UNITED STATES |
|
FORM 10-Q |
[Ö] |
| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 2010 | |
| OR | |
[ ] |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from__________ to__________ |
Commission File Number: 2-94863 |
CANANDAIGUA NATIONAL CORPORATION |
|
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New York |
| 16-1234823 |
|
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|
72 South Main Street |
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(585) 394-4260 |
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, and (2) has been subject to such filing requirements for the past 90 days. |
Yes [Ö] |
| No [ ] |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. |
Yes [ ] |
| No [ ] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [Ö] Non-accelerated filer [ ] Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [Ö] |
The registrant had 473,034 shares of common stock, par value $20.00, outstanding at October 17, 2010. |
1
This report, including information incorporated by reference, contains, and future filings by Canandaigua National Corporation on Forms 10-K, 10-Q and 8-K and future oral and written statements, press releases, and letters to shareholders by Canandaigua National Corporation and its management may contain, 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 disclosures and documents, the words "anticipate," "believe," "contemplate," "estimate," "expect," "foresee," "project," "target," "goal," "budget" 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 discussed within this document and the Companys most recent Annual Report on Form 10-K. These forward-looking statements are based on currently available financial, economic, and competitive data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, so 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, projected, targeted, or budgeted. These forward-looking statements speak only as of the date of the document. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein. We caution readers not to place undue reliance on any of these forward-looking statements. |
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES |
PART I -- FINANCIAL INFORMATION |
| PAGE |
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Item 1. Financial Statements (Unaudited) |
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Condensed consolidated balance sheets at September 30, 2010 and December 31, 2009 |
| 4 |
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Condensed consolidated statements of income for the three- and nine-month periods ended |
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| 5 | |
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Condensed consolidated statements of stockholders' equity for the nine-month periods ended |
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September 30, 2010 and 2009 |
| 6 |
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Condensed consolidated statements of cash flows for the nine-month periods ended |
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| 7 | |
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Notes to condensed consolidated financial statements |
| 8 |
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| 18 | |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
| 28 |
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| 28 | |
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PART II -- OTHER INFORMATION |
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| 29 | |
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Item 1A. Risk Factors |
| 29 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| 29 |
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| 29 | |
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| 29 | |
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| 29 | |
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| 31 | |
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| 33 | |
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3
PART I FINANCIAL INFORMATION |
Item 1. Financial Statements |
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES |
|
| September 30, |
| December 31, |
|
|
| 2010 |
| 2009 |
|
Assets |
|
|
|
|
|
Cash and due from banks | $ | 30,489 |
| 33,453 |
|
Interest-bearing deposits with other financial institutions |
| 5,451 |
| 4,376 |
|
Federal funds sold |
| 90,568 |
| 40,395 |
|
Securities: |
|
|
|
|
|
- Available for sale, at fair value |
| 115,044 |
| 118,925 |
|
- Held-to-maturity (fair value of $161,385 in 2010 and $165,913 in 2009) |
| 154,394 |
| 159,183 |
|
Loans: |
|
|
|
|
|
Commercial and industrial |
| 212,843 |
| 214,841 |
|
Commercial mortgage |
| 443,808 |
| 429,955 |
|
Residential mortgage - first lien |
| 235,535 |
| 218,731 |
|
Residential mortgage - junior lien |
| 94,658 |
| 83,236 |
|
Consumer-automobile indirect |
| 184,330 |
| 171,902 |
|
Consumer and other |
| 28,105 |
| 28,919 |
|
Loans held for sale |
| 13,532 |
| 6,657 |
|
Total gross loans |
| 1,212,811 |
| 1,154,241 |
|
Plus: Net deferred loan costs |
| 6,142 |
| 5,698 |
|
Less: Allowance for loan losses |
| (15,723) |
| (14,232) |
|
Loans - net |
| 1,203,230 |
| 1,145,707 |
|
Premises and equipment - net |
| 13,523 |
| 12,041 |
|
Accrued interest receivable |
| 7,474 |
| 6,692 |
|
Federal Home Loan Bank stock and Federal Reserve Bank stock |
| 2,453 |
| 2,689 |
|
Goodwill |
| 8,818 |
| 8,818 |
|
Intangible assets |
| 5,973 |
| 6,719 |
|
Prepaid FDIC Assessment |
| 5,670 |
| 7,659 |
|
Other assets |
| 21,472 |
| 19,343 |
|
Total Assets | $ | 1,664,559 |
| 1,566,000 |
|
|
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Liabilities and Stockholders' Equity |
|
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|
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Deposits: |
|
|
|
|
|
Demand |
|
|
|
|
|
Non-interest-bearing | $ | 190,966 |
| 182,124 |
|
Interest-bearing |
| 151,547 |
| 131,987 |
|
Savings and money market |
| 656,451 |
| 573,983 |
|
Time |
| 478,656 |
| 489,603 |
|
Total deposits |
| 1,477,620 |
| 1,377,697 |
|
Borrowings |
| 502 |
| 9,841 |
|
Junior subordinated debentures |
| 51,547 |
| 51,547 |
|
Accrued interest payable and other liabilities |
| 14,656 |
| 15,180 |
|
Total Liabilities |
| 1,544,325 |
| 1,454,265 |
|
|
|
|
|
|
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Stockholders' Equity: |
|
|
|
|
|
Common stock, $20 par value; 2,000,000 shares authorized; |
|
|
|
|
|
486,624 shares issued in 2010 and 2009 |
| 9,732 |
| 9,732 |
|
Additional paid-in capital |
| 8,823 |
| 8,591 |
|
Retained earnings |
| 105,702 |
| 97,795 |
|
Treasury stock, at cost (13,590 shares at September 30, 2010 |
|
|
|
|
|
and 15,788 at December 31, 2009) |
| (4,403) |
| (5,143) |
|
Accumulated other comprehensive income, net |
| 380 |
| 760 |
|
Total Stockholders' Equity |
| 120,234 |
| 111,735 |
|
Total Liabilities and Stockholders' Equity | $ | 1,664,559 |
| 1,566,000 |
|
See accompanying notes to condensed consolidated financial statements.
4
|
| Three months |
| Nine months |
| ||||
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Interest income: |
|
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|
Loans, including fees | $ | 17,250 |
| 16,562 | $ | 50,370 |
| 49,121 |
|
Securities |
| 2,120 |
| 2,203 |
| 6,589 |
| 6,631 |
|
Federal funds sold and other |
| 61 |
| 44 |
| 174 |
| 127 |
|
Total interest income |
| 19,431 |
| 18,809 |
| 57,133 |
| 55,879 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
Deposits |
| 2,975 |
| 4,201 |
| 9,162 |
| 13,376 |
|
Borrowings |
| 29 |
| 133 |
| 202 |
| 452 |
|
Junior subordinated debentures |
| 773 |
| 756 |
| 2,250 |
| 2,255 |
|
Total interest expense |
| 3,777 |
| 5,090 |
| 11,614 |
| 16,083 |
|
Net interest income |
| 15,654 |
| 13,719 |
| 45,519 |
| 39,796 |
|
Provision for loan losses |
| 1,700 |
| 880 |
| 4,650 |
| 3,435 |
|
Net interest income after provision for loan losses |
| 13,954 |
| 12,839 |
| 40,869 |
| 36,361 |
|
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Other income: |
|
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|
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Service charges on deposit accounts |
| 2,799 |
| 2,263 |
| 8,096 |
| 6,402 |
|
Trust and investment services income |
| 2,659 |
| 2,698 |
| 8,063 |
| 7,324 |
|
Net gain on sale of mortgage loans |
| 560 |
| 466 |
| 1,470 |
| 2,512 |
|
Mortgage servicing income, net |
| 231 |
| 175 |
| 644 |
| 414 |
|
Loan-related fees |
| 120 |
| 115 |
| 271 |
| 239 |
|
(Loss) on calls of securities and write-down, net |
| (66) |
| - |
| (170) |
| (162) |
|
Other operating income |
| 485 |
| 516 |
| 1,315 |
| 1,343 |
|
Total other income |
| 6,788 |
| 6,233 |
| 19,689 |
| 18,072 |
|
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Operating expenses: |
|
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|
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Salaries and employee benefits |
| 7,707 |
| 6,894 |
| 22,227 |
| 21,232 |
|
Occupancy, net |
| 1,590 |
| 1,553 |
| 5,029 |
| 4,585 |
|
Marketing and public relations |
| 638 |
| 526 |
| 1,788 |
| 1,468 |
|
Office supplies, printing and postage |
| 447 |
| 339 |
| 1,166 |
| 1,082 |
|
Professional and other services |
| 652 |
| 733 |
| 2,516 |
| 2,179 |
|
Technology and data processing |
| 1,009 |
| 896 |
| 2,914 |
| 2,629 |
|
Intangible amortization |
| 249 |
| 265 |
| 746 |
| 797 |
|
Other real estate operations |
| 315 |
| 228 |
| 729 |
| 887 |
|
FDIC insurance |
| 559 |
| 823 |
| 1,615 |
| 2,106 |
|
Other operating expenses |
| 1,230 |
| 1,204 |
| 3,463 |
| 3,304 |
|
Total operating expenses |
| 14,396 |
| 13,461 |
| 42,193 |
| 40,269 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| 6,346 |
| 5,611 |
| 18,365 |
| 14,164 |
|
Income taxes |
| 1,627 |
| 1,347 |
| 4,775 |
| 3,400 |
|
Net income | $ | 4,719 |
| 4,264 | $ | 13,590 |
| 10,764 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share | $ | 9.98 |
| 9.05 | $ | 28.81 |
| 22.83 |
|
Diluted earnings per share | $ | 9.82 |
| 8.89 | $ | 28.35 |
| 22.45 |
|
See accompanying notes to condensed consolidated financial statements.
5
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| Accumulated |
|
|
|
| Number of |
|
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| Additional |
|
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|
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|
|
| Other |
|
|
|
| Shares |
| Common |
| Paid-in |
| Retained |
|
| Treasury |
|
| Comprehensive |
|
|
|
| Outstanding |
| Stock |
| Capital |
| Earnings |
|
| Stock |
|
| Income (Loss) |
|
| Total |
Balance at December 31, 2009 | 470,836 | $ | 9,732 |
| 8,591 |
| 97,795 |
|
| (5,143) |
|
| 760 |
|
| 111,735 |
Comprehensive income: |
|
|
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|
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|
|
Change in fair value of |
|
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Interest rate swaps, |
|
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|
|
net of taxes of $(456) |
|
| - |
| - |
| - |
|
| - |
|
| (714) |
|
| (714) |
Change in unrealized gain on |
|
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|
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|
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|
securities available for sale, |
|
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|
|
|
|
|
|
|
|
|
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|
|
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net of taxes of $106 |
|
| - |
| - |
| - |
|
| - |
|
| 248 |
|
| 248 |
Plus reclassification adjustment |
|
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|
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|
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|
|
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|
|
for realized losses included in |
|
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net income on called securities, |
|
|
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|
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|
|
|
|
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|
|
|
net of taxes of $44 |
|
| - |
| - |
| - |
|
| - |
|
| 86 |
|
| 86 |
Net income |
|
| - |
| - |
| 13,590 |
|
| - |
|
| - |
|
| 13,590 |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 13,210 |
Shares issued as compensation | 156 |
| - |
| - |
| - |
|
| 54 |
|
| - |
|
| 54 |
Purchase of treasury stock | (544) |
| - |
| - |
| - |
|
| (186) |
|
| - |
|
| (186) |
Exercise of stock options, |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
including tax benefit of $232 | 2,586 |
| - |
| 232 |
| (562) |
|
| 872 |
|
| - |
|
| 542 |
Cash dividend - $10.85 per share |
|
| - |
| - |
| (5,121) |
|
| - |
|
| - |
|
| (5,121) |
Balance at September 30, 2010 | 473,034 | $ | 9,732 |
| 8,823 |
| 105,702 |
|
| (4,403) |
|
| 380 |
|
| 120,234 |
|
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Balance at December 31, 2008 | 471,859 | $ | 9,732 |
| 8,591 |
| 87,273 |
|
| (4,819) |
|
| (339) |
|
| 100,438 |
Comprehensive income: |
|
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Change in fair value of |
|
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Interest rate swap, |
|
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|
|
|
|
|
|
|
|
|
|
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|
net of taxes of $93 |
|
| - |
| - |
| - |
|
| - |
|
| 145 |
|
| 145 |
Change in unrealized loss on |
|
|
|
|
|
|
|
|
|
|
|
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securities available for sale, |
|
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|
|
|
|
|
|
|
|
|
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|
net of taxes of $813 |
|
| - |
| - |
| - |
|
| - |
|
| 1,275 |
|
| 1,275 |
Plus reclassification adjustment |
|
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|
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for realized losses included in |
|
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net income on called securities, |
|
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|
|
|
|
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|
|
|
net of taxes of $17 |
|
| - |
| - |
| - |
|
| - |
|
| 25 |
|
| 25 |
Net income |
|
| - |
| - |
| 10,764 |
|
| - |
|
| - |
|
| 10,764 |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
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|
| 12,209 |
Recognition of stock option |
|
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expense |
|
|
|
|
|
|
|
|
|
|
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|
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Purchase of treasury stock | (809) |
| - |
| - |
| - |
|
| (255) |
|
| - |
|
| (255) |
Sale of treasury stock | 106 |
| - |
| - |
| (3) |
|
| 36 |
|
| - |
|
| 33 |
Cash dividend - $9.90 per share |
|
| - |
| - |
| (4,669) |
|
| - |
|
| - |
|
| (4,669) |
Balance at September 30, 2009 | 471,156 | $ | 9,732 |
| 8,591 |
| 93,365 |
|
| (5,038) |
|
| 1,106 |
|
| 107,756 |
|
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See accompanying notes to condensed consolidated financial statements.
