UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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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)
(585) 394-4260
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at May 6, 2002
----- ------------------------------
Common stock, $20.00 par 476,661
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
MARCH 31, 2002
PART I -- FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at March 31, 2002
and December 31, 2001. 1
Condensed consolidated statements of income for the three-
month period ended March 31, 2002 and 2001. 3
Consolidated statements of stockholders' equity
for the three-month period ended March 31, 2002 and 2001. 4
Consolidated statements of cash flows for the three-
month period ended March 31, 2002 and 2001. 5
Notes to financial statements
at March 31, 2002. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
This information is incorporated by reference
in Part I, Item 2, Interest Rate Sensitivity and
--------------------------------
Asset/Liability Management Review 10
----------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBITS 18
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001 (Unaudited)
(dollars in thousands, except per share data)
March 31, December 31,
----------- -------------
Assets 2002 2001
------------------------------------------------------------ ----------- -------------
Cash and due from banks $ 26,381 30,248
Interest-bearing deposits with other financial institutions 5,736 8,293
Federal funds sold 23,400 8,100
Securities:
- Available for sale, at fair value 1,596 534
- Held-to-maturity (fair value of $118,920 in 2002 and
$119,971 in 2001) 117,962 118,449
Loans:
Commercial, financial & agricultural 80,322 79,304
Commercial mortgage 247,004 245,915
Residential mortgage 82,741 85,402
Consumer-auto indirect 79,640 85,243
Consumer-other 22,686 23,093
Other 1,045 1,603
Loans held for sale 9,729 14,401
----------- -------------
Total loans 523,167 534,961
Less: Allowance for loan losses (5,588) (5,480)
----------- -------------
Loans - net 517,579 529,481
Premises and equipment - net 16,796 17,062
Accrued interest receivable 3,753 3,201
Federal Home Loan Bank stock and Federal Reserve Bank stock 1,900 2,013
Other assets 9,153 8,337
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Total Assets $ 724,256 725,718
=========== =============
(Continued)
Page 1
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001 (Unaudited)
(dollars in thousands, except per share data)
March 31, December 31,
----------- -------------
Liabilities and Stockholders' Equity 2002 2001
----------------------------------------------------------- ----------- -------------
Deposits:
Demand
Non-interest bearing $ 89,670 93,931
Interest bearing 71,132 69,156
Savings and money market 273,588 276,689
Time deposits 235,311 231,067
----------- -------------
Total deposits 669,701 670,843
Borrowings 1,085 1,097
Accrued interest payable and other liabilities 4,557 5,646
----------- -------------
Total Liabilities $ 675,343 677,586
----------- -------------
Stockholders' Equity:
Common stock, $20 par value; 2,000,000 shares authorized;
486,624 shares issued in 2002 and 2001 9,732 9,732
Additional paid-in capital 6,931 6,931
Retained earnings 33,166 32,428
Treasury stock at cost (9,963 shares in 2002 and
2001) (1,218) (1,218)
Accumulated other comprehensive income 302 259
----------- -------------
Total Stockholders' Equity 48,913 48,132
----------- -------------
Total Liabilities and Stockholders' Equity $ 724,256 725,718
=========== =============
See notes to financial statements.
