were up $16.7 million to $29.3 million. Other
liabilities increased by $0.1 million to $4.4 million. The increase in
borrowings partially funded securities and loan growth, with the remaining
funding coming from deposit growth.
For the six months ended June 30, 2001, average interest-earning assets,
increased $62.0 million to $569.4 million from $507.4 million for the 2000 first
half. The yields on these assets were 7.62% and 7.77%, respectively; the
decline resulting from overall market rate reductions in 2001 versus 2000. For
the same periods, average interest-bearing liabilities increased $51.0 million
to $482.5 million from $431.5. Rates paid on these liabilities were 3.94% and
4.06%, respectively, also reflecting general market rate decreases. The
resulting 3 basis point drop in interest spread had a $0.1 million negative
impact on net interest income for the six-months ended June 30, 2001. The
growth in interest earnings assets and interest bearing liabilities had a $1.3
million positive impact on net interest income. In the first half of 2001 the
Company's net interest margin declined to 4.28% from 4.32% for the same period
in 2000. Margin is likely to continue declining over the year due to the impact
of falling market interest rates. Refer to Interest Rate Sensitivity and Asset /
Liability Management Review section for a further discussion of interest rate
risk management.
Other income for the six months ended June 30, 2001 increased $1.3 million to
$5.7 million over the same period in 2000. The increase came in all categories.
Refer to three-month discussion above.
Operating expenses increased $0.8 million for the six-month period ended June
30, 2001 to $13.4 million versus $12.6 million for the 2000 first half. Refer to
three-month discussion above.
Page 10
The Company's effective tax rate was 29.7% in 2001 versus 22.5% in 2000. Refer
to three-month discussion above.
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, 2001 the Company generated $1.0 million in net cash
and equivalents versus using $1.4 million for the same period in 2000. The
overall increase in cash and equivalents in 2001 is primarily related to
increases in customer deposit balances.
Net cash used by operating activities was $.06 million in 2001. In the first
half of 2000 the Company used $0.9 million of cash and equivalents in its
operating activities. Both the largest source and use of operating cash in 2001
and 2000 were mortgage-banking activity. However, activity in 2001 was nearly
50% higher than that of 2000's, reflective of the pick-up in mortgage
refinancings due to market interest rate reductions. Because all non-portfolio
mortgages are pre-sold to investors, the Company limits its credit, liquidity
and interest rate risk.
Cash used by investing activities increased in 2001 to $57.0 million from $50.2
million in 2000. The increase came from higher security purchases, offset
somewhat by lower loan growth. The Company's fixed asset investing activities
continued, but at a slower pace than in 2000. Fewer banking offices were under
renovation in 2001 than 2000, although the Company did purchase its Pittsford
banking office during 2001 for approximately $1.0 million.
Cash provided by financing activities was $58.6 million in 2001 versus $49.6
million in 2000. 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, 2001 residential mortgage loans with a carrying value of
approximately $36.5 million were pledged as collateral for the Bank's advances
from the Federal Home Loan Bank. Approximately $8.4 million was available for
additional borrowing. Indirect automobile loans with a carrying value of
approximately $87.1 million were pledged as collateral for a $69.7 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.
For the remainder of 2001, 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.
Page 11
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 select members of 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 CD's.
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.
The Company's interest rate risk profile has changed little since December 31,
2000 with net interest earnings projections reflecting a minor decrease when
applying an expected. Continuing falling interest rate environment through the
remainder of 2001.
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, 2000.
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 June 30, 2001, 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 2001 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 12
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, 2001 and 2000 follow (dollars in thousands):
June 30,
-------------------
2001 2000
---------- -------
Balance at beginning of period $ 4,712 $4,136
Provision for loan losses 798 558
Loans charged off (611) (420)
Recoveries on loans previously charged off 176 312
---------- -------
Balance at end of period $ 5,075 $4,586
========== =======
Allowance as a percentage of total period end loans 1.03% 1.04%
========== =======
Allowance as a percentage of non performing loans 194.5% 111.3%
========== =======
The increase in the provision for loan losses from first half of 2000 to the
first half of 2001 is related to the increase in net-chargeoffs over 2000 (as
seen in the table above). The increase in the allowance for loan losses from
$4.6 million at June 30, 2000 to $5.1 million at June 30, 2001 is due to overall
loan portfolio growth.
At June 30, 2001, the recorded investment in loans that are considered impaired
totaled $2.4 million as compared to $3.2 million at December 31, 2000 and $3.2
million at June 30, 2000. The average recorded investment in impaired loans
during the six-month periods ended June 30, 2001 and 2000 were approximately
$2.6 million and $2.5 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 $1.5
million to $2.6 million at June 30, 2001 as compared to $4.1 million at June 30,
2000. The decrease came primarily from commercial real estate loans and is
mainly attributable to two relationships. Non-performing loans represent .53%
of the total loan portfolio at June 30, 2001 as compared to .93% at June 30,
2000.
At June 30, 2001, other real estate owned consisted of three commercial real
estate parcels, totaling $1.5 million. These are the same three parcels that
were in other real estate owned at June 30, 2000. The balance reduction is due
to cash proceeds from sales of a portion of the properties and from lease
payments. Management continues efforts to liquidate these assets.
Page 13
Non-Performing Assets
Non-Performing Assets
(Dollars in thousands)
June 30,
-------------------
2001 2000
---------- -------
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 58 $ -
Real estate-commercial - 786
Real estate-residential - -
Consumer 97 116
---------- -------
Total past due 90 days or more and
accruing 155 902
---------- -------
Loans in non-accrual status
Commercial, financial & agricultural 1,023 935
Real estate-commercial 1,156 1,919
Real estate-residential 275 365
---------- -------
Total non-accrual loans 2,454 3,219
---------- -------
Total non-performing loans 2,609 4,121
---------- -------
Other real estate owned - commercial 1,460 1,638
---------- -------
Total non-performing assets $ 4,069 $5,759
========== =======
Non performing loans to total period-end loans 0.53% 0.93%
========== =======
Non performing assets to total period-end
loans and other real estate 0.82% 1.28%
========== =======
The Company has no restructured loans.
New Accounting Pronouncements
-------------------------------
In June, 2001 the Financial Accounting Standards Board issued three
accounting standards:
Statement 141, "Business Combinations," requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. Because of its
prospective adoption, the standard had no impact on the Company's financial
condition or results of operations through June 30, 2001. Its impact on the
Company will be dependent upon future business combinations, if any.
Statement 142, "Goodwill and Other Intangible Assets," changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of this standard on January 1,
2002. At June 30, 2001, the Company had less than $0.1 million in unamortized
goodwill, most of which will be amortized by December 31, 2001.
Statement 143, "Accounting for Asset Retirement Obligations," requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and accrete the liability over
time. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard,
effective for the Company's 2003 fiscal year, is not expected to impact the
Company's financial position or results of operations.
Page 14
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 15
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 13, 2001 /s/ George W. Hamlin, IV
--------------- ------------------------
Date George W. Hamlin, IV, President
August 13, 2001 /s/ Gregory S. MacKay
--------------- ---------------------
Date Gregory S. MacKay, Treasurer
Page 16
INDEX OF EXHIBITS
Exhibit
(3.i.) Certificate of Incorporation, of the Exhibit A on Form 10-K
Registrant, as amended for the year ended
December
31, 1994
(3.ii.) By-laws of the Registrant, Exhibits B on Form 10-K
as amended for the year ended
December
December 31, 1994
(27) Financial Data Schedule
Page 17