6
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES For the nine-month periods ended September 30, 2010 and 2009 (Unaudited) |
|
| 2010 |
|
|
| 2009 |
|
Cash flow from operating activities: |
|
|
|
|
|
|
|
Net income | $ | 13,590 |
|
|
| 10,764 |
|
Adjustments to reconcile net income to |
|
|
|
|
|
|
|
net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation, amortization and accretion |
| 3,916 |
|
|
| 3.670 |
|
Provision for loan losses |
| 4,650 |
|
|
| 3,435 |
|
Gain on sale of premises and equipment and other real estate, net |
| (48) |
|
|
| (20) |
|
Writedown of other real estate |
| 45 |
|
|
| - |
|
Deferred income tax benefit |
| (906) |
|
|
| (736) |
|
Income from equity-method investments, net |
| (38) |
|
|
| (22) |
|
Loss on calls of securities and write-down, net |
| 170 |
|
|
| 162 |
|
Gain on sale of mortgage loans, net |
| (1,470) |
|
|
| (2,512) |
|
Originations of loans held for sale |
| (139,475) |
|
|
| (221,113) |
|
Proceeds from sale of loans held for sale |
| 134,070 |
|
|
| 220,365 |
|
Decrease (increase) in other assets |
| 980 |
|
|
| (2,996) |
|
(Decrease) increase in all other liabilities |
| (1,694) |
|
|
| 3,056 |
|
Net cash provided by operating activities |
| 13,790 |
|
|
| 14,053 |
|
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
Proceeds from maturities and calls |
| 51,885 |
|
|
| 14,850 |
|
Purchases |
| (47,813) |
|
|
| (36,649) |
|
Securities held to maturity: |
|
|
|
|
|
|
|
Proceeds from maturities and calls |
| 23,746 |
|
|
| 31,472 |
|
Purchases |
| (19,802) |
|
|
| (30,796) |
|
Loan originations and principal collections, net |
| (57,221) |
|
|
| (69,366) |
|
Purchase of premises and equipment |
| (3,026) |
|
|
| (1,800) |
|
Calls of FHLB stock, net of purchases of FHLB stock and FRB stock |
| 236 |
|
|
| 322 |
|
Investment in equity-method investments |
| (759) |
|
|
| (28) |
|
Proceeds from sale of other real estate |
| 1,392 |
|
|
| 586 |
|
Net cash used in investing activities |
| (51,362) |
|
|
| (91,409) |
|
|
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
Net increase in demand, savings and money market deposits |
| 110,870 |
|
|
| 114,301 |
|
Net (decrease) increase in time deposits |
| (10,947) |
|
|
| 62,784 |
|
Overnight borrowings, net |
| - |
|
|
| (4,400) |
|
Principal repayments on borrowings |
| (9,356) |
|
|
| (11,580) |
|
Proceeds from sale of treasury stock |
| 54 |
|
|
| 33 |
|
Payments to acquire treasury stock |
| (186) |
|
|
| (255) |
|
Proceeds from issuance of treasury stock under stock option plan |
| 310 |
|
|
| - |
|
Tax benefit from stock option exercise |
| 232 |
|
|
| - |
|
Dividends paid |
| (5,121) |
|
|
| (4,669) |
|
Net cash provided by financing activities |
| 85,856 |
|
|
| 156,214 |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
| 48,284 |
|
|
| 78,858 |
|
Cash and cash equivalents - beginning of period |
| 78,224 |
|
|
| 32,670 |
|
Cash and cash equivalents - end of period | $ | 126,508 |
|
|
| 111,528 |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Interest paid | $ | 11,646 |
|
|
| 16,378 |
|
Income taxes paid |
| 5,668 |
|
|
| 3,324 |
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing activities |
|
|
|
|
|
|
|
Real estate acquired in settlement of loans | $ | 1,923 |
|
|
| 2,864 |
|
|
|
|
|
|
|
|
|
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
(1) Basis of Presentation | ||
|
| |
| The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable regulations of the Securities and Exchange Commission (SEC) 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, 2009 Form 10-K Report of the Company filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management has prepared the financial information included herein without audit by an independent registered public accounting firm. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. 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, 2009. | |
|
| |
| Amounts in prior periods' condensed consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation. | |
|
| |
| Management has evaluated the impact of subsequent events on these financial statements to the date of filing of this Form 10Q with the Securities and Exchange Commission. | |
|
| |
| Effective August 31, 2010, CNB Mortgage Company became a wholly-owned subsidiary of The Canandaigua National Bank and Trust Company. It was formerly a wholly-owned subsidiary of Canandaigua National Corporation. The reason for the change was to bring CNB Mortgage Company under the federal banking regulatory structure from New York States banking regulatory structure, which has become increasingly rigid and costly. There was no change in the consolidated financial results, in segment reporting, or in management of the companies. |
(2) Dividend |
|
On July 14, 2010, the Board of Directors declared a semi-annual $5.70 per share dividend on common stock to shareholders of record on July 24, 2010. The dividend was paid on August 2, 2010. Total dividends declared and paid in 2010 were $10.85 per share compared to $9.90 per share in 2009. |
(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 issuable upon conversion of stock options. Calculations for the three- and nine-month periods ended September 30, 2010 and 2009 follow (dollars in thousands, except share data): |
|
| Three months |
| Nine months |
| ||||
|
| Ended September 30, |
| Ended September 30 |
| ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders | $ | 4,719 |
| 4,264 |
| 13,590 |
| 10,764 |
|
Weighted average common shares outstanding |
| 473,029 |
| 471,248 |
| 471,716 |
| 471,454 |
|
Basic earnings per share | $ | 9.98 |
| 9.05 |
| 28.81 |
| 22.83 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders | $ | 4,719 |
| 4,264 |
| 13,590 |
| 10,764 |
|
Weighted average common shares outstanding |
| 473,029 |
| 471,248 |
| 471,716 |
| 471,454 |
|
Effect of assumed exercise of stock options |
| 7,724 |
| 8,187 |
| 7,679 |
| 7,947 |
|
Total |
| 480,753 |
| 479,435 |
| 479,395 |
| 479,401 |
|
Diluted earnings per share | $ | 9.82 |
| 8.89 |
| 28.35 |
| 22.45 |
|
8
(4) Segment Information |
|
The Company is organized into three reportable segments: the Company and its banking and Florida trust subsidiaries (Bank), CNB Mortgage Company (CNBM), and Genesee Valley Trust Company (GVT). These have been segmented due to differences in their distribution channels, the volatility of their earnings, and internal and external financial reporting requirements. The interim period reportable segment information for the three- and nine-month periods ended September 30, 2010 and 2009 follows (dollars in thousands). |
Three months ended September 30, |
| 2010 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Bank |
| CNBM |
| GVT |
| Intersegment |
| Total |
Net interest income | $ | 15,659 |
| 3 |
| (2) |
| (6) |
| 15,654 |
Non-interest income |
| 5,887 |
| 1,077 |
| 910 |
| (1,086) |
| 6,788 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| 21,546 |
| 1,080 |
| 908 |
| (1,092) |
| 22,442 |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
| 1,700 |
| - |
| - |
| - |
| 1,700 |
Intangible amortization |
| 55 |
| - |
| 194 |
| - |
| 249 |
Other operating expenses |
| 13,011 |
| 593 |
| 766 |
| (223) |
| 14,147 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
| 14,766 |
| 593 |
| 960 |
| (223) |
| 16,096 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax |
| 6,780 |
| 487 |
| (52) |
| (869) |
| 6,346 |
Income tax |
| 1,627 |
| 206 |
| 42 |
| (248) |
| 1,627 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 5,153 |
| 281 |
| (94) |
| (621) |
| 4,719 |
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets | $ | 1,650,207 |
| 12,253 |
| 16,987 |
| (14,888) |
| 1,664,559 |
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| 2009 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Bank |
| CNBM |
| GVT |
| Intersegment |
| Total |
Net interest income | $ | 13,719 |
| 3 |
| (19) |
| 16 |
| 13,719 |
Non-interest income |
| 4,869 |
| 1,105 |
| 920 |
| (661) |
| 6,233 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| 18,588 |
| 1,108 |
| 901 |
| (645) |
| 19,952 |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
| 880 |
| - |
| - |
| - |
| 880 |
Intangible amortization |
| 56 |
| - |
| 209 |
| - |
| 265 |
Other operating expenses |
| 11,891 |
| 494 |
| 793 |
| 18 |
| 13,196 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
| 12,827 |
| 494 |
| 1,002 |
| 18 |
| 14,341 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax |
| 5,761 |
| 614 |
| (101) |
| (663) |
| 5,611 |
Income tax |
| 1,347 |
| 235 |
| (93) |
| (142) |
| 1,347 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 4,414 |
| 379 |
| (8) |
| (521) |
| 4,264 |
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets | $ | 1,575,051 |
| 7,204 |
| 19,651 |
| (11,551) |
| 1,590,355 |
|
|
|
|
|
|
|
|
|
|
|
9
(4) Segment Information (continued)
Nine months ended September 30, |
| 2010 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Bank |
| CNBM |
| GVT |
| Intersegment |
| Total |
Net interest income | $ | 45,534 |
| 9 |
| (6) |
| (18) |
| 45,519 |
Non-interest income |
| 16,608 |
| 2,861 |
| 2,883 |
| (2,663) |
| 19,689 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| 62,142 |
| 2,870 |
| 2,877 |
| (2,681) |
| 65,208 |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
| 4,650 |
| - |
| - |
| - |
| 4,650 |
Intangible amortization |
| 163 |
| - |
| 583 |
| - |
| 746 |
Other operating expenses |
| 37,880 |
| 1,520 |
| 2,495 |
| (448) |
| 41,447 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
| 42,693 |
| 1,520 |
| 3,078 |
| (448) |
| 46,843 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax |
| 19,449 |
| 1,350 |
| (201) |
| (2,233) |
| 18,365 |
Income tax |
| 4,775 |
| 545 |
| 37 |
| (582) |
| 4,775 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 14,674 |
| 805 |
| (238) |
| (1,651) |
| 13,590 |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
| 2009 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Bank |
| CNBM |
| GVT |
| Intersegment |
| Total |
Net interest income | $ | 39,796 |
| 9 |
| (50) |
| 41 |
| 39,796 |
Non-interest income |
| 14,257 |
| 4,342 |
| 2,668 |
| (3,195) |
| 18,072 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| 54,053 |
| 4,351 |
| 2,618 |
| (3,154) |
| 57,868 |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
| 3,435 |
| - |
| - |
| - |
| 3,435 |
Intangible amortization |
| 171 |
| - |
| 626 |
| - |
| 797 |
Other operating expenses |
| 34,671 |
| 1,267 |
| 3,447 |
| 87 |
| 39,472 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
| 38,277 |
| 1,267 |
| 4,073 |
| 87 |
| 43,704 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax |
| 15,776 |
| 3,084 |
| (1,455) |
| (3,241) |
| 14,164 |
Income tax |
| 3,400 |
| 1,208 |
| (494) |
| (714) |
| 3,400 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 12,376 |
| 1,876 |
| (961) |
| (2,527) |
| 10,764 |
|
|
|
|
|
|
|
|
|
|
|
The operating results of GVT for the nine-month period ended September 30, 2009 were negatively affected by a decline in revenues caused by the fall in fair value of assets under administration and a retirement expense accrual upon the former presidents early retirement. |
|
The operating results of CNB Mortgage for the three and nine-month periods ended September 30, 2010 declined due to reduced volume of loan originations particularly refinance activity, which slowed significantly by year-end 2009. |
(5) Loan Servicing Assets |
The Company services first-lien, residential loans for the Federal Home Loan Mortgage Company (FHLMC), also known as Freddie Mac, and certain commercial loans as lead participant. The associated servicing rights (assets) entitle the Company to a future stream of cash flows based on the outstanding principal balance of the loans and contractual servicing fees. Failure to service the loans in accordance with contractual requirements may lead to a termination of the servicing rights and the loss of future servicing fees. |
|
The Company services all loans for FHLMC on a non-recourse basis; therefore, its credit risk is limited to temporary advances of funds to FHLMC, while FHLMC retains all credit risk associated with the loans. Commercial loans are serviced on a non- recourse basis, whereby the Company is subject to credit losses only to the extent of the proportionate share of the loans principal balance owned. |
|
The Companys contract to sell loans to FHLMC and to the Federal Housing Administration (FHA) via third-parties contain certain representations and warranties that if not met by the Company would require the repurchase of such loans. The Company has not historically been subject to a material volume of repurchases nor has it currently been. |
|
Gross servicing fees earned by the Company for the three-month periods ended September 30, 2010 and 2009, respectively, amounted to $346,000 and $294,000, and for the nine-month periods ended September 30, 2010 and 2009 amounted to $1,014,000 and $783,000, respectively. These fees are included in net mortgage servicing income on the statements of income. |
10
(5) Loan Servicing Assets (continued)
|
The following table presents the changes in loan servicing assets for the nine-month periods ended September 30, 2010 and 2009, respectively, as well as the estimated fair value of the assets at the beginning and end of the period (in thousands). |
| 2010 |
| 2009 | |||||
|
| Book |
| Estimated Fair |
| Book |
| Estimated Fair |
|
| Value |
| Value |
| Value |
| Value |
Balance at January 1, | $ | 1,797 |
| $ 2,893 | $ | 855 |
| $ 1,597 |
Originations |
| 597 |
|
|
| 1,206 |
|
|
Amortization |
| (370) |
|
|
| (368) |
|
|
Balance at September 30, | $ | 2,024 |
| $ 3,114 | $ | 1,693 |
| $ 2,288 |
(6) Interest Rate Swap Agreement |
|