Page 2
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three month periods ended March 31, 2002 and 2001 (Unaudited)
(dollars in thousands, except per share data)
2002 2001
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Interest income:
Loans, including fees $ 9,570 9,749
Securities 1,072 1,155
Other 88 32
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Total interest income 10,730 10,936
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Interest expense:
Deposits 3,738 4,804
Borrowings 9 89
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Total interest expense 3,747 4,893
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Net interest income 6,983 6,043
Provision for loan losses 241 438
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Net interest income after provision for loan losses 6,742 5,605
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Other income:
Service charges on deposit accounts 1,076 1,078
Trust income 901 1,013
Net gain on sale of mortgage loans 294 219
Other operating income 445 402
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Total other income 2,716 2,712
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Operating expenses:
Salaries and employee benefits 3,940 3,713
Occupancy 1,241 1,210
Marketing and public relations 257 175
Office supplies, printing and postage 252 271
FDIC insurance 90 49
Other operating expenses 1,244 1,254
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Total operating expenses 7,024 6,672
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Income before income taxes 2,434 1,645
Income taxes 718 486
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Net income $ 1,716 1,159
======= ======
Basic earnings per share $ 3.60 2.43
======= ======
Diluted earnings per share $ 3.57 2.42
======= ======
See notes to financial statements
Page 3
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three month periods ended March 31, 2002 and 2001 (Unaudited)
(dollars in thousands, except per share data)
Accumulated
Additional Other
Common Paid in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
------------ -------- --------- --------- ------------- -------
Historical balance at
January 1, 2002 $ 8,110 8,553 32,428 (1,218) 259 48,132
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of taxes of $29 - - - - 43 43
Net income - - 1,716 - - 1,716
-------
Total comprehensive
income 1,759
-------
Cash dividend - $2.05
per share - - (978) - - (978)
Three-for-one stock split
and increase in par value 1,622 (1,622) - - -
------------ -------- --------- --------- ------------- -------
Balance at March 31, 2002 9,732 6,931 33,166 (1,218) 302 48,913
============ ======== ========= ========= ============= =======
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 $12 - - - - 14 14
Net income - - 1,159 - - 1,159
-------
Total comprehensive
income 1,173
-------
Cash dividend - $1.98
per share - - (960) - - (960)
------------ -------- --------- --------- ------------- -------
Balance at March 31, 2001 8,110 8,532 28,886 (1,268) 222 44,482
============ ======== ========= ========= ============= =======
See notes to financial statements
Page 4
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three month periods ended March 31, 2002 and 2001 (Unaudited)
(dollars in thousands)
2002 2001
--------- --------
Cash flow from operating activities:
Net income $ 1,716 1,159
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation, amortization and accretion 551 344
Provision for loan losses 241 438
Deferred income taxes (110) (100)
Undistributed income from minority owned entities (4) -
Originations of loans held for sale (44,382) (13,278)
Proceeds from sale of loans held for sale 49,054 13,823
Increase in accrued interest receivable
and other assets (1,597) (399)
Increase (decrease) in accrued interest payable and
other liabilities (1,089) 318
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Net cash provided by operating activities 4,380 2,305
--------- --------
Cash flow from investing activities:
Proceeds from call of FHLB stock 315 -
Purchase of FHLB stock (202) -
Securities held to maturity:
Proceeds from maturities and calls 59,347 39,949
Purchases (59,809) (59,452)
Loans originated, net of repayments 6,989 (8,752)
Fixed asset purchases - net (326) (338)
Investment in minority owned entity - (636)
Cash received from sale of other real estate 314 12
--------- --------
Net cash provided by (used in) investing activities 6,628 (29,217)
--------- --------
Cash flow from financing activities:
Net (decrease) increase in demand, savings and money
market deposits (5,386) 20,894
Net increase in time deposits 4,244 8,911
Repayment of overnight borrowings - (3,400)
Principal repayments on long-term borrowings (12) (11)
Dividends paid (978) (960)
--------- --------
Net cash provided by (used in) financing activities (2,132) 25,434
--------- --------
Net increase (decrease) in cash & cash equivalents 8,876 (1,478)
Cash & cash equivalents - beginning of period 46,641 28,254
--------- --------
Cash & cash equivalents - end of period $ 55,517 26,776
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,913 4,764
========= ========
Income taxes $ 136 82
========= ========
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, 2001 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. All references in the consolidated financial statements to
common shares, share prices, per share amounts and stick plans have been
restated retroactively for the stock split, unless otherwise noted. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2002, is not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. 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, 2001.
Amounts in prior periods' condensed consolidated financial statements are
reclassified whenever necessary to conform with the current year's presentation.
