UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2001
[ ] 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
----------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1234823
--------- ----------
(State of Incorporation) (IRS Employer Identification No.)
72 South Main Street, Canandaigua, NY 14424
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (585) 394-4260
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
240,000 shares $50 par common
---------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of January 31, 2002.
Common Stock, $50.00 par value - described on page 9 of 2001 Annual
Report and Common Stock Data disclosed on page 33 of the Annual Report are
incorporated herein by reference.
Number of shares outstanding of the Registrant's shares of common stock
as of January 31, 2002. 158,887 shares, common stock, $50.00 par value
The Company's stock is not actively traded nor is it traded in the
over-the-
counter market. In addition, it is not listed with a national securities
exchange.
Due to the limited number of transactions, the weighted average sales price
disclosed on page 33 of the Annual Report may not be indicative of the
actual
market value of the Company's stock.
Page 1
Documents Incorporated by Reference
---------------------------------------------------
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 2001, are incorporated by reference into Parts I and II.
Portions of the Registrant's Definitive Proxy Statement relating to the Annual
Meeting of Shareholders held on March 13, 2002, are incorporated by reference
into Part III.
SAFE HARBOR STATEMENT
- -----------------------
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: This report contains certain "forward-looking statements" intended to
qualify for the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. When used or incorporated by reference in the Company's
disclosure documents, the words "anticipate," "estimate," "expect," "project,"
"target," "goal" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act. Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including, but not limited to (1) economic conditions, (2) real
estate market, and (3) interest rates. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. These forward-looking statements speak only as of the date of the
document. The Company expressly disclaims any obligation or undertaking to
publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectation with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Page 2
CANANDAIGUA NATIONAL CORPORATION
FORM 10-K
INDEX
Page No.
PART I.
Item 1. Business 4
Item 2. Properties 20
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of
Security Holders 21
PART II.
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 34
PART III.
Item 10. Directors and Executive Officers of
the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain
Beneficial Owners and Management 34
Item 13. Certain Relationships and Related Transactions 34
PART IV.
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 35
Signatures 36
Page 3
PART I
Item 1. Business
Canandaigua National Corporation
Canandaigua National Corporation, referred to as "Company", is a one-bank
holding company that builds lasting customer relationships by providing
comprehensive financial solutions to individuals, be they building families or
businesses. It was organized on October 31, 1984, and registered under the Bank
Holding Company Act of 1956, for the purpose of becoming a one-bank holding
company. The formation of the bank holding company was consummated on May 31,
1985, through the exchange of 80,000 shares of Canandaigua National Corporation
$50 par value common stock for all of the outstanding shares of The Canandaigua
National Bank and Trust Company. The one-bank holding company serves as a means
of increasing the scope of banking and financial services in the market area
served by The Canandaigua National Bank and Trust Company. The Company's
principal operating subsidiaries are CNB Mortgage Company and The Canandaigua
National Bank and Trust Company, However, the Bank is and is expected to remain
the principal source of the Company's operating revenue and net income.
CNB Mortgage Company
The Company acquired 100% of CNB Mortgage Company (formerly known as
HomeTown Funding, Inc.) in October 1997. CNB Mortgage Company, operating as the
Company's mortgage department, offers a full line of mortgage products. It is
engaged in underwriting and funding mortgages primarily in western New York
State. It resells residential mortgages to the Bank and unaffiliated entities,
which service the loans. In January 2001 all (non-construction) residential
mortgage origination activities of the Bank were consolidated into CNB Mortgage
Company, completing a three-year process of consolidating from three origination
units to one. On January 1, 1999, the Company merged the mortgage banking
operations of CNB Mortgage Company and Greater Funding of New York, Inc (GFNYI),
a mortgage banking company formed in 1990 and owned 100% by the Company since
1996.
The Canandaigua National Bank and Trust Company
The Canandaigua National Bank and Trust Company ("Bank") was incorporated
under the laws of The United States of America as a national bank in 1887.
Since that time, the Bank has operated as a national banking association doing
business at its main office at 72 South Main Street, Canandaigua, New York, and
several locations in Ontario County and Monroe County, New York.
As of December 31, 2001, Bank had total assets of $724.3 million; total
capital of $45.7 million; and total deposits of $673.0 million. Its deposits
are insured through the Bank Insurance Fund by the Federal Deposit Insurance
Corporation (FDIC), subject to the FDIC limits.
The Bank provides a full range of financial services to its retail,
commercial and municipal customers through a variety of deposit, lending, trust,
investment and insurance products. These products are delivered by employees
through a "lifestyle" marketing concept, whereby customers' needs are
anticipated and evaluated based upon their stage in life (e.g., growing family,
retirement, college student, etc.). New products are developed around this
concept. These services are delivered through the Bank's network of eighteen
community banking offices, which include drive-up facilities and automatic
teller machines, other remote cash-dispensing machines, its customer call
center, and the internet. The locations and staffing of the Bank's full-service
offices are described in more detail in Item 2 and on page 35 of the Annual
Report.
The Bank's deposit services include accepting time, demand and savings
deposits, NOW accounts, regular savings accounts, money market deposits,
fixed-rate time deposits and club accounts. The Bank also provides its retail
customers safe-keeping services through the renting of safe deposit facilities.