The Company is exposed to interest rate risk as a result of both the timing of changes in interest rates of assets and liabilities, and the magnitude of those changes. In order to reduce this risk for the Companys $30 million floating-rate junior subordinated debenture, the Company entered into an interest rate swap agreement in 2007, which expires on June 15, 2011. This interest rate swap agreement modifies the repricing characteristics of the debentures from a floating-rate debt (LIBOR +1.40%) to a fixed-rate debt (5.54%). For this swap agreement, amounts receivable or payable are recognized as accrued under the terms of the agreement, and the net differential is recorded as an adjustment to interest expense of the related debentures. The interest rate swap agreement is designated as a cash flow hedge. Therefore, the effective portion of the swaps unrealized gain or loss was recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, is immediately reported in other operating income. The swap agreement is carried at fair value in Other Liabilities on the Condensed Consolidated Statement of Condition. |
|
In consideration of the pending expiration of the aforementioned agreement, the Company entered into a forward interest rate swap agreement on July 1, 2010. This swap becomes effective on June 15, 2011 and expires on June 15, 2021. This interest rate swap agreement will modify the repricing characteristics of the Companys $30 million floating-rate junior subordinated debenture from a floating-rate debt (LIBOR +1.40%) to a fixed-rate debt (4.81%). The accounting for this is the same as the existing swap agreement. |
(7) Fair Values of Financial Instruments |
|
Current accounting pronouncements require disclosure of the estimated fair value of financial instruments. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly, non-distressed sale between market participants at the measurement date. With the exception of certain marketable securities and one-to-four-family residential mortgage loans originated for sale, the Companys financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with accounting disclosure pronouncements, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. Finally, the Company expects to retain substantially all assets and liabilities measured at fair value to their maturity or call date. Accordingly, the fair values disclosed herein are unlikely to represent the instruments liquidation values, and do not, with the exception of securities, consider exit costs, since they cannot be reasonably estimated by management. |
|
The estimated fair values of the Company's financial instruments are as follows (in thousands): |
|
| September 30, 2010 |
| December 31, 2009 | ||||
|
|
|
|
|
|
|
|
|
|
| Carrying |
| Fair |
| Carrying |
| Fair |
Financial Assets: |
| Amount |
| Value |
| Amount |
| Value |
Cash and equivalents | $ | 126,508 |
| 126,508 |
| 78,224 |
| 78,224 |
Securities, available-for-sale and held-to-maturity | $ | 271,891 |
| 278,882 |
| 280,797 |
| 287,527 |
Loans-net | $ | 1,203,230 |
| 1,241,771 |
| 1,145,707 |
| 1,207,093 |
Loan servicing assets | $ | 2,024 |
| 3,114 |
| 1,797 |
| 2,893 |
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand, savings and |
|
|
|
|
|
|
|
|
money market accounts | $ | 998,964 |
| 998,964 |
| 888,094 |
| 888,094 |
Time deposits | $ | 478,656 |
| 484,888 |
| 489,603 |
| 482,384 |
Borrowings | $ | 502 |
| 504 |
| 9,841 |
| 9,993 |
Junior subordinated debentures | $ | 51,547 |
| 53,036 |
| 51,547 |
| 53,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial instruments: |
|
|
|
|
|
|
|
|
Interest rate swap agreements | $ | (2,607) |
| (2,607) |
| (1,437) |
| (1,437) |
Letters of credit | $ | (148) |
| (148) |
| (120) |
| (120) |
11
(7) Fair Values of Financial Instruments (continued) |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument: |
|
Cash and Equivalents |
|
For these short-term instruments that generally mature in 90 days or less, or carry a market rate of interest, the carrying value approximates fair value. |
|
Securities (Available-for-Sale and Held-to-Maturity) |
|
Fair values for securities are determined using independent pricing services and market-participating brokers, or matrix models using observable inputs. The pricing service and brokers use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to their pricing models include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Management obtains a single market quote or price estimate for each security. None of the quotes or estimates is considered a binding quote, as management would only request one if management had the positive intent to sell the securities in the foreseeable future and management believed the price quoted represented one from a market participant with the intent and the ability to purchase. Internal matrix models are used for non-traded municipal securities. Matrix models consider observable inputs, such as benchmark interest rates and spreads. |
|
Certain securities fair values are determined using unobservable inputs and include bank debt based CDOs. There is a very limited market and limited demand for these CDOs due to imbalances in marketplace liquidity and the uncertainty in evaluating the credit risk in these securities. In determining fair value for these securities, management considered various inputs. Management considered fair values from several brokerage firms which were determined using assumptions as to expected cash flows and approximate risk-adjusted discount rates. |
|
Loans |
|
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by interest type such as floating, adjustable, and fixed-rate loans, and by portfolios such as commercial, mortgage, and consumer. |
|
The fair value of performing loans is calculated by discounting scheduled cash flows through the loans' estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan category. The estimate of maturity is based on the average maturity for each loan classification. |
|
Delinquent loans (not in foreclosure) are valued using the method noted above, and also consider the fair value of collateral, based on 3rd party appraisals, for collateral-dependent loans. While credit risk is a component of the discount rate used to value loans, delinquent loans are presumed to possess additional risk. Therefore, the calculated fair value of loans is reduced by the allowance for loan losses. |
|
The fair value of loans held for sale is estimated based on outstanding investor commitments or in the absence of such commitments, is based on current yield requirements or quoted market prices. |
|
Loan Servicing Assets |
|
Fair value is determined through estimates provided by a third party. To estimate the fair value, the third party considers market prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense. Such assumptions include estimates of the cost of servicing loans, loan default rates, an appropriate discount rate, and prepayment speeds. The estimated fair value of mortgage servicing rights may vary significantly in subsequent periods due to changing interest rates and the effect thereof on prepayment speeds. The key economic assumptions used to determine the fair value of mortgage servicing rights at September 30, 2010 and 2009, and the sensitivity of such values to changes in those assumptions are summarized in the 2009 Annual Report and are substantially unchanged. |
Deposits |
|
The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated using a discounted cash flow approach that applies current market rates to a schedule of aggregated expected maturities of time deposits. |
|
Borrowings |
|
The fair value of borrowings is based on quoted market prices for the identical debt when traded as an asset in an active market. If a quoted market price is not available, fair value is calculated by discounting scheduled cash flows through the borrowings' estimated maturity using current market rates. |
12
|
|
|
|
| Internal models |
|
| Internal models |
|
|
|
|
|
|
| Quoted market |
|
| with significant |
|
| with significant |
|
|
| Total carrying |
|
|
| prices in active |
|
| observable market |
|
| unobservable market |
|
|
| value in the |
|
|
| markets |
|
| parameters |
|
| parameters |
|
|
| Consolidated |
|
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
|
| Balance Sheet |
|
Measured on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
| $ 502 |
|
| - |
|
| - |
|
|
| 502 |
|
U.S. government sponsored |
|
|
|
|
|
|
|
|
|
|
|
|
|
enterprise obligations |
| - |
|
| 40,307 |
|
| - |
|
|
| 40,307 |
|
State and municipal obligation |
| - |
|
| 71,884 |
|
| - |
|
|
| 71,884 |
|
All other |
| - |
|
| 1,394 |
|
| 957 |
|
|
| 2,351 |
|
Total assets |
| $ 502 |
|
| 113,585 |
|
| 957 |
|
|
| 115,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement |
| $ - |
|
| - |
|
| 2,607 |
|
|
| 2,607 |
|
Letters of credit |
| - |
|
| - |
|
| 148 |
|
|
| 148 |
|
Total liabilities |
| $ - |
|
| - |
|
| 2,755 |
|
|
| 2,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans-held-for-sale |
| $ - |
|
| 13,532 |
|
| - |
|
|
| 13,532 |
|
Collateral dependent impaired loans |
| - |
|
| - |
|
| 3,994 |
|
|
| 3,994 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
| - |
|
| - |
|
| 3,255 |
|
|
| 3,255 |
|
Loan servicing assets |
| - |
|
| - |
|
| 2,024 |
|
|
| 2,024 |
|
Total assets |
| $ - |
|
| 13,532 |
|
| 9,273 |
|
|
| 22,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
(8) Fair Values Measurements (continued) |
|
The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three-month and nine-month periods ended September 30, 2010 (in thousands). |
|
| Three months ended |
| Nine months ended |
|
|
| |
|
| September 30, 2010 |
| September 30, 2010 |
|
|
| |
Securities available for sale, beginning of period | $ | 995 |
| $ | 972 |
|
|
|
Unrealized gain included in other comprehensive income |
| 2 |
|
| 25 |
|
|
|
Impairment charge included in earnings |
| (40) |
|
| (40) |
|
|
|
Securities available for sale, end of period | $ | 957 |
| $ | 957 |
|
|
|
|
The following table presents for each of the fair-value hierarchy levels the Companys assets and liabilities that were measured at fair value on a recurring and non-recurring basis at September 30, 2009, by caption on the Consolidated Balance Sheet (dollars in thousands). |
|
|
|
|
| Internal models |
|
| Internal models |
|
|
|
|
| Quoted market |
|
| with significant |
|
| with significant |
| Total carrying |
|
|
| prices in active |
|
| observable market |
|
| unobservable market |
| value in the |
|
|
| markets |
|
| parameters |
|
| parameters |
| Consolidated |
|
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| Balance Sheet |
|
Measured on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
| $ - |
|
| 119,352 |
|
| 814 |
| 120,166 |
|
Total assets |
| $ - |
|
| 119,352 |
|
| 814 |
| 120,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement |
| $ - |
|
| - |
|
| 1,634 |
| 1,634 |
|
Letters of credit |
| - |
|
| - |
|
| 149 |
| 149 |
|
Total liabilities |
| $ - |
|
| - |
|
| 1,783 |
| 1,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
Loans-held-for-sale |
| $ - |
|
| 5,313 |
|
| - |
| 5,313 |
|
Collateral dependent impaired loans |
| - |
|
| - |
|
| 8,995 |
| 8,995 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
| - |
|
| - |
|
| 3,007 |
| 3,007 |
|
Loan servicing assets |
| - |
|
| - |
|
| 1,693 |
| 1,693 |
|
Total assets |
| $ - |
|
| 5,313 |
|
| 13,695 |
| 19,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
(9) Securities |
|
Amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2010 are summarized as follows: |
|
| September 30, 2010 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Unrealized |
|
|
| ||
|
| Amortized |
|
|
|
|
|
| Fair |
|
| Cost |
| Gains |
| Losses |
|
| Value |
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
U. S. Treasury | $ | 502 |
| - |
| - |
|
| 502 |
Government sponsored enterprise obligations |
| 39,970 |
| 351 |
| (14) |
|
| 40,307 |
State and municipal obligations |
| 68,940 |
| 2,962 |
| (18) |
|
| 71,884 |
Corporate obligations(1) |
| 1,190 |
| - |
| (233) |
|
| 957 |
Equity securities |
| 1,292 |
| 102 |
| - |
|
| 1,394 |
|
|
|
|
|
|
|
|
|
|
Total securities Available for Sale | $ | 111,894 |
| 3,415 |
| (265) |
|
| 115,044 |
|
|
|
|
|
|
|
|
|
|
(1) Amortized cost includes cumulative $860,000 write-down for other-than-temporary impairment. | |||||||||
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
Government sponsored enterprise obligations | $ | 9,005 |
| 65 |
| (1) |
|
| 9,069 |
State and municipal obligations |
| 144,536 |
| 6,481 |
| (51) |
|
| 150,966 |
Corporate obligations |
| 853 |
| 497 |
| - |
|
| 1,350 |
|
|
|
|
|
|
|
|
|
|
Total securities Held to Maturity | $ | 154,394 |
| 7,043 |
| (52) |
|
| 161,385 |
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of debt securities by years to maturity as of September 30, 2010, follow (in thousands). Maturities of amortizing securities are classified in accordance with the contractual repayment schedules. Expected maturities will differ from contracted maturities since issuers may have the right to call or prepay obligations without penalties. |
|
| Available for Sale |
| Held to Maturity | ||||
|
| Amortized Cost(1) |
| Fair Value |
| Amortized Cost |
| Fair Value |
Years |
|
|
|
|
|
|
|
|
Under 1 | $ | 15,381 |
| 15,583 |
| 27,358 |
| 27,716 |
1 to 5 |
| 56,730 |
| 59,227 |
| 109,554 |
| 115,182 |
5 to 10 |
| 34,339 |
| 34,855 |
| 16,591 |
| 17,096 |
10 and over |
| 4,152 |
| 3,985 |
| 891 |
| 1,391 |
|
|
|
|
|
|
|
|
|
Total | $ | 110,602 |
| 113,650 |
| 154,394 |
| 161,385 |
(1) Amortized cost includes a cumulative $860,000 write-down for other-than-temporary impairment. |
The following table presents gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010.