(2) Changes to Common Stock
--------------------------
On January 9, 2002, the Board of Directors declared a three-for-one common stock
split, subject to the approval of stockholders of an increase in the number of
common shares authorized from 240,000 to 2,000,000 and a change in the par value
from $50.00 per share to $20.00 per share. The record date of the split was
January 9, 2002, to shareholders of record January 9, 2002. The stockholders
approved the increase on March 13, 2002. All per share calculations have been
restated to reflect the stock split.
(2) Dividends Per Share
---------------------
The Company declared a semi-annual $2.05 per share dividend on common stock on
January 9, 2002, and paid February 1, 2002, to shareholders of record January 9,
2002.
(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-month periods ended March 31, 2002, and 2001 follow (dollars in thousands,
except share data):
For the three months ended March 31, 2002 2001
-------- --------
Basic Earnings Per Share:
Net income applicable to common shareholders $ 1,716 $ 1,159
Weighted average common shares outstanding 476,661 476,196
-------- --------
Basic earnings per share: $ 3.60 $ 2.43
======== ========
Diluted Earnings Per Share:
Net income applicable to common shareholders $ 1,716 $ 1,159
Weighted average common shares outstanding 476,661 476,196
Effect of assumed exercise of stock options 3,932 2,883
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Total 480,593 479,079
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Diluted earnings per share: $ 3.57 $ 2.42
======== ========
Page 6
(4) Stock Option Plan
-------------------
The Company's incentive stock option program for employees authorizes grants of
options to purchase up to 48,000 shares of common stock. In 2002, the Board of
Directors granted 7,941 non-qualified options to management under the Company's
incentive compensation plan for 2001's performance (7,179 in 2001 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 four years to twenty-eight 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 2002 and 2001 would have been reduced to the pro forma amounts
indicated below (net income in thousands):
For the three months ended March 31, 2002 2001
------ ------
Net income:
As reported $1,716 $1,159
Pro forma 1,506 994
Earnings per share:
As reported:
Basic $ 3.60 $ 2.43
Diluted 3.57 2.42
Pro forma:
Basic $ 3.16 $ 2.09
Diluted 3.13 2.07
The weighted average fair value of options granted during 2002 and 2001 was
$37.46 and $32.51, 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 2002 2001
----------- -----------
Dividend yield 2.60% 2.61%
Risk free interest rate 5.07% 4.92%
Life 13.2 years 10.4 years
Volatility 13.30% 13.81%
(5) Contract Termination Costs and Sale of Credit Card Portfolios
---------------------------------------------------------------------
Approximately $2.2 million of the Company's total credit card portfolio of $2.7
million at March 31, 2002, is included in "Loans held for sale" on the Condensed
Consolidated Balance Sheet. These loans were sold in April 2002 as part of the
Company's previously reported realignment. Total gross proceeds were $2.2
million. No gain or loss on the sale was recognized. The unsold balances, all
commercial related, of $0.5 million have been converted to demand loans and are
carried in "Commercial, financial & agricultural" on the Condensed Consolidated
Balance Sheet.
The balance of the contract termination costs liability at March 31, 2002, was
$145,000, unchanged from December 31, 2001. It is expected to be fully paid and
funded through operations in 2002, when final termination costs are invoiced.
Page 7
Notes to Financial Statements (continued)
(6) Impact of Accounting Standard Adoption
------------------------------------------
The Company adopted Financial Accounting Standards Board (FASB) Statement No.
142, "Goodwill and Other Intangible Assets," on January 1, 2002. This statement
changed the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, ceased upon its adoption. Since the
Company had no unamortized goodwill at December 31, 2001, the statement had no
impact.
The Company also adopted FASB Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which replaced FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement 144 requires long-lived assets held for sale or
disposal to be measured at the lower of carrying amount or fair value less costs
to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. The Statement also broadens the reporting of discontinued operations.
Although adopted, the statement had no impact on the Company as it is dependent
upon any future long-lived assets asset disposal decisions.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, 2001,
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
--------
At the end of the first quarter of 2002, total assets were $724.3 million,
nearly the same as the year end December 31, 2001, of $725.7 million. However,
net income for the quarter ended March 31, 2002, was $1.7 million, nearly fifty
percent higher than the $1.2 million for the first quarter of 2001. These
results are in line with the Company's internal budget and are reflective of the
20.9% annualized growth in average earning assets, combined with a modest 5.3%
annualized growth in operating expenses year-on-year.