Page 4
Item 1. Business (continued)
The Bank's lending services include making secured and unsecured commercial
and consumer loans, financing commercial transactions either directly or through
regional industrial development corporations, and making construction and
mortgage loans. Other services include making residential mortgage loans,
revolving credit loans with overdraft checking protection, small business loans,
and education finance products. The Bank's business loans include seasonal,
credit, collateral, and term loans.
Trust and investment services provided by the Bank include services as
executor and trustee under wills and trust agreements, as guardian and custodian
and as trustee and agent for pension, profit sharing, individual retirement
account and other employee benefit trusts as well as various investment, pension
and estate planning services. Trust services also include service as transfer
agent and registrar of Canandaigua National Corporation stock and as paying
agent for bond issues and as escrow agent.
Since the formation of its insurance subsidiary in 1995 and upon its
successful lawsuit against the New York State Superintendent of Insurance, the
Bank has been offering a full line of auto, home and life insurance products to
its customers through its wholly owned subsidiary CNB Insurance Agency.
The Bank also acts as advisor to the Canandaigua Equity Fund and the
Canandaigua Bond Fund. [Shares of these funds are not bank deposits or
obligations of, or guaranteed or endorsed by, any bank, and are not insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency. Shares of these funds may increase or decrease in value.]
The Bank has a relatively stable deposit base, and no material amount of
deposits are obtained from a single depositor. Historically, approximately 15%
- - 20% of average deposits are placed by local governments in the Bank's business
region. The Bank has not experienced any significant seasonal fluctuations in
the amount of its deposits, nor does the Bank rely on foreign sources of funds
or income.
Geographic Market Served
The Company's physical market area generally covers western Ontario County
and Monroe County in New York State. Customers generally initiate their
relationship with the Bank from this area. However, the Bank conducts business
through the internet and by telephone and with payment services such as credit
cards and debit cards; thus, the Bank's customers are served world-wide. Since
the mid 1990s, the Bank has expanded into Monroe County by opening community
banking offices in Pittsford (1995), Webster/Penfield (1998), Greece (1999),
Chili (1999), Honeoye Falls (1999), Perinton (2000), Irondequoit (2000),
Bushnell's Basin (2000), and the City of Rochester (2000). In 2001, the Company
relocated the Honeoye Falls office to a permanent site. Plans to open an office
in Brighton in 2002 are being finalized.
Competition
The Company considers its business to be highly competitive in its market
areas. The Company competes with respect to its lending services, as well as in
attracting deposits, with commercial banks, savings banks, savings and loan
associations, insurance companies, regulated small loan companies, non-bank
banks, credit unions and investment managers. The Company also competes with
securities firms, brokerages, insurance companies, investment counseling firms,
mutual funds and other business firms and individuals in corporate trust and
investment management services.
The Company is generally competitive with financial institutions in its
service areas with respect to interest rates paid on time and savings deposits
and interest rates charged on loans and charges for services.
Page 5
Item 1. Business (continued)
One measure of competitive strength is the percentage of deposits held by
an institution in a geographic location. Based upon the most recent data
available from the Federal Financial Institutions Examination Council (FFIEC) as
of June 30, 2001, the Company's share of deposits for all banks and credit
unions (with share totals greater than $50 million) in the Company's physical
market area was 4.20% ($578.4 million)in 2001, 4.02% ($509.4 million) in 2000,
and 3.27% ($395.5 million)in 1999. At June 30, 2001, this defined market area
had total deposits of approximately $13.8 billion.
Employees
At December 31, 2001, the Company had 324 employees of whom 75 worked on a
part-time basis. None of the employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be very
good.
Supervision and Regulation
Canandaigua National Corporation is incorporated under the laws of the
State of New York. As a bank holding company, the Company is subject to the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is required to
file annual reports and such additional information as may be required by the
Federal Reserve Board (the "FRB") pursuant to the BHC Act. The FRB has the
authority to examine the Company and its subsidiaries.
The Gramm-Leach-Bliley Act (the Act) of 1999 represents the most sweeping
reform of financial services regulation in over sixty years. The Act permits
the creation of new financial products under a strong regulatory regime based on
the principle of functional regulation. The legislation eliminates legal
barriers to affiliation among banks and securities firms, insurance companies,
and other financial services companies. The Act provides financial
organizations with flexibility in structuring these new financial affiliations
through a holding company structure or a financial subsidiary, with appropriate
safeguards.
The Act preserves the role of the Federal Reserve Board as the umbrella
supervisor for holding companies while at the same time incorporating a system
of functional regulation designed to utilize the strengths of the various
federal and state regulators. It also sets up a mechanism for coordination
between the Federal Reserve Board and the Secretary of the Treasury regarding
the approval of new financial activities for both holding companies and national
bank financial subsidiaries. The Act provides for functional regulation of bank
securities activities. The Act repeals bank's blanket exemption from the
definition of a "broker" and replaces it with a set of limited exemptions that
allow the continuation of some traditional activities performed by banks
(trust-related activities). The Act amends the Exchange Act to include banks
within the general definition of dealer. The bank exclusion from the definition
of investment adviser is also eliminated.
The Act also establishes, for the first time, a minimum federal standard
for privacy. Financial institutions are required to have written privacy
policies that must be disclosed to customers. The disclosure of a financial
institution's privacy policy must take place at the time a customer relationship
is established and not less than annually during the continuation of the
relationship.