September 30, 2010 |
| Less than 12 months |
| Over 12 months |
|
| Total | ||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
|
| Unrealized | ||
Securities Available for Sale |
| Value |
| Losses |
| Value |
| Losses |
| Value |
|
| Losses | ||
Government sponsored enterprise obligations | $ | 8,009 |
| 14 |
| - |
| - |
| 8,009 |
|
| 14 | ||
State and municipal obligations |
| 755 |
| 13 |
| 456 |
| 5 |
| 1,211 |
|
| 18 | ||
Corporate obligations |
| - |
| - |
| 817 |
| 233 |
| 817 |
|
| 233 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total temporarily impaired securities | $ | 8,764 |
| 27 |
| 1,273 |
| 238 |
| 10,037 |
|
| 265 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Securities Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
State and municipal obligations | $ | 3,423 |
| 36 |
| 1,548 |
| 15 |
| 4,971 |
|
| 51 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
(9) Securities (continued) |
|
Substantially all of the unrealized losses on the Company's securities were caused by market interest rate changes from those in effect when the securities were purchased by the Company. With the exception of certain corporate obligations, discussed below, the contractual terms of these securities do not permit the issuer to settle the securities at a price less than par value. Except for certain corporate obligations, all securities rated by an independent rating agency carry an investment grade rating. Because the Company does not intend to sell the securities and it believes it is not likely to be required to sell the securities before recovery of their amortized cost basis, which may be, and is likely to be, maturity, the Company does not consider these securities to be other than temporarily impaired at September 30, 2010, except as discussed below. |
|
In the available-for-sale portfolio, the Company holds approximately $1.0 million of bank trust-preferred securities with an adjusted cost basis of $1.2 million. These securities are backed by debt obligations of banks, with about $0.7 million of the securities backed by two of the largest U.S. banks and $0.3 million backed by a pool of banks debt in the form of a collateralized debt obligation (CDO). As a result of market upheaval, a lack of regular trading market in these securities, and bank failures, the fair value of these securities had fallen sharply in 2008 and continued to fall in the first half of 2009. Until the second quarter of 2009, there had been no reduction in cash receipts (interest) on these securities; that is, they were current as to principal and interest. However, the collateral underlying one CDO had diminished due to debt defaults and interest deferrals of some of the banks, and beginning in the September 2009 quarter, a portion of interest payments due had been deferred. Management analyzed the expected underlying cash flows and the ability of the collateral to produce sufficient cash flows to support future principal and interest payments. Managements analysis indicated these cash flows would be insufficient, and accordingly, the Company recognized other-than-temporary-impairment (OTTI) and wrote down this CDO by $0.7 million during the quarter ended September 30, 2008. An additional OTTI write-down of $0.1 million was taken in the quarter ended September 30, 2009 and a follow write-down of $0.04 million was taken in the quarter ended September 30, 2010. Because all of the impairment was deemed to be credit related, the entire write-down had been charged to income with none charged to other comprehensive income. Management intends to sell this security, as such, if the financial condition of the underlying banks continues to deteriorate, further write-downs could occur before a sale. The maximum potential write-down would be its current carrying value of less than $0.2 million. |
Amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2009 are summarized as follows: |
|
| December 31, 2009 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Unrealized |
|
|
| ||
|
| Amortized |
|
|
|
|
|
| Fair |
|
| Cost |
| Gains |
| Losses |
|
| Value |
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
U.S. Treasury | $ | 502 |
| - |
| (2) |
|
| 500 |
U.S. government sponsored enterprise obligations |
| 35,473 |
| 192 |
| (382) |
|
| 35,283 |
State and municipal obligations |
| 77,742 |
| 3,126 |
| (52) |
|
| 80,816 |
Corporate obligations(1) |
| 1,227 |
| - |
| (255) |
|
| 972 |
Equity securities |
| 1,322 |
| 32 |
| - |
|
| 1,354 |
|
|
|
|
|
|
|
|
|
|
Total securities Available for Sale | $ | 116,266 |
| 3,350 |
| (691) |
|
| 118,925 |
|
|
|
|
|
|
|
|
|
|
(1)Amortized cost includes a $820,000 write-down for other-than-temporary impairment prior to January 1, 2010. | |||||||||
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
U.S. government sponsored agencies obligations | $ | 1,015 |
| 4 |
| - |
|
| 1,019 |
State and municipal obligations |
| 157,414 |
| 6,673 |
| (75) |
|
| 164,012 |
Corporate obligations |
| 754 |
| 128 |
| - |
|
| 882 |
|
|
|
|
|
|
|
|
|
|
Total securities Held to Maturity | $ | 159,183 |
| 6,805 |
| (75) |
|
| 165,913 |
|
|
|
|
|
|
|
|
|
|
16
(9) Securities (continued) |
The following table presents the fair value of securities with gross unrealized losses at December 31, 2009, excluding those for which other-than-temporary-impairment charges have been taken, aggregated by category and length of time that individual securities have been in a continuous loss position.
|
| Less than 12 months |
| Over 12 months |
| Total | ||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
|
| Unrealized | |
Securities Available for Sale |
| Value |
| Losses |
| Value |
| Losses |
| Value |
|
| Losses | |
U.S. Treasury | $ | 500 |
| 2 |
| - |
| - |
| 500 |
|
| 2 | |
U.S. government sponsored enterprise obligations |
| 20,592 |
| 382 |
| - |
| - |
| 20,592 |
|
| 382 | |
State and municipal obligations |
| 4,586 |
| 52 |
| - |
| - |
| 4,586 |
|
| 52 | |
Corporate obligations |
| - |
| - |
| 792 |
| 255 |
| 792 |
|
| 255 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total temporarily impaired securities | $ | 25,678 |
| 436 |
| 792 |
| 255 |
| 26,470 |
|
| 691 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| |
State and municipal obligations | $ | 5,675 |
| 63 |
| 1,808 |
| 12 |
| 7,483 |
|
| 75 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total temporarily impaired securities | $ | 31,353 |
| 499 |
| 2,600 |
| 267 |
| 33,953 |
|
| 766 |
(10) Accounting Pronouncements Implemented in the Current Year | ||
|
| |
| We implemented the following Accounting Standards Updates (ASU) as of January 1, 2010 with no impact to our financial condition or results of operations. In some instances, expanded disclosures were implemented: | |
|
| |
| ASU 2009-16, Accounting for Transfers of Financial Assets. ASU 2009-16 amends the guidance in Topic 860-10, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. | |
|
| |
| ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 amends the guidance related to the consolidation of variable interest entities (VIE). It requires reporting entities to evaluate former Qualifying Special Purpose Entities (QSPEs) for consolidation, changes the approach to determining a VIEs primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. | |
|
| |
| ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). ASU 2010-06 was issued in January 2010. Subtopic 820-10 has been amended to require new disclosures: (a) transfers in and out of Levels 1 and 2 should be disclosed separately including a description of the reasons for the transfers, and (b) activity in Level 3 fair value measurements shall be reported on a gross basis, including information about purchases, sales, issuances, and settlements. The amendments also clarify existing disclosures relating to disaggregated reporting, model inputs, and valuation techniques. The new disclosures were effective for us in the first quarter of 2010, except for the gross reporting of Level 3 activity which is effective beginning in the first quarter of 2011. | |
|
| |
| ASU 2010-09, Subsequent Events (Topic 855). This ASU amends FASB ASC Topic 855, Subsequent Events (originally issued as FASB Statement No. 165, Subsequent Events), so that SEC filers, as defined in the ASU, no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. Entities that are not SEC filers must continue to disclose the date through which subsequent events have been evaluated, including situations in which the financial statements are revised for a correction of an error or retrospective application of U.S. GAAP. The Company is an SEC filer. | |
|
| |
| We implemented the following Accounting Standards Updates (ASU) during the quarter ended September 30, 2010 with no impact to our financial condition or results of operations. | |
|
| |
| ASU No. 2010-11, Derivatives and Hedging (Topic 815). This ASU clarifies that embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another are not subject to potential bifurcation and separate accounting. Other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. The ASU provides guidance about whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and separate accounting. | |
|
|
17
|
| |
(10) Accounting Pronouncements Implemented in the Current Year (continued) | ||
|
| |
| ASU No. 2010-18, Effect of a Loan Modification When The Loan Is Part of a Pool That Is Accounted for as a Single Asset, a consensus of the FASB Emerging Issues Task Force (Issue No. 09-I) (Topic 310). This ASU amends FASB ASC Subtopic 310-30, Receivables Loans and Debt Securities Acquired with Deteriorated Credit Quality, so that modifications of loans that are accounted for within a pool under that Subtopic do not result in the removal of the loans from the pool even if the modifications of the loans would otherwise be considered a troubled debt restructuring. A one-time election to terminate accounting for loans in a pool, which may be made on a pool-by-pool basis, is provided upon adoption of the new guidance. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early adoption was permitted. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| |
The following is our 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. This discussion and analysis supplements our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009. | |
| |
Critical Accounting Estimate | |
| |
We are instructed, pursuant to SEC guidance, to evaluate and disclose those accounting estimates that we judge to be critical - those most important to the portrayal of the Company's financial condition and results, and that require our most difficult, subjective and complex judgments. We consider the Allowance for Loan Losses (allowance) as critical given the inherent uncertainty in evaluating the levels of the allowance required to reflect credit losses in the portfolio. We also consider the valuation of investment securities for Other-Than-Temporary-Impairment (OTTI) as critical in the current market environment given the lack of an active and liquid market for a small number of our holdings. There has been no change in our methodology for estimating the allowance or securities valuation, which is fully described within the 2009 Annual Report. | |
| |
Significant Corporate Developments | |
| |
On October 13, 2010 the Board of Directors elected Frank H. Hamlin, III to become the next president and Chief Executive Officer (CEO) of Canandaigua National Corporation. Frank Hamlin will assume these responsibilities in two phases: | |
FIRST Phase: Effective January 1, 2011 the roles of George W. Hamlin, IV and Daniel P. Fuller, Chairman of the Board will shift. George Hamlin will vacate the role of President and retain the role of CEO for the transition period. George Hamlin will assume the role of Chairman of the Board and retain the existing role of CEO. Frank Hamlin will serve as President for the transition. Daniel Fuller will assume the role of the newly created position of Vice-Chairman of Board. | |
SECOND Phase: Effective some time after January, 1, 2012, but on or before March 31, 2013, Frank Hamlin will become President & CEO. Subject to their re-election by shareholders, George Hamlin and Daniel Fuller will remain as Chairman and Vice-Chairman of both companies. | |
| |
On October 4, 2010, the Bank opened its 24th banking office in Webster, NY at Jackson and Ridge Roads. This full-service office, owned by us, was built on leased land. | |
| |
Effective August 31, 2010, CNB Mortgage Company became a wholly-owned subsidiary of The Canandaigua National Bank and Trust Company. It was formerly a wholly-owned subsidiary of Canandaigua National Corporation. The reason for the change was to bring CNB Mortgage Company under the federal banking regulatory structure from New York States banking regulatory structure, which has become increasingly rigid and costly. There was no change in the consolidated financial results, in segment reporting, or in management of the companies. | |
| |
Financial Overview | |
| |
Diluted earnings per common share for the third quarter of 2010 rose 10.4% to $9.82 from $8.89 in the same quarter of 2009. Net income in these periods was $4.7 million and $4.3 million, respectively. | |
| |
The recent quarters earnings, as compared with the third quarter of 2009, reflected a continued rise in net interest income, resulting from a substantial widening of the net interest margin and offset by a near doubling of the provision for credit losses due to deteriorating credit quality. Also contributing to the improved performance as compared with the year-earlier quarter were continued strength in non-interest income revenue sources and lower relative growth in operating expenses. | |