Financial Condition and Results of Operations
--------------------------------------------------
As of March 31, 2002, total assets of the Company were $724.3 million, down from
$725.7 million at year-end 2001. Cash and bank balances decreased $6.4 million
to $32.1 million, resulting from the Company's reduced holdings of year-end cash
reserves and a shift to federal funds sold. Fed funds sold increased $15.3
million or 189% to $23.4 million at the quarter end, due to higher than
anticipated consumer and residential loan payoffs. Securities increased $0.6
million to $119.6 million to allow for collateralization of municipal deposits.
Net loans decreased $11.9 million to $517.6 million, and all other assets rose
$1.0 million to $31.6 million, reflective of earning asset and branch network
growth.
Page 8
Total deposits at March 31, 2002 were $669.7 million and were down $1.1 million
from December 31, 2001. However, nationally marketed brokered deposits decreased
$5.5 million for the quarter, resulting in a net increase in local deposits of
$4.4 million for the quarter. There was a minor shift to interest bearing from
non-interest bearing deposit accounts for the quarter. Borrowings remain at
$1.0 million as the increase in federal funds sold has reduced the Company's
demand for overnight borrowing. Other liabilities decreased by $1.0 million to
$4.6 million as a result of cash contributions to the Company's employee profit
sharing and other retirement plans accrued at year end 2001.
For the three months ended March 31, 2002, average interest-earning assets
increased $114.8 million to $665.5 million from $550.7 million for the 2001
first quarter. The tax-equivalent yields on these assets were 6.62% and 8.10%,
respectively--the decrease resulting from an overall decline in general interest
rates during 2001. For the same periods, average interest-bearing liabilities
increased $112.9 million to $582.1 million from $469.2. Rates paid on these
liabilities were 2.57% and 4.17%, respectively, also reflecting general market
rate decreases. The net effect of these yield and cost decreases was an
increased spread of twelve basis points; however, the lower overall interest
rate environment led to a decreased margin (net interest income to average
earning assets) of nineteen basis points. The difference between spread and
margin reflects the contribution of non-interest bearing deposits - 32 basis
points in 2002 and 62 basis points in 2001 - which dropped in 2002 due to the
lower average asset yields. The growth in interest-earning assets and interest
bearing liabilities had a $1.2 million positive impact on net interest income
for the quarter ended March 31, 2002, while the reduction in rates had a $0.3
million negative impact on net interest income as compared to the first quarter
of 2001. Refer to Interest Rate Sensitivity and Asset / Liability Management
Review section for a further discussion of interest rate risk management.
Other income for the quarter ended March 31, 2002, remained at $2.7 million.
Service charges on deposit accounts were $1.1 million at both quarters ended
March 31, 2002, and 2001. While the number of accounts increased year on year,
new product offerings - "CNB Options" provide customers more fee waiver
opportunities. Trust income declined $0.1 million attributed to a reduction in
estate close-out fees. Both the book value and market value of assets under
management have increased year on year by approximately $25 million. Net gain
on the sale of mortgage loans was $0.3 million in 2002 versus $0.2 million in
2001 due to higher mortgage loan sales activity than 2001. In the first quarter
of 2001, the Company consolidated its mortgage origination operations which has
allowed more serviced loans to be retained than had been the case prior to the
consolidation. Other operating income remained unchanged at $0.3 million.
Operating expenses increased $0.4 million for the quarter ended March 31, 2002,
to $7.0 million versus $6.6 million for the 2001 first quarter. The increase
came in nearly all expense categories, reflecting growth in customers, employees
and banking offices. However, the growth rate of expenses at 5.3% is lower than
the growth rate of revenues (net interest income plus other operating income) at
10.8%, resulting in increased profitability. The Company's successful cost
containment efforts initiated in the last half of 2000 continued to pay off in
2002. The Company's efficiency ratio (Operating expenses to revenues) improved
to 72.4% at March 31 2002, from 76.2% at March 31, 2001.