The Act opens the possibility for complex new products to be developed
with both banking and securities elements. The Act provides a procedure for
handling new hybrid products sold by banks that have securities elements. The
statute provides for a rule-making and resolution process between the Securities
and Exchange Commission (SEC) and the Federal Reserve Board regarding new hybrid
products, with a federal appeal court as final arbiter.
Page 6
Item 1. Business (continued)
As discussed above, the Company already conducts business, directly through
affiliates or through other contractual arrangements in many of the activities
allowed under the Act. Management and the Board of Directors review the
Company's strategic plan at least annually. There are no current plans to
materially expand or change the types of products or service offerings beyond
those currently provided.
The Federal Reserve Act imposes restrictions on extensions of credit by
subsidiary banks of a bank holding company to the bank holding company or any of
its subsidiaries, or investments in the stock or other securities of the holding
company, and on the use of such stock or securities as collateral for loans to
any borrower. Further, under the FRB's regulations, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property, or
furnishing of services.
From time to time, the FRB may adopt further regulations pursuant to the
Act. The Company cannot predict whether any further regulations will be adopted
nor how such regulations might affect the consolidated operating results or
business of the Company.
In addition, the Company reports to the Securities and Exchange Commission
under the laws governing corporations with registered securities.
The primary supervisory authority of the Bank is the Office of the
Comptroller of the Currency (the " OCC"), which regularly examines aspects of
the Bank's operations such as capital adequacy, reserves, loans, investments,
management practices, etc. In addition to these regular examinations, the Bank
must furnish quarterly and annual reports to the OCC. The OCC has the authority
to issue cease-and-desist orders to prevent a bank from engaging in an unsafe or
an unsound practice or violating the law in conducting its business.
The Bank is also a member of the Federal Reserve System, and as such, is
subject to certain laws and regulations administered by the FRB. As a member
of the Federal Reserve System, the Bank is required to maintain non-interest
bearing reserves against certain accounts. (Refer to Note 15 of the Annual
Report). The amount of reserves required to be maintained is established by
regulations of the FRB and is subject to adjustment from time to time.
The Bank's deposits are insured by the Bank Insurance Fund (BIF) of the
FDIC up to a maximum of $100,000 per insured deposit account, subject to the
rules and regulations of the FDIC. For this protection, the Bank pays a
quarterly statutory assessment.
Government Monetary Policies and Economic Controls
The earnings of the Company and the Bank are affected by the policies of
regulatory authorities including the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance
Corporation. An important function of the Federal Reserve System is to regulate
the money supply and interest rates. Among the instruments used to implement
these objectives are open market operations in U.S. Government securities,
changes in reserve requirements against member bank deposits, and changes in the
federal discount rate. These instruments are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
for deposits.
The policies and regulations of the Federal Reserve Board have had, and
will probably continue to have, a significant effect on the Bank's deposits,
loans and investment growth, as well as the rate of interest earned and paid,
and are expected to affect the Bank's operations in the future. The effect of
such policies and regulations, if any, upon the future business and earnings of
the Bank cannot be predicted.
Page 7
Item 1. Business (continued)
The United States Congress has periodically considered and adopted
legislation that has resulted in deregulation of banks and other financial
institutions. Such legislative changes have placed the Bank in more direct
competition with other financial institutions including mutual funds, securities
brokerage firms, insurance companies, and investment banking firms. The effect
of any such legislation on the business of the Bank cannot be predicted.
Consolidated Financial and Statistical Data
A review of the business activities of the Company and Bank is
presented in the following pages.
Page 8
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
A. and B. Average Balance Sheets and Analysis of Net Interest Margin
The following table reflects the net interest margin and interest rate
spread for the years shown, on a tax equivalent basis. Average amounts are based
upon the average daily balances.
Average Balance Sheets and Analysis of Net Interest Margin
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 Average Average
Balance Interest Rate
- ------------------------------------ ---------- --------- --------
Assets
Interest earning assets:
Interest bearing deposits with
others $ 666 $ 23 3.45 %
Federal funds sold 2,731 86 3.15
Securities (1):
Taxable 56,416 2,613 4.63
Tax-exempt 47,216 2,839 6.01
Loans, net (2) 484,526 39,408 8.13
---------- --------- --------
Total interest earning assets 591,555 44,969 7.60
--------- --------
Non-interest earning assets 54,313
----------
Total assets $ 645,868
==========
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Savings, interest checking and
money market $ 267,056 $ 5,784 2.17 %
Certificates of deposit 231,118 11,803 5.11
Borrowings 9,285 390 4.20
---------- --------- --------
Total interest bearing
liabilities 507,459 17,977 3.54
--------- --------
Non-interest bearing liabilities 92,744
Stockholders' equity 45,665
----------
Total liabilities and
stockholders' equity $ 645,868
==========
Interest rate spread 4.06 %
==========
Net interest margin $ 26,992 4.56 %
========== =========
(1) Securities available-for sale are stated at fair value and include the
Company's required investments in Federal Reserve Bank Stock and Federal Home
Loan Bank Stock. Interest include a tax equivalency adjustment of $878,000.
(2) Average balance includes non-accrual loans. Interest includes
amortization of net deferred origination costs of $947,000.