| |
The current quarters balance sheet growth occurred in the loan portfolio, funded by strong deposit growth. The investment portfolio declined modestly, and Federal Funds Sold increased. Off-balance sheet, both the book value and market value of Assets under Administration increased, reflecting improved stock market performance and new customer accounts and assets. | |
| |
For the fourth quarter we expect modest growth in the loan portfolio as well as in retail and commercial deposits. We expect operating results to remain strong due to revenue growth. We are watching credit conditions closely for signs of improvement, and anticipate a decrease in the provision for loan losses from this quarter if we experience no significant portfolio deterioration in the coming quarter. | |
| |
| |
Impact of Financial Regulation Legislation | |
| |
On July 21, 2010, President Obama signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). The Financial Reform Act significantly alters financial regulation in the United States by creating new regulators, regulating new markets, bringing new firms into the regulatory arena, and providing new rulemaking and enforcement powers to regulators. The Financial Reform Act is intended to address specific issues that contributed to the financial crisis and is heavily remedial in nature. Many of the provisions in the Act are applicable to larger institutions (greater than $10 billion in assets). A summary of the Financial Reform Acts provisions that may potentially impact or have impact on the Company is presented in the section entitled Legislative and Fiscal Matters below. | |
|
|
At September 30, 2010, total assets were $1,664.6 million, up $40.6 million or 2.5% from $1,624.0 million at June 30, 2010. |
|
Cash and cash equivalents (cash, balances with other financial institutions, and federal funds sold) were $126.5 million, rising $13.1 million on strong deposit growth. |
|
The securities portfolio fell $3.2 million or 1.6% from June 2010. Much like we have experienced all year, the third quarter of 2010 saw a continuation of security calls (i.e., issuers repaid debt obligations before their stated maturities). The low interest rate environment has made it beneficial for issuers to call outstanding higher cost debt and replace with lower cost debt. Conversely, with these investments called, we are finding fewer investments with attractive terms (rate, maturity, credit quality) in which to invest. Accordingly, we purchased fewer investments in the quarter than had matured and called. During the fourth quarter of 2010 we expect more securities to be called, but we cannot accurately predict the volume. We expect to reinvest some funds into new investments, but the portfolios total size could shrink further if attractive opportunities are not available. |
|
The securities portfolio consists principally of New York State municipal obligations (81.4% of total at September 30, 2010) with the remainder mostly in US Treasury and government sponsored enterprise obligations. The total fair value of both the available-for-sale and the held-to-maturity securities portfolios exceeded amortized cost as a result of a decrease in mid- and long-term market rates since the securities purchase. In both portfolios we hold some securities with fair values below their amortized cost and concluded at September 30, 2010, there are none considered to be other than temporarily impaired, which could require a write-down of carrying value in the income statement other than one security discussed below. |
|
During this quarter, due to continued credit deterioration of the underlying collateral in one CDO, we wrote down its carrying value by less than $0.1 million. This is in addition to the $0.82 million cumulative write-down we took on this CDO in prior years. This CDO is backed by a pool of debt obligations of banks. Because of the continuing economic strains and bank failures, the fair value of this security had fallen further. The collateral underlying this CDO had diminished due to debt defaults and interest deferrals of some of the banks. As in each quarter, we analyzed the expected underlying cash flows and the ability of the collateral to produce sufficient cash flows to support future principal and interest payments. Our analysis indicated these cash flows would be insufficient, and accordingly, we have written down this CDO. Though we believe our fair value estimate is reasonable, it is possible future write-downs could be necessary in future periods. The carrying value of this CDO is less than $0.2 million at September 30, 2010. |
|
Gross loans increased $30.9 million to $1,218.9 from $1,188.0 million. The commercial portfolios increased $6.5 million due to higher originations, principally in commercial and industrial loans. The residential loan portfolios increased $11.5 million reflecting our capturing of business in the mortgage refinance arena and higher draws on home equity lines of credit. The consumer loan portfolios increased $15.4 million for the quarter principally due to higher originations of indirect automobile loans. In the coming quarter we expect the commercial and residential portfolios to grow similarly to this quarter and consumer growth to slow due to seasonally lower indirect automobile originations. Please see the section entitled Impaired Loans and Non-Performing Assets for a discussion of loan credit quality. |
|
Total deposits at September 30, 2010, were $1,477.6 million and were up $45.6 million from June 30, 2010. Growth occurred mostly in higher interest-bearing accounts among all customer types. Unlike last quarter, we experienced an increase in time deposits principally driven by municipal customers investing school tax receipts for the short-term. Continuing the trend weve experienced in recent quarters we expect both retail and commercial customer account growth mostly in demand, savings and money market accounts with little growth in time deposits. We expect municipal deposits, which increased $18.3 million this quarter consistent with seasonal fluctuations, to decline somewhat. |
|
As expected, total borrowings fell $8.1 million during the quarter due to scheduled maturities. We do not expect to incur new long-term borrowings or need to access overnight borrowings for the remainder of the year, because the strength of deposit inflows should be sufficient to fund the increases we expect in earning assets and the deposit outflows of municipalities. |
|
19
|
Results of Operations (three months ended September 30, 2010) |
|
Net interest income increased $1.9 million or 14.1% for the quarter over the same quarter in 2009, reflecting the positive impact of the balance sheet's year-over-year growth and a widening of interest rate margin and spread. With general interest rates remaining low we have seen both asset yields and liability costs fall as maturing products are replaced at lower interest rates. Given the general steepness of the yield curve, this downward pricing is impacting deposit costs more favorably than asset yields, thus widening our interest rate spread and margin. |
|
On a tax-equivalent basis, compared to the same quarter in 2009, the overall growth in interest-earning assets and interest-bearing liabilities had a $1.1 million positive impact on net interest income, and the change in rates had a $0.8 million positive impact. Net interest margin was 4.32% for the third quarter of 2010, up from 4.03% during the same quarter in 2009. As we discussed in our 2009 Annual Report, we expect net interest income to increase for the year due to our balance sheet growth, but we had expected little positive impact from rate changes given the interest rate environment and our anticipation of a higher rate environment towards the second half of the year. In actuality, the interest rate environment has fallen during the year, resulting in declining interest costs. |
|
Summary tax-equivalent net interest income information for the three-month periods ended September 30, 2010 and 2009 follows (dollars in thousands). |
|
|
|
|
| 2010 |
|
|
|
|
|
| 2009 |
|
|
|
|
|
|
|
|
|
|
|
| Annualized |
|
|
|
|
|
| Annualized |
|
|
|
|
|
| Average |
|
|
| Average |
|
| Average |
|
|
| Average |
|
|
|
|
|
| Balance |
| Interest |
| Rate |
|
| Balance |
| Interest |
| Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
| $ | 1,534,319 |
| 20,359 |
| 5.31 | % |
| 1,457,579 |
| 19,772 |
| 5.43 | % |
|
|
Non interest earning assets |
|
| 103,623 |
|
|
|
|
|
| 92,515 |
|
|
|
|
|
|
|
Total assets |
| $ | 1,637,942 |
|
|
|
|
|
| 1,550,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
| $ | 1,313,287 |
| 3,777 |
| 1.15 | % |
| 1,252,439 |
| 5,089 |
| 1.63 | % |
|
|
Non-interest bearing liabilities |
|
| 206,198 |
|
|
|
|
|
| 193,040 |
|
|
|
|
|
|
|
Equity |
|
| 118,457 |
|
|
|
|
|
| 104,615 |
|
|
|
|
|
|
|
Total liabilities and equity |
| $ | 1,637,942 |
|
|
|
|
|
| 1,550,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
| 4.16 | % |
|
|
|
|
| 3.80 | % |
|
|
Net interest margin |
|
|
|
| $16,582 |
| 4.32 | % |
|
|
| 14,683 |
| 4.03 | % |
|
|
The provision for loan losses was $1.7 million for the quarter, about double the same quarter last year. The higher provision in the 2010 quarter was mostly driven by weakened asset quality indicators (past-due and nonaccrual loans, impaired loans, current and historical net-charge-offs) compared to the same period last year, offset by loan portfolio growth. A summary of the allowance for loan losses and net charge-offs for the year to date is presented in a following section. |
|
Total other income for the quarter ended September 30, 2010 increased 8.9% to $6.8 million from $6.2 million in 2009. Service charges on deposit accounts increased 23.7% reflecting customer usage of our Courtesy Limit product launched in the last quarter of 2009. Account maintenance service charges (included in service charges) were up slightly year-on-year reflecting growth in new accounts. Also included in the same line item, debit and ATM card revenues continued to increase with consumers shifting from cash and checks to electronic transactions. We discussed in prior period reports our concern that service charge revenues in the second half of 2010 may be substantially lower than the first half due to the impact of recent federal regulations limiting financial institutions sales of overdraft protection products. Our cross-functional team of employees successfully modified our product offerings consistent with these new regulations, and we have seen no measureable decline in revenues. This confirms our belief that (1) we have developed a well-structured service offering, and (2) despite the belief of legislators and consumer advocates, customers want this service and will pay for it to protect their financial affairs. With respect to our other significant source of deposit account related revenues we remain concerned that the Financial Reform Act, discussed elsewhere, may negatively impact our debit card income beginning in the second half of 2011, depending upon regulations promulgated by the Federal Reserve. |
|
Trust and investment services income was relatively unchanged at $2.7 million for the quarter compared to last year. Total assets under administration (see table below) have grown markedly year on year due to both organic growth in underlying accounts and higher market value of assets within the accounts resulting from improved equity and bond markets. However, the stock markets poor performance earlier in the third quarter 2010 and a shift to lower revenue services by customers more than offset the market value gains realized from the strong market performance later in the quarter. We anticipate organic and market value growth to continue into the coming quarters with year-over-year growth rates expected to be less than 10%. |
20
Assets Under Administration as of (in thousands) |
|
| September 30, |
| June 30, |
| December 31, |
| September 30, |
|
| 2010 |
| 2010 |
| 2009 |
| 2009 |
|
|
|
|
|
|
|
|
|
Cost basis of assets under administration |
| $ 1,617,685 |
| 1,591,411 |
| 1,591,943 |
| 1,537,263 |
|
|
|
|
|
|
|
|
|
Fair value of assets under administration |
| $ 1,729,316 |
| 1,607,528 |
| 1,651,777 |
| 1,583,716 |
|
|
|
|
|
|
|
|
|
|
With the rapid fall in mortgage interest rates during 2009 we saw the largest refinance boom in over five years. By the end of 2009, rates had settled and slightly increased into 2010. This increase in rates led to a lower volume of refinance loans in 2010 compared to 2009. Additionally, the federal governments The Worker, Homeownership, and Business Assistance Act of 2009s extension of the tax credit to April 2010 led to higher demand for purchase money mortgages last quarter, thus pulling forward home purchases that might have occurred in the third quarter of 2010. Consequently, our total closings for the quarter fell nearly 17% compared to the same quarter in 2009. Corresponding with this decline in volume, the net gain on loans sold fell nearly 42% when compared to 2009. Entering the end of the home selling season in our region, we expect closings in the coming quarter to be lower than this quarters. However, since mortgage rates in the first month of the 2010 fourth quarter have been at historically low levels, it is possible there will be another wave of heavy refinance activity. |