The Company's effective tax rate was 29.5% in both 2002 and 2001.
Liquidity
---------
The Board of Directors has set general liquidity guidelines, 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.
Page 9
Liquidity needs generally arise from asset origination and deposit outflows.
Liquidity needs can increase when asset generation (loans and investments)
exceed net deposit inflows. Conversely, liquidity needs are reduced when the
opposite occurs. In these instances, the needs are funded through short-term
FHLB borrowings, while excess liquidity is sold into the Federal Funds market.
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 March 31, 2002, residential mortgage loans with a carrying value of
approximately $5.7 million were pledged as collateral for the Bank's advances
and letters of credit from the Federal Home Loan Bank, and an additional $39.5
million was available for pledging. Indirect automobile loans with a carrying
value of approximately $78.1 million were pledged as collateral for a $62.5
million line of credit from the Federal Reserve Bank of New York.
Secondarily, the Company uses the liquidity source of time deposit sales 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. The balance of
these so-called "brokered deposits" amounted to $23.3 million at March 31, 2001,
versus $28.9 million at year-end 2001. However, given the Bank's current
classification as "Adequately Capitalized," an increase or renewal of brokered
deposits requires permission from the FDIC. Management does not anticipate
raising brokered deposits for the remainder of 2002, as local deposit growth is
expected to outpace asset growth. Should the need arise, management has no
reason to believe permission would be denied. In addition, during 2002
management intends to increase regulatory capital, which will return the Bank to
a "well-capitalized" classification. Refer to Capital Resources.
For the quarter ended March 31, 2002, the Company generated $8.9 million in net
cash and equivalents versus using $1.4 million for the same quarter in 2001.
Net cash provided by operating activities was $4.4 million in 2002, an increase
over 2001 from $2.3 million. Both the largest source and use of operating cash
in 2002 and 2001 were loans held for sale. However, activity in 2002 was
significantly higher than 2001's due to the effects of the continuing strong
mortgage refinancing market.
Cash provided by investing activities was $6.6 million in 2002 versus a usage of
$29.2 million in 2001. Earnings assets decreased slightly in the first quarter
of 2002 versus a large increase, mainly investments, in 2001.
Cash used by financing activities was $2.1 million in 2002 versus providing
$25.4 million in 2001. Net deposit activity was the main contributor in both
years.
For the remainder of 2002, cash for growth is expected to come primarily from
customer sources; however, a portion will also come from the debt issuance
discussed in "Capital Resources." Customer deposit growth is mainly expected to
come from Monroe County sources.
Less material, but a part of the Company's ongoing operations, and expected to
be funded by normal operations, are liquidity uses such as lease obligations,
long-term debt repayments, and other funding commitments. There has been no
material change from the information presented in the December 31, 2001, Form
10-K.
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 10
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) includes the Bank's Chief Executive Officer, Chief Economist,
Chief Financial Officer, Senior Vice President of Retail Services, Senior Vice
President of Commercial Services and Senior Vice President of Sales. It reports
to the Board of Directors on its activities to monitor and manage interest rate
risk.
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 risks associated with available alternatives. Since the
Company does not utilize derivative financial 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.
Using the aforementioned simulation model, net interest earnings projections
reflect an increase when applying the rising interest rate environment
management projects for late 2002. This profile has changed little since
December 31, 2001. Management projects interest rates to remain stable for at
least the first half of 2002 and rise modestly during the second half of the
year as the economy shows signs of recovery and the need for low-cost funds to
stimulate the market is reduced. A net interest income increase is projected as
management anticipates the ability to increase asset yields faster than deposit
rates, if and when market rates (federal funds rate) rise.
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 also been no significant change
in this measurement since December 31, 2001.