Page 9
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
2000 Average Average
Balance Interest Rate
- ------------------------------------ ---------- --------- --------
Assets
Interest earning assets:
Interest bearing deposits with
others $ 107 $ 5 4.67 %
Federal funds sold 1,201 71 5.91
Securities (1):
Taxable 40,095 2,355 5.87
Tax-exempt 46,018 2,882 6.26
Loans, net (2) 431,768 37,406 8.66
---------- --------- --------
Total interest earning assets 519,189 42,719 8.23
--------- --------
Non-interest earning assets 50,052
----------
Total assets $ 569,241
==========
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Savings, interest checking and
money market $ 217,052 $ 5,449 2.51 %
Certificates of deposit 205,140 11,985 5.84
Borrowings 21,760 1,367 6.28
---------- --------- --------
Total interest bearing
liabilities 443,952 18,801 4.23
--------- --------
Non-interest bearing liabilities 82,618
Stockholders' equity 42,671
----------
Total liabilities and
stockholders' equity $ 569,241
==========
Interest rate spread 4.00 %
==========
Net interest margin $ 23,918 4.60 %
========== =========
(1) Securities available-for sale are stated at fair value and include the
Company's required investments in Federal Reserve Bank Stock and Federal Home
Loan Bank Stock. Interest include a tax equivalency adjustment of $884,000.
(2) Average balance includes non-accrual loans. Interest includes amortization
of net deferred origination costs of $604,000.
Page 10
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
1999 Average Average
Balance Interest Rate
- ------------------------------------ ---------- --------- --------
Assets
Interest earning assets:
Interest bearing deposits with
others $ 182 $ 6 3.30 %
Federal funds sold 4,700 227 4.83
Securities (1):
Taxable 36,647 2,015 5.50
Tax-exempt 40,853 2,524 6.18
Loans, net (2) 339,351 28,683 8.45
---------- --------- --------
Total interest earning assets 421,733 33,455 7.93
--------- --------
Non-interest earning assets 47,893
----------
Total assets $ 469,626
==========
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Savings, interest checking and
money market $ 188,333 $ 4,678 2.48 %
Certificates of deposit 156,618 8,049 5.14
Borrowings 9,917 527 5.31
---------- --------- --------
Total interest bearing
liabilities 354,868 13,254 3.73
--------- --------
Non-interest bearing liabilities 73,225
Stockholders' equity 41,533
----------
Total liabilities and
stockholders' equity $ 469,626
==========
Interest rate spread 4.20 %
==========
Net interest margin $ 20,201 4.78 %
========== =========
(1) Securities available-for sale are stated at fair value and include the
Company's required investments in Federal Reserve Bank Stock and Federal Home
Loan Bank Stock. Interest include a tax equivalency adjustment of $783,000.
(2) Average balance includes non-accrual loans. Interest includes amortization
of net deferred origination costs of $470,000.
C. Rate/Volume Analysis
The following table sets forth the dollar and volume of changes in interest
income and interest expense, on a tax equivalent basis, resulting from changes
in the volume of earning assets and interest bearing liabilities, and from
changes in rates. Volume changes are computed by multiplying the volume
difference by the prior year's rate. Rate changes are computed by multiplying
the rate difference by the prior year's balance. The change in interest due to
both rate and volume has been allocated to rate and volume changes in proportion
to the dollar amounts of the change in each.
Page 11
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
C. Rate/Volume Analysis (continued)
Rate/Volume Analysis
For the Years Ended December 31, 2001 and 2000
(Dollars in thousands)
2001 compared to 2000
Increase/(decrease) due
to change in
Volume Rate Total
-------- ------- ------
Assets
Interest bearing deposits with
others $ 20 (2) 18
Federal funds sold 60 (45) 15
Securities 979 (764) 215
Loans, net 4,384 (2,382) 2,002
-------- ------- ------
Total $ 5,443 (3,193) 2,250
======== ======= ======
Liabilities
Savings, interest checking and
money market $ 1,218 (883) 335
Certificates of deposit 1,422 (1,604) (182)
Borrowings (619) (358) (977)
-------- ------- ------
Total 2,021 (2,845) (824)
======== ======= ======
Net change $ 3,422 (348) 3,074
======== ======= ======
2000 compared to 1999
Increase/(decrease) due
to change in
Volume Rate Total
-------- ------ ------
Assets
Interest bearing deposits with
others $ (3) 2 (1)
Federal funds sold (198) 42 (156)
Securities 519 179 698
Loans, net 7,990 733 8,723
-------- ------ ------
Total $ 8,308 956 9,264
======== ====== ======
Liabilities
Savings, interest checking and
money market $ 720 51 771
Certificates of deposit 2,730 1,206 3,936
Borrowings 729 111 840
-------- ------ ------
Total 4,179 1,368 5,547
======== ====== ======
Net change $ 4,129 (412) 3,717
======== ====== ======
Page 12
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
II. Securities Portfolio
A. Securities Portfolio
The following table summarizes the Company's carrying value of securities
available for sale and held to maturity. Other securities includes the Company's
required investments in Federal Reserve Bank Stock and Federal Home Loan Bank
Stock.