CNB Mortgage Closed Loans by Type |
|
| 2010 |
| 2009 |
|
Purchase money mortgages | $ | 34,570 |
| 44,476 |
|
Refinance mortgages |
| 29,083 |
| 31,921 |
|
Total mortgage originations | $ | 63,653 |
| 76,397 |
|
|
|
|
|
|
|
Percentage of loans retained in portfolio |
| 13.7 | % | 23.4 | % |
|
The heavy mortgage refinance activity in the past two years had led us to sell more originations to third parties rather than add these low-rate, long-term assets to our portfolio. We service many of these originated loans on behalf of Freddie Mac. The amount of loans serviced stood at $423.0 million at September 30, 2010 compared to $373.7 million at September 30, 2009. Consistent with this increase in loans serviced we have seen an increase in mortgage servicing income. We expect this increasing trend to continue as long as rates remain historically low and we service the sold originated loans for Freddie Mac. |
|
Total operating expenses grew 6.9% or $1.0 million for the quarter ended September 30, 2010, compared to the same three-month period in 2009. All categories with the exception of FDIC insurance increased, and were consistent with the growth in our franchise-loans, deposits, assets under administration, etc. The largest component increase was in salaries and employee benefits reflecting the addition of new staff, raises for incumbents, and higher bonus accruals due to our higher than budgeted earnings. We expect similar results for the fourth quarter of the year. FDIC insurance expense was lower than last year when we were accruing for expected higher premiums. |
|
Occupancy costs have increased with the addition of new offices including our newest banking offices in the City of Rochester, New York and the Town of Webster, New York. Marketing and public relations expenses have increased due to an increase in television advertising, promotional activities in Sarasota, Florida, and a higher level of charitable contributions to not-for-profit agencies in our communities. Office supplies expenses and technology and related services expenses have increased consistent with the aforementioned activities. Professional and other services declined mostly due to lower legal costs which can fluctuate depending upon the scope of services needed. |
|
The quarterly effective tax rate was 25.6% in 2010 and 24.0% in 2009. The change in the effective rate is attributable to the ratio of tax-exempt income to total income. |
|
| Financial Condition and Results of Operations (nine months ended September 30, 2010) | |
|
| |
At September 30, 2010, total assets of the Company were up $98.6 million or 6.3% from December 31, 2009. Cash and equivalents (cash, balances and federal funds sold) increased as a result of securities maturities and calls and net deposit growth exceeding net loan originations and borrowings maturities. Securities fell $8.7 million as we chose to purchase fewer investments at current low long-term rates so as to better manage for an eventual increasing interest rate environment. Loans grew $59.0 million or 5.1%. Total deposits at September 30, 2010, were up $99.9 million or 7.3% with a little over half of the growth coming from consumer and commercial depositors. | ||
|
| |
Net interest income improved 14.4% for the nine-month period in 2010 from the same period in 2009. The increase in net interest margin was caused by rates on interest-bearing liabilities falling faster than yields on interest-earning assets, combined with growth in the average balance of these liabilities and assets. |
|
Summary tax-equivalent net interest income information for the nine-month periods ended September 30, 2010 and 2009 follows (dollars in thousands): |
|
|
|
|
| 2010 |
|
|
|
|
|
| 2009 |
|
|
|
|
|
|
|
|
|
|
|
| Annualized |
|
|
|
|
|
| Annualized |
|
|
|
|
|
| Average |
|
|
| Average |
|
| Average |
|
|
| Average |
|
|
|
|
|
| Balance |
| Interest |
| Rate |
|
| Balance |
| Interest |
| Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
| $ | $1,507,408 |
| 59,958 |
| 5.30 | % |
| 1,420,570 |
| 58,737 |
| 5.51 | % |
|
|
Non interest earning assets |
|
| 104,585 |
|
|
|
|
|
| 89,059 |
|
|
|
|
|
|
|
Total assets |
| $ | 1,611,993 |
|
|
|
|
|
| 1,509,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
| $ | 1,310,502 |
| 11,614 |
| 1.18 | % |
| 1,233,502 |
| 16,082 |
| 1.74 | % |
|
|
Non-interest bearing liabilities |
|
| 186,542 |
|
|
|
|
|
| 173,644 |
|
|
|
|
|
|
|
Equity |
|
| 114,949 |
|
|
|
|
|
| 102,483 |
|
|
|
|
|
|
|
Total liabilities and equity |
| $ | 1,611,993 |
|
|
|
|
|
| 1,509,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
| 4.12 | % |
|
|
|
|
| 3.77 | % |
|
|
Net interest margin |
|
|
|
| $48,344 |
| 4.28 | % |
|
|
| 42,655 |
| 4.00 | % |
|
|
Other income for the nine months ended September 30, 2010, increased 8.9% to $19.7 million from $18.1 million in 2009. The same factors impacting the three-month period impacted the nine-month period results. |
Mortgage originations fell 32.1% for the nine month period ended September 30, 2010 versus the same period in 2009 due to the slowing of the mortgage refinance boom last year, somewhat offset by increased originations of purchase money mortgages in 2010 resulting from the aforementioned tax credit which expired in the second quarter. Along with the overall decrease in volume was the reduction in net gain on the sale of mortgage loans. A summary of originations follows (dollars in thousands): |
|
CNB Mortgage Closed Loans by Type |
For the nine-month periods ended September 30, |
(dollars in thousands). |
|
| 2010 |
| 2009 |
|
Purchase money mortgages | $ | 112,082 |
| 92,569 |
|
Refinance mortgages |
| 65,225 |
| 168,510 |
|
Total mortgage originations | $ | 177,307 |
| 261,079 |
|
|
|
|
|
|
|
Percentage of loans retained in portfolio |
| 21.3 | % | 15.3 | % |
Operating expenses increased 4.8% or $1.9 million for the nine months ended September 30, 2010, over the same period in 2009. Excluding the one-time items in the second quarter of 2009 totaling $1.5 million, operating expenses increased 8.9% reflecting our franchise growth. Please refer to the three-month period discussion. |
|
The Company's effective tax rate for the year to date in 2010 increased to 26.0% from 24.0% in 2009. The change in the effective rate is attributable to the ratio of tax-exempt income to total income. |
| Liquidity | |
|
| |
| There has been no material change from December 31, 2009 in our available sources of wholesale liquidity from either the Federal Home Loan Bank of New York (FHLB) or the Federal Reserve Bank of New York. At September 30, 2010 we had no overnight or short-term borrowings outstanding, and during the quarter we did not utilize any overnight or short-term borrowings. | |
|
| |
| For the nine months ended September 30, 2010, cash flows from all activities provided $48.3 million in net cash and cash equivalents versus $78.9 million for the same period in 2009. In both years the principal source of cash inflows was deposits. | |
|
| |
| Net cash provided by operating activities was $13.8 million in 2010 versus $14.1 million in 2009. Both the largest source and use of operating cash in 2010 and 2009 were loans held for sale with activity in 2010 about 40% lower than that of 2009. Excluding the effect of loans held for sale, operating activities provided $20.7 million cash for the nine-month period in 2010 and $17.3 million in 2009. | |
|
| |
| During the first nine months of 2010, investing activities used $51.4 million in cash and equivalents while using $91.4 million in 2009. Major investing activities in both periods occurred in the loan portfolio. Securities activities provided cash in 2010 as maturities and calls of higher yield investments more than offset our new investments in lower yields investments. In 2009, securities purchases outpaced maturities and calls. | |
|
| |
| Cash provided by financing activities was $85.9 million in 2010 versus $156.2 million in 2009. The main contributor in both years was deposit activity with 2010s a little more than half of 2009s. | |
|
| |
| For the remainder of 2010, cash for growth is expected to come primarily from operating activities and customer deposits. Customer deposit growth is expected to come mainly from Monroe and Ontario Counties consumers and businesses. | |
| ||
| ||
Contractual obligations and commitments | ||
| ||
Less material, but a part of our ongoing operations, and expected to be funded through 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 disclosed in our 2009 Annual Report. | ||
| ||
Also, as discussed more fully in our 2009 Annual Report, in the normal course of business, various commitments and contingent liabilities are outstanding. Because many commitments and almost all letters of credit expire without being funded in whole or in part, the notional amounts are not estimates of future cash flows. The following table presents the notional amount of the Company's significant commitments. Most of these commitments are not included in the Company's consolidated balance sheet (in thousands). |
|
| September 30, 2010 |
|
| December 31, 2009 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| Notional |
|
|
|
| Notional |
|
|
|
| Amount |
|
|
|
| Amount |
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
Commercial lines of credit |
| $ | 105,231 |
|
|
|
| 104,423 |
|
Commercial real estate and construction |
| $ | 20,292 |
|
|
|
| 23,069 |
|
Residential real estate at fixed rates |
| $ | 5,099 |
|
|
|
| 5,824 |
|
Home equity lines of credit |
| $ | 141,418 |
|
|
|
| 113,982 |
|
Unsecured personal lines of credit |
| $ | 16,042 |
|
|
|
| 15,937 |
|
Standby and commercial letters of credit |
| $ | 9,775 |
|
|
|
| 8,298 |
|
Commitments to sell real estate loans |
| $ | 13,532 |
|
|
|
| 6,657 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Resources |
|
Under the regulatory framework for prompt corrective action, as of September 30, 2010, the Company and Bank are categorized as "well-capitalized." This is unchanged from December 31, 2009, and management anticipates no change in this classification for the foreseeable future |
|
On September 12, 2010, the Basel Committee on Banking Supervision released its proposal for revising capital requirements for internationally active financial institutions. These new standard are called Basel III. As a signatory to this proposal, the United States banking regulators will be revising capital standards for financial institutions in the U.S. Accordingly, our capital standards will change. However, regulators have not released any new standards and are not expected to do so for some time. Furthermore, the international standards do not become fully effective until 2018, which is likely when the U.S. standards would become fully effective. It is too early to determine whether there will be any material impact to the Company. |
23
Credit-Related Information Allowance for Loan Losses and Net Charge-offs |
|
Changes in the allowance for loan losses for the nine-month periods ended September 30, 2010, and 2009 follow (dollars in thousands): |
|
| September 30, | ||||
|
| 2010 |
|
| 2009 |
|
Balance at beginning of period | $ | 14,232 |
|
| 11,992 |
|
Provision for loan losses |
| 4,650 |
|
| 3,435 |
|
Loans charged off |
| (4,155) |
|
| (1,862) |
|
Recoveries on loans previously charged off |
| 996 |
|
| 615 |
|
Balance at end of period | $ | 15,723 |
|
| 14,180 |
|
|
|
|
|
|
|
|
Allowance as a percentage of total period end loans |
| 1.30 | % |
| 1.23 | % |
|
|
|
|
|
|
|
Allowance as a percentage of non-performing loans |
| 66.4 | % |
| 75.4 | % |
|
|
|
|
|
|
|
Net charge-offs to average loans (annualized) |
| 0.36 | % |
| 0.15 | % |
The provision for loan losses for the nine-month period ended September 30, 2010 was substantially higher than the same period in 2009, reflecting growth in the allowance for loan losses. The balance in the allowance and the provision for loan losses have increased with growth in total loans and negative changes in asset quality compared to 2009 reflecting actual and inherent losses in the portfolio. As discussed more fully in the 2009 Annual Report, we determine the amount necessary in the allowance for loan losses based upon a number of factors. Based on our current assessment of the loan portfolio, we believe the amount of the allowance for loan losses at September 30, 2010, is adequate at $15.7 million. However, should this years trend of generally higher non-performing and non-accrual loans continue, or should we experience further declines in customers credit quality measured through loan impairment or internal loan classifications, we may need a higher allowance for loan losses as a percentage of total loans, which would necessitate an increase to the provision for loan losses. |
|
Net charge-offs to average loans increased during 2010 to 36 basis points compared to 15 basis points in 2009. This is a historically high net charge-off rate for us and was driven by a large charge-off on an impaired commercial loan with an impaired reserves in the first quarter coupled with a higher level of charge-offs on smaller balance commercial loans and indirect automobile loans throughout the year. Net charge-offs in the third quarter of 2010 were $0.9 million, compared to $0.1 million in the second quarter and $2.2 million in the first quarter of 2010. |
|