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 possible additional -
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
Page 11
As of March 31, 2002, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as "adequately" capitalized
under the regulatory framework for prompt corrective action. This
classification is the same as at December 31, 2001, but lower than "well"
capitalized, the categorization of the Bank at March 31, 2001. As reported in
prior filings, the Bank's asset growth was anticipated to exceed its capital
formation, which would result in a continuing trend toward declining capital
ratios. The decline from well- to adequately-capitalized primarily has two
impacts on the Bank and Company: (1) FDIC insurance increased on an annual basis
by approximately $0.2 million; and (2) For the Bank to renew or reissue
brokered deposits, it will be required to obtain approval from the FDIC.
Management does not believe either of these items will materially impact the
Company's or Bank's financial condition, operations or liquidity. In addition,
management expects the Bank and Company to return to "well" capitalized in 2002
through the issuance of Trust Preferred Securities, as discussed below.
Trust Preferred Issuance
In the second quarter of 2002, the Company intends to issue up to $20 million of
junior subordinated debentures through a wholly owned business trust. Subject
to regulatory approval, $15 million of the debentures will be considered Tier I
capital of the Company. Certain proceeds of the issuance will be downstreamed
to the Bank. This is expected to return the Bank to "well" capitalized
categorization by the end of the third quarter of 2002.
The Company will establish a wholly-owned statutory business trust formed under
Connecticut law, upon filing a certificate of trust with the Connecticut
Secretary of State. The Trust, which will be consolidated in the Company's
financial statements, will exist for the exclusive purposes of: (i) issuing and
selling 30-year guaranteed preferred beneficial interests in the Company's
junior subordinated debentures ("capital securities") in the aggregate amount of
up to $20 million at a variable rate of interest based upon 3-month LIBOR; (ii)
using the proceeds from the sale of the capital securities to acquire the junior
subordinated debentures issued by the Company; and (iii) engaging in only those
other activities necessary, advisable or incidental thereto. The junior
subordinated debentures will be the sole asset of the Trust, and accordingly,
payments under the Company-obligated junior debentures will be the sole revenue
of the Trust. All of the common securities of the Trust will be owned by the
Company. The Company intends to use approximately $10 million of the proceeds
for a capital injection into the Bank. The remaining proceeds will be used by
the Company for general purposes. The Company's primary sources of funds to pay
interest on the debentures owed to the Trust will be current dividends from the
Company's subsidiaries and from interest earned on investment of the proceeds
not injected to the Bank. Accordingly, the Company's ability to service the
debentures is dependent upon the continued ability of subsidiaries, primarily
the Bank, to pay dividends to the Company. Since the capital securities will be
classified as debt for financial statement purposes, the tax deductible expense
associated with the capital securities will be recorded as interest expense in
the condensed consolidated statement of income. The Company expects to incur
approximately $625,000 in costs to issue the securities.
Page 12
Allowance for Loan Losses and Non-Performing Assets
---------------------------------------------------------
Allowance for Loan Losses
----------------------------
Changes in the allowance for loan losses for the three-month periods ended March
31, 2002 and 2001, follow (dollars in thousands):
March 31,
-------------------
2002 2001
----------- ------
Balance at beginning of period $ 5,480 4,712
Provision for loan losses 241 438
Loans charged off (218) (349)
Recoveries on loans previously charged off 85 104
----------- ------
Balance at end of period $ 5,588 4,905
=========== ======
Allowance as a percentage of total period end loans 1.06% 1.05%
=========== ======
Allowance as a percentage of non-performing loans 74.4% 194.3%
=========== ======
The decrease in the provision for loan losses from the first quarter of 2001 to
the first quarter of 2002 is related to the decrease in net-chargeoffs
year-on-year and a contraction of loans from 2001 (as seen in the table above
and condensed consolidated balance sheets). The increase in the allowance for
loan losses from $4.9 million at March 31, 2001, to $5.6 million at March 31,
2002, is due to overall loan portfolio growth year-on-year. The ratio of
allowance to non-performing loans decreased due to an increase in non-performing
loans, driven mainly by one commercial real estate mortgage relationship, which
management believes is fully secured.