Securities
As of December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------- ------ ------
U.S. Treasury and other U.S.
government agencies' obligations $ 55,456 36,949 26,865
Obligations of states and political
subdivisions 61,918 42,062 46,061
Other securities 3,622 4,963 6,486
-------- ------ ------
Total $120,996 83,974 79,412
======== ====== ======
B. Maturity and Yields of Securities Portfolio
The following table summarizes the maturities and weighted average yields of the Company's
securities available for sale and held to maturity at year end. Yields on "Obligations of States
and Political Subdivisions" are not reflected on a tax equivalent basis. Other securities
includes the Company's required investments in Federal Reserve Bank Stock and Federal Home Loan
Bank Stock. Mortgage backed securities, included in other securities, are reported at their
final stated maturity, notwithstanding that principal is prepaid regularly, reducing their
effective maturity.
Maturities and Weighted Average Yields of Securities
As of December 31, 2001
(Dollars in thousands)
After After
One Five
One through through After
Year or Five Ten Ten
Less Years Years Years
-------- -------- ------- -------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- ------ ------- ------ ------- ------
U.S. Treasury and other
U.S. Government agen-
cies' obligations $ 42,964 2.46% $ 11,992 4.10% $ 500 7.49% $ -- --%
Obligations of states
and political
subdivisions(1) 13,998 3.66 36,071 4.18 11,698 3.90 151 5.53
Other securities -- -- 593 7.90 -- -- 3,029 2.22
-------- -------- -------- ------ ------- ------ ------- ------
Total $ 56,962 2.75% $ 48,656 4.21% $12,198 4.05% $ 3,180 2.38%
======== ======== ======== ====== ======= ====== ======= ======
(1) Yields are not reflected on a tax equivalent basis.
Page 13
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
C. Significant Holdings
At December 31, 2001, there were no security holdings in which the
aggregate of any issuer exceeds ten percent of stockholders' equity, except US
Treasury obligations.
III. Loan Portfolio
The loan portfolio is comprised solely of domestic loans with their
concentrations set forth in the schedule of loan classifications below.
Management is not aware of any material concentrations of credit risk to any
industry or individual borrower. The following summary shows the
classifications of loans by category.
A. Types of Loans
Composition of Loan Portfolio
As of December 31,
(Dollars in thousands)
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
Commercial, financial, and
agricultural $ 79,304 65,324 62,491 43,260 37,610
Commercial mortgage 245,915 195,153 141,255 83,771 74,228
Residential mortgage 85,402 81,475 69,862 76,130 94,593
Consumer
Auto - indirect 85,243 93,746 103,605 84,370 73,211
Other 23,093 20,214 18,561 17,753 15,245
Other 16,004 4,059 2,589 6,485 14,257
--------- -------- -------- -------- --------
534,961 459,971 398,363 311,769 309,144
Less: Allowance for loan losses (5,480) (4,712) (4,136) (3,283) (3,153)
--------- -------- -------- -------- --------
Loans, net $529,481 455,259 394,227 308,486 305,991
========= ======== ======== ======== ========
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table sets forth the maturities and sensitivity to changes in
interest rates of the loan portfolio exclusive of real estate mortgage, consumer
and other loans.
Maturity and Sensitivity of Loans
As of December 31, 2001
(Dollars in thousands)
After
One
One through After
Year or Five Five
Less Years Years Total
-------- ------- ----- ------
Commercial, financial and
agricultural $ 50,089 25,260 3,955 79,304
Loans maturing after one year:
With a predetermined interest rate 14,910 3,716
With a floating or adjustable rate 10,350 239
The maturities set forth above are based upon contractual maturities.
Demand loans, overdrafts and certain time loans, the principal of which may be
renewed in whole or in part, are included in the " One Year or Less"
classification. The Company's loan policy encourages a repayment schedule to be
established whenever possible for loan that do not have stated contractual
maturities.
Page 14
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
III. Loan Portfolio (continued)
The policy provides that a demand loan should mature within one year of its
origination, with any renewals at the then prevailing interest rates and with
the assurance that the borrower demonstrates the ability to repay on maturity of
the loan.
The Company provides standby letters of credit commitments which also
provide for availability of funds over a period of generally one year. All such
commitments have fixed expiration dates and may require the payment of a fee.
The Company extends lines of credit under which a customer may borrow for
various purposes. The extension of these commitments and lines of credit have
been in the normal course of business. In the opinion of management, at December
31, 2001, there are no material commitments to extend credit which represent
unusual risks.
C. Risk Elements
(1) Non-accrual, Past Due and Restructured Loans
The following table summarizes the Company's non-performing assets as of
December 31 for each of the last five years.