In the coming quarter, we do not expect a continuation of either the very low net charge-off rate of the second quarter nor the very high rate of the first quarter. We anticipate a return to annualized net charge-offs in the 25-35 basis points range if we experience no significant portfolio deterioration. As is our internal practice, we order updated appraisals on a regular basis to verify the adequacy of collateral underlying loans or on an ad-hoc basis when we believe a borrowers credit or collateral position has changed. In accordance with this practice in October 2010, we ordered new appraisals for one commercial real estate secured loan totaling $0.5 million which recently became vacant, and one inventory secured loan totaling $2.2 million. Should the appraisals indicate a lower value than we have currently ascribed, establishment of impairment reserves or charge-offs may be necessary, which could be material. |
24
Non-Performing Assets and Impaired Loans |
Non-Performing Assets | |
Non-Performing Assets | |
(Dollars in thousands) |
|
| September 30, |
| June 30, |
| March 31, |
| December 31, |
| September 30, |
|
|
| 2010 |
| 2010 |
| 2010 |
| 2009 |
| 2009 |
|
Loans past due 90 days or more and accruing: |
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | 305 |
| 196 |
| 202 |
| 422 |
| 117 |
|
Real estate-commercial |
| 14 |
| 191 |
| 369 |
| - |
| 667 |
|
Real estate-residential |
| 273 |
| 24 |
| 407 |
| 290 |
| 730 |
|
Consumer and other |
| 228 |
| 472 |
| 107 |
| 375 |
| 312 |
|
Total past due 90 days or more and accruing |
| 820 |
| 883 |
| 1,085 |
| 1,087 |
| 1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in non-accrual status: |
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| 8,535 |
| 9,245 |
| 8,850 |
| 10,282 |
| 11,586 |
|
Real estate-commercial |
| 11,506 |
| 10,651 |
| 12,497 |
| 5,656 |
| 3,711 |
|
Real estate-residential |
| 2,609 |
| 2,146 |
| 2,705 |
| 2,609 |
| 1,690 |
|
Consumer and other |
| 200 |
| - |
| - |
| - |
| - |
|
Total non-accrual loans |
| 22,850 |
| 22,042 |
| 24,052 |
| 18,547 |
| 16,987 |
|
Total non-performing loans |
| 23,670 |
| 22,925 |
| 25,137 |
| 19,634 |
| 18,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| 421 |
| 529 |
| 547 |
| 603 |
| 648 |
|
Residential |
| 2,834 |
| 3,279 |
| 2,069 |
| 2,166 |
| 2,359 |
|
Total other real estate owned |
| 3,255 |
| 3,808 |
| 2,616 |
| 2,769 |
| 3,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets | $ | 26,925 |
| 26,733 |
| 27,753 |
| 22,403 |
| 21,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured commercial real-estate |
|
|
|
|
|
|
|
|
|
|
|
debt (included non-accrual loans) | $ | 4,805 |
| 4,805 |
| None |
| None |
| None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total period-end loans |
| 1.94 | % | 1.94 | % | 2.19 | % | 1.70 | % | 1.63 | % |
Non-performing assets to total period-end |
|
|
|
|
|
|
|
|
|
|
|
loans and other real estate |
| 2.20 | % | 2.25 | % | 2.42 | % | 1.94 | % | 1.89 | % |
|
|
Total non-performing loans were $23.7 million at September 30, 2010, up from $22.9 million in the previous quarter, but down from $25.1 million at March 31, 2010. The general increase in non-performing loans during the year from less than $20 million at December 31, 2009 has come mainly in real estate secured commercial loans and was principally due to a large commercial relationship discussed in the Annual Report. The loans underlying these relationships are considered impaired, but are sufficiently collateralized such that no impairment reserve is necessary. |
|
Though a comparatively modest amount, other real-estate owned has also increased during the year. Given the current economic climate and fragile recovery, and overall growth in non-performing loans, we can expect additional foreclosures in the coming periods. |
|
The percentage of non-performing loans to total loans has risen substantially over the last twelve months, but showed improvement from the first quarter and stability relative to last quarter. While the year-on-year increase is large, it is consistent with the peak percentage reached by the Company in the last recession earlier in the decade of 1.93%. |
|
In the process of resolving nonperforming loans, we may choose to restructure the contractual terms of certain loans and attempt to work out alternative payment schedules with the borrower in order to avoid foreclosure of collateral. Any loans that are modified are evaluated to determine if they are "troubled debt restructurings (TDR)" and if so, are evaluated for impairment. A TDR is defined as a loan restructure where for legal or economic reasons related to a borrowers financial difficulties, the creditor grants one or more concessions to the borrower that it would not otherwise consider. Terms of loan agreements may be modified to fit the ability of the borrower to repay in respect of its current financial status and restructuring of loans may include the transfer of assets from the borrower to satisfy debt, a modification of loan terms, or a combination of the two. If a satisfactory restructure and payment arrangement cannot be reached, the loan may be referred to legal counsel for foreclosure. As of September 30, 2010 there was one lending relationship totaling $4.8 million that is considered a TDR. This is set forth in the Non-Performing Assets table as restructured commercial real estate debt |
|
25
Impaired Loans |
Information on impaired loans for the nine-month periods ended September 30, 2010, and 2009 and twelve months ended December 31, 2009, follows (dollars in thousands): |
|
| Nine Months |
| Twelve Months |
| Nine Months |
|
|
| Ended |
| Ended |
| Ended |
|
|
| September 30, |
| December 31, |
| September 30, |
|
|
| 2010 |
| 2009 |
| 2009 |
|
|
|
|
|
|
|
|
|
Recorded investment at period end | $ | 22,850 |
| 19,634 |
| 18,813 |
|
Impaired loans as percent of total loans |
| 1.88 | % | 1.69 | % | 1.63 | % |
Impaired loans with related allowance | $ | 3,994 |
| 7,771 |
| 8,995 |
|
Related allowance | $ | 833 |
| 2,799 |
| 3,399 |
|
Average investment during period | $ | 21,713 |
| 14,306 |
| 13,246 |
|
Interest income recognized during period |
| n/m |
| n/m |
| n/m |
|
n/m not meaningful |
|
|
|
|
|
|
|
As noted in the Non-Performing Assets section, we experienced a significant increase in non-performing loans during the year. This increase resulted from a small number of large commercial loans becoming past due on scheduled principal and interest payments. Impaired loans with a related reserve have declined since year end, and reserves for impaired loans declined to $0.8 million at September 30, 2010 versus $2.8 million at December 31, 2009 and $3.4 million at September 30, 2009. The balance of impaired loans with a related reserve declined due to a combination of (1) improved financial position of loans, and (2) charge-offs of loans. These charge-offs also reduced the related allowance. We believe the trend of impaired loans, the level of impaired loans, and the related reserve are consistent with current economic conditions. Typically the longer an economic recession continues the more likely borrowers will experience financial difficulties due to constraints on their income and cash flow. These constraints make it more difficult for them to timely pay their debt obligations, resulting in higher non-accrual and impaired loans for us. We continue to see signs of improving regional economic conditions, but their positive impact will take time to be realized only slowly. We can anticipate more loans, though we know of no material ones that will become impaired in the coming quarters. Concurrently, we expect some loans, which are currently impaired, to improve over this same period. Accordingly we do not expect the level of impaired loans to substantially decline during the December 31, 2010 quarter. | ||
| ||
At September 30, 2010 we identified a total of 65 loans totaling $22.9 million that were considered impaired. Of these, nine, with a balance outstanding of $3.4 million had specific reserves associated with them amounting to $0.8 million. These reserves are included in the total allowance for loan losses. Accounting for the largest concentration of impaired loans are two relationships (6 loans) totaling $6.1 million associated with two commercial and industrial loans to companies in the food and beverage industry originated between 2005 and 2007 for which we have made specific reserves of $0.4 million. During the first quarter of 2010, we charged-off $1.6 million of these loans, on which we had impairment reserves. These companies market their products throughout the United States, and their businesses have been negatively impacted by the recession, and their operating cash flow has been insufficient to support principal and interest payments on our loans. One relationship (two loans) with no impairment reserves (due to adequate collateralization) totaling $4.8 million is in the recreation business. This is a local company that has been negatively impacted by the recession, experiencing a decline in user revenues. These loans have been restructured. | ||
| ||
. | ||
| Legislative and Fiscal Matters | |
|
| |
| The Financial Reform Act created the Financial Stability Oversight Council with the primary obligation to identify, monitor, and assist in the management of systemic risk that may pose a threat to the countrys financial system. Included in its responsibilities is a requirement to review and at its option submit comments, as appropriate to any standard-setting body (such as FASB) with respect to existing or proposed accounting principles, standards or procedures. Though this responsibility may not directly impact the Company, the Councils review and commentary on accounting matters may result in more consideration by standard-setters of the volatility created by some of its current and proposed standards. We hope the Councils activities will bring restraint to standard setters and temper current proposals such as mark-to-market accounting for all financial instruments. | |
|
| |
| The Act permanently implemented FDIC insurance coverage for all deposit accounts up to $250,000. Furthermore, the insurance premium assessment base is revised from all domestic deposits to the average of total assets less tangible equity. The minimum reserve ratio of the deposit insurance fund is increased from 1.15% to 1.35%, with the increase to be covered by assessments on insured institutions with assets over $10 billion until the new reserve ratio is reached. We believe the change in the assessment base calculation may result in a reduced premium charge for the Company from its current charge, but may not result in a lower expense amount since the Company continues to grow its asset base and the FDIC is required to grow its reserves, which have been depleted during this recession. In October 2010, the FDIC announced that it will extend the period to reach its maximum reserve levels, and combined with lower loss projections, has eliminated the three (3) basis point premium increase scheduled for 2011. This should save us approximately $0.4 million annually compared to our original expectations. | |
|
| |
| The Act creates the Consumer Financial Protection Bureau (CFPB). It will have an independent budget and be housed in the Federal Reserve Board, but not subject to its jurisdiction. The CFPB has rulemaking authority to promulgate regulations regarding consumer financial products and services offered by all banks and thrifts, their affiliates and many non-bank financial services firms. We cannot determine what the impact the CFPBs rules and regulations might have on the Company, its product offerings, its customers ability to purchase products to meet their specific needs, or the Companys general business practices, but they are likely to be significant given the CFPBs broad powers. | |
|
| |
| The so-called Durbin Amendment requires the Federal Reserve Board to adopt regulations limiting interchange fees that can be charged in an electronic debit card transaction to the reasonable and proportionate costs related to the incremental cost of the transaction. Banks under $10 billion in assets are exempt, which would include the Company. However, the Company contracts with large debit card processors with which we have relatively weak bargaining power. It is possible these processors, as a result of the Act, will earn lower revenues, leaving less revenue per transaction for the Company. The Federal Reserve Board has until July 2011 to complete its regulations, so the timing and extent of impact to the Company is unknown. | |
|
| |
| The Act has changed the prudential regulation of our Company whereby both the Bank and its holding company will be regulated by the Office of the Comptroller of the Currency (OCC), because the Company has less than $50 billion in assets. Formerly the Bank was regulated by the OCC and the holding company was regulated by the Federal Reserve Board. | |
|
| |
| The Act significantly changes the regulatory structure of the mortgage lending business, but, in effect, has codified the prudent and customer-focused activities the Company has always pursued. For example, the Act provides that a creditor must make a reasonable and good faith determination of a consumers ability to repay before making a residential mortgage loan. The determination must be based on verified and documented information and must take into account all applicable taxes, insurance and assessments. | |
|
| |