Impaired Loans
---------------
Impaired Loans*
(Dollars in thousands)
Three Twelve Three
months months months
Ended Ended Ended
March 31, December 31, March 31,
2002 2001 2001
----- ----- -----
Recorded investment at period end $ 7,201 8,084 2,299
Impaired loans as percent of total loans 1.38% 1.51% 0.49%
Impaired loans with allowance 238 273 -
Related allowance 238 229 -
Average investment during the period 7,644 3,033 2,190
* For each of the periods indicated, interest income recognized on impaired
loans was not material.
Impaired loans decreased $0.9 million from December 31, 2001, to March 31, 2002,
reflecting the pay-off of a number of loans. In addition, impaired loans as a
percentage of total loans outstanding has also fallen from 1.51% at December 31,
2001, to 1.38% at March 31, 2002. However, impaired loans increased from March
31, 2001, to March 31, 2002, by $4.9 million, reflective of the impact of a
slowing economy on borrowers.
Page 13
Non-Performing Assets
----------------------
Non-Performing Assets
(Dollars in thousands)
March 31, December 31, March 31,
2002 2001 2001
----------- ------------- ----------
Loans past due 90 days or more and accruing
Commercial, financial & agricultural $ 7 34 102
Real estate-commercial 48 - -
Real estate-residential 43 69 -
Consumer 212 166 123
----------- ------------- ----------
Total past due 90 days or more and
accruing 310 269 225
----------- ------------- ----------
Loans in non-accrual status
Commercial, financial & agricultural 2,806 2,793 863
Real estate-commercial 4,174 1,653 1,160
Real estate-residential 221 209 276
Consumer - 333 -
----------- ------------- ----------
Total non-accrual loans 7,201 4,988 2,299
----------- ------------- ----------
Total non-performing loans 7,511 5,257 2,524
----------- ------------- ----------
Other real estate owned - commercial 1,094 1,408 1,454
----------- ------------- ----------
Total non-performing assets $ 8,605 6,665 3,978
=========== ============= ==========
Non performing loans to total period-end loans 1.44% 0.98% 0.54%
=========== ============= ==========
Non performing assets to total period-end
Loans and other real estate 1.64% 1.24% 0.85%
=========== ============= ==========
The Company has no restructured loans.
Total non-performing loans increased $2.2 million to $7.5 million at March 31,
2002, from December 31, 2001, and was due to one relationship (discussed in the
Company's 10-K filing as impaired). Total non-performing loans increased over
the twelve-month period by $5.0 million and is due to the impact of the
generally slower economic conditions on the Company's borrowers.
At March 31, 2002, other real estate owned consisted of three commercial real
estate parcels, totaling $1.1 million. The Company has been successful and
continues to work at liquidating these properties.
Other Recently Issued Accounting Standards
----------------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement 143,
"Accounting for Asset Retirement Obligations," which 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 and Use of Proceeds
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
(a) The annual meeting of stockholders of Canandaigua National
Corporation was held on March 13, 2002, for the following purposes:
Three directors were elected for a three-year term and
votes were cast as follows:
Votes
-------
Name For Withheld Abstain Against
----- ------- -------- ------- -------
Stephen D. Hamlin 117,164 138 0 0
James S. Fralick 117,164 138 0 0
Daniel P. Fuller 117,164 138 0 0
The Company's Certificate of Incorporation was amended to increase the
number of authorized common shares to 2,000,000 from 240,000 and adjust the par
value per share to $20.00 from $50.00. Votes were cast as follows:
Votes
-------
For Withheld Abstain Against
------- -------- ------- -------
114,454 0 840 2,008
Shares of Common Stock of the Company were split on a 3-for-1 basis.
Votes
-------
For Withheld Abstain Against
------- -------- ------- -------
115,152 0 840 1,310
Page 15
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 16
SIGNATURES
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANANDAIGUA NATIONAL CORPORATION
----------------------------------
(Registrant)
May 13, 2002 /s/ George W. Hamlin, IV
------------ ------------------------
Date George W. Hamlin, IV, President
May 13, 2002 /s/ Gregory S. MacKay
------------ ---------------------
Date Gregory S. MacKay, Treasurer
Page 17
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 and amendment
attached hereto
(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 18