Non-Performing Assets
(Dollars in thousands)
2001 2000 1999 1998 1997
-------- ------- ------- ------- ------
Loans past due 90 days or more and
accruing:
Commercial, financial, and
agricultural $ 34 22 -- 14 347
Real estate-commercial -- -- 11 102 610
Real estate-residential 69 17 13 157 508
Consumer 166 166 91 108 501
-------- ------- ------- ------- ------
Total past due 90 days or more
and accruing 269 205 115 381 1,966
-------- ------- ------- ------- ------
Loans in non-accrual status:
Commercial, financial, and
agricultural 2,793 437 509 1,498 1,210
Real estate-commercial 1,653 1,890 980 225 1,327
Real estate-residential 209 371 151 390 586
Consumer 333 471 -- -- 53
-------- ------- ------- ------- ------
Total non-accrual loans 4,988 3,169 1,640 2,113 3,176
-------- ------- ------- ------- ------
Total non-performing loans 5,257 3,374 1,755 2,494 5,142
-------- ------- ------- ------- ------
Other real estate owned:
Commercial 1,408 1,466 1,651 1,642 2,494
Residential -- -- -- -- 18
-------- ------- ------- ------- ------
Total other real estate owned 1,408 1,466 1,651 1,642 2,512
-------- ------- ------- ------- ------
Total non-performing assets $ 6,665 4,840 3,406 4,136 7,654
======== ======= ======= ======= ======
Non-performing loans to total
period-end loans 0.98% 0.73% 0.44% 0.80% 1.66%
======== ======= ======= ======= ======
Non-performing assets to total
period-end loans and other real
estate 1.24% 1.05% .85% 1.33% 2.48%
======== ======= ======= ======= ======
Allowance to non-performing loans 104.24% 139.66% 235.67% 131.64% 61.32%
======== ======= ======= ======= ======
Page 15
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
III. Loan Portfolio (continued)
The accrual of interest on commercial and real estate loans is
discontinued, and previously accrued and unpaid interest is reversed when the
loans become 90 days delinquent or when, in management's judgment, the
collection of principal and interest is uncertain. Loans are returned to
accrual status when doubt no longer exists about the loan's collectibility.
Consumer loans are generally charged off upon becoming 120 days past due.
The Company earned interest on a cash basis of $140,000 in 2001, $55,000 in
2000, and $77,000 in 1999, on loans in non-accrual status at the respective year
end. Additional interest income of $279,000, $245,000, and $138,000 would have
been recognized on these loans during 2001, 2000, and 1999, respectively, if
they had been current in accordance with the original terms.
(2) Potential Problem Loans
In January 2002, commercial real estate loans to one customer approximating
$3.1 million were placed on non-accrual. These loans were considered impaired at
year end 2001. Management believes the underlying collateral value of the loans,
and, if necessary, the liquidation thereof, are sufficient to cover the loan
balances and therefore specific reserves on these loans have not been
established.
IV. Summary of Loan Loss Experience
A. Analysis of Loss Experience
The allowance for loan losses is a valuation reserve available for losses
incurred or inherent in the loan portfolio. Credit losses arise primarily from
the loan portfolio, but may also be derived from other credit-related sources,
when drawn upon, such as, commitments, guarantees and standby letters of credit.
Additions are made to the allowance through periodic provisions, which are
charged to expense. All losses of principal are charged to the allowance when
incurred or when a determination is made that a loss is probable. Subsequent
recoveries, if any, are credited to the allowance. The Company has established a
process to assess the adequacy of the allowance for loan losses and to identify
the risks inherent in the loan portfolio. This process consists of the
identification of specific reserves for identified problem loans and the
calculation of general reserves, which is a formula-driven calculation on loans
not evaluated on a specific basis. Specific reserves are determined through
assessment of the borrower's ability to repay and the fair value of the
underlying collateral, for collateral dependent loans. If the carrying value of
a loan exceeds the discounted expected cash flows or the value of the underlying
collateral, the excess is specifically reserved or charged off.
The calculation of the general reserve involves several steps. A historical
loss factor is applied to each loan by business segment and loan classification.
The historical loss factors are calculated using a loan-by-loan, trailing eight
quarter loss migration analysis for commercial loans. For all other loans a
portfolio-wide, trailing eight quarter loss migration analysis is used.
Adjustments are then made to the historical loss factors based on quantitative
objective elements (delinquency, non-performing assets, classified/criticized
loan trends, charge-offs, concentrations of credit and recoveries, etc.) and
the subjective elements (economic conditions, portfolio growth rate, portfolio
management, credit policy, and others).
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Page 16
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
IV. Summary of Loan Loss Experience (continued)
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of collateral if the loan is collateral dependent.
Impairment losses are included in the allowance for loan losses through a charge
to the provision for loan losses. Cash receipts on impaired loans are applied to
reduce the principal balance outstanding. In considering loans for evaluation of
impairment, management generally excludes smaller balance, homogeneous loans -
residential mortgage loans, home equity loans and all consumer loans. These
loans are collectively evaluated for impairment as discussed above.
The following table summarizes the changes in the allowance for loan losses for
each of the last five years.
Summary of Loan Loss Allowance
(Dollars in thousands)
2001 2000 1999 1998 1997
-------- ------ ------ ------- ------
Balance at beginning of year $ 4,712 4,136 3,283 3,153 2,675
Provision charged to operations 1,431 1,028 1,239 641 851
Charge-offs:
Commercial, financial and
agricultural (201) (165) (3) (274) (257)
Real estate-commercial -- -- -- -- --
Real estate-residential (3) -- (29) (19) (40)
Consumer (839) (792) (843) (760) (498)
-------- ------ ------ ------- ------
(1,043) (957) (875) (1,053) (795)
-------- ------ ------ ------- ------
Recoveries:
Commercial, financial and
agricultural 27 85 20 25 190
Real estate-commercial -- -- -- -- --
Real estate-residential 1 13 3 102 19
Consumer 352 407 466 415 213
-------- ------ ------ ------- ------
380 505 489 542 422
-------- ------ ------ ------- ------
Net charge-offs: (663) (452) (386) (511) (373)
-------- ------ ------ ------- ------
Balance at end of year $ 5,480 4,712 4,136 3,283 3,153
======== ====== ====== ======= ======
Net charge-offs to average loans 0.14% 0.10% 0.11% 0.17% 0.13%
======== ====== ====== ======= ======
Allowance to total loans 1.02% 1.02% 1.04% 1.05% 1.02%
======== ====== ====== ======= ======
Page 17
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
IV. Summary of Loan Loss Experience (continued)
B. Allocation of Allowance for Loan Losses
The following table presents an allocation of the allowance for loan losses
and the percentage of loans in each category to total loans at December 31 of
each of the last five years. In addition to an allocation for specific problem
loans, each category includes a portion of the general allowance for loan losses
based upon loans outstanding, credit risk and historical charge-offs.