| On the other hand, the Act does add substantial burdens to the Company by, subject to certain exemptions, requiring the establishment of an escrow account in connection with a closed-end consumer credit transaction secured by a first lien on a consumers principal dwelling for the payment of taxes and hazard insurance and, if applicable, flood insurance, mortgage insurance, ground rents and any other required periodic payments or premiums with respect to the property or the loan terms. The Company has not historically escrowed such payments. We provided financial advice and a savings product for customers to self-escrow, believing that customers were the best stewards and managers of their cash flow sources and uses, and government was ill-suited to dictate how much and when consumers should save to meet their financial obligations. | |
|
| |
| The Act also modifies the calculation for a loan to be subject to high-cost-loan status under the Home Ownership and Equity Protection Act (HOEPA) by requiring the Annual Percentage Rate (APR) to be compared to the average prime offer rate for a comparable transaction and not the rate on U.S. Treasury securities having a comparable maturity. The points and fees trigger is lowered, and a prepayment fee trigger is added. We are analyzing how this modification will impact the pricing of our portfolio of first and second mortgages. | |
|
|
27
Recent Accounting Standards to be implemented in Future Periods |
|
The following presents a summary of Accounting Standards Updates (ASUs), exclusive of technical correction ASUs that will be subject to implementation in future periods. |
|
ASU 2010-20, Disclosures about Credit Quality of Financing Receivables and Allowance for Credit Losses, which amends FASB ASC 310 Receivables. In July 2010, the FASB issued ASU 2010-20 which requires an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this standard, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. These new disclosure requirements are effective for the Company in its December 31, 2010 financial statements. The adoption of the standard will have no impact on the Companys financial condition or results of operations, but will significantly expand disclosures in the footnotes to the financial statements. |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | |
|
| |
| Interest Rate Sensitivity and Asset / Liability Management Review | |
|
| |
As set forth in our 2009 Annual Report, we predicted market interest rates for 2010 would remain fairly steady for most of the year at current historic lows with an increase in the second half of the year. Given recent economic, fiscal, and monetary reports, including a review of the Federal Open Market Committees minutes, we now believe there will be little change in interest rates for the remainder of the year. | ||
|
| |
| We measure net interest income at-risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus- or minus- 200 basis points over a twelve-month period. This provides a basis or benchmark for our Asset/Liability Committee to manage our interest rate risk profile. Presented below is a table showing our interest rate risk profile at September 30, 2010 and December 31, 2009. |
|
| Estimated | ||||
Changes in Interest |
| Percentage Change in | ||||
Rates |
| Future Net Interest Income | ||||
(basis points) |
|
|
|
|
|
|
|
| 2010 |
|
| 2009 |
|
+200 |
| (2) | % |
| (1) | %% |
+100 |
| (4) |
|
| (3) |
|
No change |
| - |
|
| - |
|
-100 |
| (1) |
|
| (1) |
|
-200 |
| (2) |
|
| (3) |
|
| ||
| Our model suggests our interest rate risk has increased slightly from year end for an upward change in rates, and improved slightly for a downward change in rates. Our exposure to increasing rates has increased, because, if interest rates move upward our liability costs (deposits and borrowings) will rise faster than our asset yields. Our decreased exposure in a downward rate scenario is due mostly to loans which have reached floor interest rates. |
|
| Item 4. Controls and Procedures | ||||
|
|
| ||||
| The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of September 30, 2010, that the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. | |||||
|
| |||||
| Also, there have been no changes in the Company's internal control over financial reporting that occurred during the third quarter of 2010, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. | |||||
|
|
|
| |||
|
PART II -- OTHER INFORMATION |
CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES |
|
Item 1. Legal proceedings |
|
In October 2009, the Bank was served with a Summons and Complaint filed in United States District Court for the Western District of New York in an action seeking class action status alleging that the Bank violated the Electronic Funds Transfer Act, 15 U.S.C. §1693 et seq. and its implementing regulations 12 C.F.R §205 et seq. by failing to post a notice on or at two of its automatic teller machines advising consumers who transact an electronic funds transfer of the fact that a fee may be imposed for the transaction and the amount of the fee. The plaintiff was seeking statutory damages on behalf of the class and attorneys fees. Damages are capped by statute at $500,000, exclusive of costs and fees. On May 7, 2010, the Bank reached a settlement agreement with plaintiffs counsel resolving all claims against the Bank. Substantially all of the settlement will be covered by insurance. |
|
Item 1A. Risk Factors |
|
There has been no material change to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. |
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
|
The following table sets forth, for the monthly periods indicated in 2010, the total number of shares purchased and the price paid per share by The Canandaigua National Corporation for treasury and by subsidiaries of the Company for compensation, including the Arthur S. Hamlin award. Each of these entities is considered an affiliated purchaser of the Company under Item 703 of Regulation S-K. The Company and subsidiaries purchases were determined based on the most recent price established in the sealed-bid auction immediately preceding the purchase. Purchases occur on an ad-hoc basis when shares become available in the marketplace and the Company is interested in purchasing these shares for the corporate purposes discussed above. Sales occur when corporate needs require the use of shares and there are none available in the market at the time. |
|
Purchases and Sales of Equity Securities for the year to date through September 30, 2010 |
|
| Total |
| Average |
|
|
|
| Shares |
| Price Per |
|
|
Date |
| Purchased (#) |
| Share ($) |
| Purpose |
|
|
|
|
|
|
|
March 2010 |
| 110 |
| $ 341.46 |
| Compensation |
April 2010 |
| 35 |
| $ 341.46 |
| Compensation |
June 2010 |
| 544 |
| $ 341.46 |
| Treasury |
August 2010 |
| 11 |
| $ 353.77 |
| Arthur S. Hamlin Award |
| Item 3. Defaults Upon Senior Securities | |
|
| |
| None | |
|
| |
| Item 4. Submission of Matters to a Vote of Security Holders | |
|
| |
None | ||
| ||
Item 5. Other information | ||
| ||
Unresolved Staff Comments | ||
| ||
On February 1, 2010, the Company responded to a series of comments issued by the Commission Staff in December 2009. On July 2, 2010 the staff issued a response regarding our confidential filing of certain exhibits related to our acquisition of Genesee Valley Trust Company. We have responded within our June 30, 2010 quarterly report by filing additional exhibits. At the date of this filing believe we have resolved all staff comments. |
29
|
Common Stock Trades |
|
While the Company's stock is not listed on a national securities exchange and not actively traded, it trades periodically in sealed-bid public auctions administered by the Banks Trust Department for selling shareholders at their request. Due to the limited number of transactions, the quarterly high, low and weighted average sale prices may not be indicative of the actual market value of the Company's stock. The following table sets forth a summary of information about the Company's common stock during each period for transactions that were administered by the Banks Trust Department: |
Date of Transaction |
| Number of Shares Sold |
| Average Price Per Share |
| Highest Accepted Bid |
| Lowest Accepted Bid |
|
|
|
|
|
|
|
|
|
March 18, 2010 |
| 760 |
| $ 341.46 |
| $ 367.00 |
| $ 335.00 |
June 17, 2010 |
| 800 |
| $ 353.77 |
| $ 370.00 |
| $ 350.10 |
September 9, 2010 |
| 793 |
| $ 367.54 |
| $ 400.00 |
| $ 360.10 |
Although the Companys common stock is not listed with a national securities exchange, it trades sporadically on the Over-the-Counter Bulletin Board System. The following table sets forth a summary of information about these trades. Due to the limited number of transactions, the quarterly high, low and weighted average sale prices may not be indicative of the actual market value of the Company's stock. |
|
The OTC Bulletin Board® (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (OTC) equity securities. An OTC equity security generally is any equity that is not listed or traded on NASDAQ® or a national securities exchange. The OTCBB is a quotation medium for subscribing members, not an issuer listing service, and should not be confused with The NASDAQ Stock MarketSM. Investors must contact a broker/dealer to trade OTCBB securities. Investors do not have direct access to the OTCBB service. The Securities and Exchange Commission's (SEC's) Order-Handling Rules which apply to NASDAQ-listed securities do not apply to OTCBB securities. The OTCBB market quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. |
Period |
| Number of Shares Transacted |
| Quarterly Average Sales Price |
| Quarterly High Sales Price |
| Quarterly Low Sales Price |
|
|
|
|
|
|
|
|
|
1st Quarter, 2010 |
| 452 |
| $ 309.68 |
| $ 330.00 |
| $ 280.00 |
2nd Quarter, 2010 |
| 187 |
| $ 312.05 |
| $ 320.00 |
| $ 301.00 |
3rd Quarter, 2010 |
| 814 |
| $ 302.21 |
| $ 315.00 |
| $ 281.00 |
|
|
|
|
|
|
|
|
|
30
Item 6. Exhibits |
| Exhibit |
| Where exhibit may be found: |
|
|
|
|
(2.1) | Stock purchase Agreement, dated September 6, 2007, by and among Canandaigua National Corporation, Genesee Valley Trust Company |
| Filed as an Exhibit to Form 10-Q for the period ended June 30, 2010* |
|
|
|
|
(2.2) | Asset Purchase Agreement, dated December 22, 2008, by and among The Canandaigua National Bank and Trust Company, Greentree Capital Management, LLC, Peter J Gaess, and T.C. Lewis |
| Filed as an Exhibit to Form 10-Q for the period ended June 30, 2010* |
|
|
|
|
(2.3) | Amendment to Asset Purchase Agreement, dated December 31, 2008, by and among The Canandaigua National Bank and Trust Company, Greentree Capital Management, LLC, Peter J. Gaess, and T.C. Lewis |
| Filed as an Exhibit to Form 10-Q for the period ended June 30, 2010* |
|
|
|
|
(3.i) | Certificate of Incorporation of the Registrant, as amended |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2008 |
|
|
|
|
(3.ii.) | By-laws of the Registrant, as amended |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2008 |
|
|
|
|
(10.1) | Canandaigua National Corporation Stock Option Plan, as amended |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2008 |
|
|
|
|
(10.2) | Canandaigua National Corporation Incentive Stock Plan, as amended |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2008 |
|
|
|
|
(10.3) | The Canandaigua National Bank and Trust Company Supplemental Executive Retirement Plan #1 |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2008 |
|
|
|
|
(10.4) | The Canandaigua National Bank and Trust Company Supplemental Executive Retirement Plan #2 |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2008 |
|
|
|
|
(10.5) | Canandaigua National Corporation Employee Stock Ownership Plan |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2009 |
|
|
|
|
(10.6) | Employment Agreement of Joseph L. Dugan dated November 20, 2000 |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2009 |
|
|
|
|
(10.7) | Stock Purchase Agreement, dated September 6, 2007, by and among Canandaigua National Corporation, Genesee Valley Trust Company, and the Shareholders of Genesee Valley Trust Company |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2009* |
|
|
|
|
(10.8) | Asset purchase Agreement, dated December 22, 2008, by and among The Canandaigua National Bank and Trust Company, Greentree Capital Management, LLC, Peter J. Gaess, and T.C. Lewis |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2009* |
|
|
|
|
(10.9) | Amendment to Asset purchase Agreement, dated December 31, 2008, by and among The Canandaigua National Bank and Trust Company, Greentree Capital Management, LLC, Peter J. Gaess, and T.C. Lewis |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2009* |
|
|
|
|
(11) | Calculations of Basic Earnings Per Share and Diluted Earnings Per Share |
| Note 3 to the Condensed Consolidated Financial Statements |
|
|
|
|
(24) | Form of Power of Attorney for filing Forms 3, 4, 5 and 13 under 1934 Act |
| Filed as an Exhibit to Form 10-K for the year ended December 31, 2009 |
31
(31.1) | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| Filed Herewith |
|
|
|
|
(31.2) | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| Filed Herewith |
|
|
|
|
(32) | Certification of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Filed Herewith |
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| *The Company has requested the Securities and Exchange Commission to grant confidential treatment for certain portions of these agreements. Confidential information is omitted from these agreements and filed separately with the Commission |
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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. |