Notwithstanding the following allocation, the entire allowance for loan losses
is available to absorb charge-offs in any category of loans.
Allocation of Allowance for Loan Losses
(Dollars in thousands)
2001 2000 1999
Allowance %(1) Allowance %(1) Allowance %(1)
- ----------------------------- ------- ---------- ------- ---------- -------
Commercial, financial, and
agricultural(2) $3,469 60.8% $2,200 56.6% $1,783 51.1%
Real estate-residential 249 16.0 309 17.7 50 17.5
Consumer 1,762 23.2 2,203 25.7 2,303 31.4
------- ---------- ------- ---------- ------- ------
$5,480 100.0% $4,712 100.0% $4,136 100.0%
======= ========== ======= ========== ======= ======
1998 1997
Allowance %(1) Allowance %(1)
------- ------- ------- -------
Commercial, financial, and
agricultural(2) $1,484 40.7% $1,974 36.2%
Real estate-residential 54 24.4 111 30.6
Consumer 1,745 34.8 1,068 33.2
------- ---------- ------- ----------
$3,283 100.0% $3,153 100.0%
======= ========== ======= ==========
(1)Percentage of loans in each category to total loans.
(2)Includes commercial real estate.
V. Deposits
The following tables summarize the average deposits and average rates paid
during the years presented.
Average Deposits and Rates Paid
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
------------------ ---------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- -------- ------- ------- ------- -----
Non-interest bearing demand $ 87,803 --% $ 78,775 --% $ 66,769 --%
Interest-bearing demand 58,593 1.01% 51,652 1.15% 47,851 1.33%
Savings and money market 208,463 2.49% 165,400 2.93% 140,480 2.88%
Time 231,118 5.11% 205,140 5.84% 156,618 5.14%
-------- ------- -------- ------- -------- -----
$585,977 3.00% $500,967 3.48% $411,718 3.09%
======== ======= ======== ======= ======== =====
Page 18
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
V. Deposits (continued)
The following table sets forth the time deposits of $100,000 or greater,
classified by the time remaining until maturity, which were on deposit as of
December 31, 2001.
Maturity Distribution of Time Deposits of $100,000 or More
As of December 31, 2001
(Dollars in thousands)
3 months or less $28,655
3 through 6 months 25,748
6 through 12 months 25,882
Over 12 months 16,504
-------
$96,789
=======
VI. Return on Equity and Assets
The following table sets forth certain ratios used in evaluating the
Company's financial position and results of operations.
Financial Ratios
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------ ------ ------
Return on average assets 0.88% 0.61% 0.50%
Return on average equity 12.40% 8.17% 5.68%
Dividend payout ratio 34.16% 54.44% 77.81%
Average equity to average assets 7.07% 7.50% 8.84%
VII. Short-term Borrowings
The following table sets forth the Company's short-term borrowings at the
dates indicated. The Company considers short-term borrowings to be those with
an original maturity date of three months or less.
Short-term Borrowings
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------- ------- -------
Amount outstanding at December 31, $ -- 10,400 18,900
Weighted average rate $ -- 5.85% 5.72%
Maximum outstanding at any month end
during the year $28,200 19,200 26,300
Average amount outstanding during the year $ 4,005 7,855 3,948
Weighted average rate 4.37% 6.30% 5.36%
Page 19
Item 2. Properties
Canandaigua National Corporation operates from the main office of the Bank.
The Company owns a building in Pittsford that is occupied by CNB Mortgage
Company, and is sublet to them and other unrelated businesses. The Bank owns
and leases real property in Ontario County and Monroe County for its Community
Bank Offices and to support its operations.
As of December 31, 2001, the Bank's operations were conducted from eight offices
(including the main office) located in Ontario County, New York, and ten offices located
in Monroe County, New York. The main office of the Bank is a three-story structure
located at 72 South Main Street, Canandaigua, New York. The administrative, operational
and electronic data processing offices of the Bank are located in this facility. There
are drive-up facilities located at all permanent offices except for the Eastview Mall
and Pittsford offices. Some of the leases also provide for contingent rent to be paid
annually based upon increases in the Consumer Price Index (CPI). Properties providing
customer service are as follows:
Location Use Ownership Expiration(1)
- ----------------- ---------------------------------- ------------------ -------------
Canandaigua, NY Main office Owned --
Bloomfield, NY Bloomfield bank office Owned --
Victor, NY Victor bank office Owned --
Canandaigua, NY Lakeshore bank office Leased office 12/31/2011
Farmington, NY Farmington bank office Owned, leased land 06/30/2017
Honeoye, NY Honeoye bank office Owned --
Shortsville, NY Manchester-Shortsville bank office Leased office 04/30/2009
Mendon, NY Mendon bank office Leased office 12/31/2004
Victor, NY Eastview Mall bank office Leased office 10/31/2004
Pittsford, NY Pittsford bank office Owned --
Canandaigua, NY Customer call center Leased office 06/30/2002
Penfield, NY Webster bank office Leased office 08/31/2008
Greece, NY Greece bank office Leased office 10/31/2018
Chili, NY Chili bank office Leased office 06/01/2010
Honeoye Falls, NY Honeoye Falls bank office Owned --
Irondequoit, NY Irondequoit bank office Owned --
Perinton, NY Perinton bank office Leased office 03/15/2009
Perinton, NY Basin Park Financial Center Leased office 04/30/2011
Rochester, NY Rochester bank office Leased office 12/31/2009
Pittsford, NY CNB Mortgage Company office Owned --
(1)If applicable; includes renewal options.
During 2002, the Bank will continue to increase its number of Monroe County
offices. It expects to enter into lease agreements for offices in the town of
Brighton, New York and another in the town of Penfield, New York.
Page 20
Item 2. Properties (continued)
The Bank also provides, free to its customers, 24-hour banking services
through automatic teller facilities located at each office and through remote
automatic teller machines and cash dispenser machines at the following
locations:
Finger Lakes Community College Hopewell, New York
F.F. Thompson Hospital Canandaigua, New York
Finger Lakes Performing Arts Center Hopewell, New York
Bristol Mountain Bristol, New York
Case's Convenient Canandaigua, New York
Roseland Bowl Canandaigua, New York
The Greater Rochester International Airport Rochester, New York
The Company Store Cheshire, New York
The Strong Museum Rochester, New York
J-Mart Canandaigua, New York
Canandaigua Medical Group Canandaigua, New York
Rank's IGA Canandaigua, New York
Webster Community Sports Center Webster, New York
Midtown Tennis Club Rochester, New York
Hemlock General Store Hemlock, New York
Roseland Waterpark Canandaigua, New York
The Bank anticipates that in order to expand its service to its Monroe and
Ontario County customers it will increase the number of remote cash-dispenser
machines in operation.
The carrying value of the Company's properties as of December 31, 2001,
which is required to be included herein pursuant to Item 102 of Regulation S-K,
is included in Note 6 "Premises and Equipment" in the Notes to Consolidated
Financial Statements set forth on page 20 of the 2001 Annual Report to
Stockholders and is incorporated herein by reference.
Item 3. Legal Proceedings
The Company and its subsidiaries are, from time to time, parties to or
otherwise involved in legal proceedings arising in the normal course of
business. Management does not believe that there is any pending or threatened
proceeding against the Company or its subsidiaries which, if determined
adversely, would have a material effect on the Company's business, results of
operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders (in the fourth
quarter of 2001)
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The market and dividend information required to be included herein,
pursuant to Item 201 of Regulation S-K, is incorporated herein by reference from
page 33 of the 2001 Annual Report to Stockholders and the Proxy Statement.
While there can be no assurance that the amount and timing of dividends
paid in recent years will continue, management has no knowledge of current
activities that would require reduction of dividends paid in recent years and at
the same times.
At December 31, 2001, the Company had approximately 877 shareholders of
record. Information regarding beneficial ownership of the Company's stock is set
forth in the Company's Proxy Statement and incorporated herein by reference.
Page 21
Item 6. Selected Financial Data
The following table represents a summary of selected components of the
Company's consolidated financial statements for the five years ended December
31, 2001. All information concerning the Company should be read in conjunction
with the consolidated financial statements and related notes.
Selected Financial Data
(Dollars in thousands except per share data)
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
Income Statement Information:
Net interest income $ 26,114 23,034 19,418 18,420 18,194
Provision for loan losses 1,431 1,028 1,239 641 851
Other income 10,545 9,452 7,978 5,924 3,788
Operating expenses 27,147 26,756 22,904 18,430 15,632
Income taxes 2,419 1,215 896 1,686 1,762
Net income 5,662 3,487 2,357 3,587 3,737
Balance Sheet Data:
Total investments $120,996 83,974 79,412 76,464 74,499
Total loans, net 529,481 455,259 394,227 308,486 305,991
Total assets 725,718 594,737 522,135 428,047 418,942
Total deposits 670,843 533,513 454,290 376,507 324,761
Total borrowings 1,097 12,644 22,218 7,142 50,667
Total equity 48,132 44,269 42,477 42,478 40,932
Average assets 645,868 569,241 469,626 417,001 385,767
Average equity 45,665 42,671 41,533 40,357 39,383
Per Share Data:
Net income, basic $ 35.67 22.00 14.82 22.38 23.22
Net income, diluted $ 35.42 21.86 14.78 22.38 23.22
Cash dividends $ 12.10 11.90 11.50 11.00 10.00
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The purpose of this discussion is to focus on information about Canandaigua
National Corporation's financial condition and results of operations which is
not otherwise apparent from the consolidated financial statements in the annual
report. Reference should be made to those statements and the selected financial
data presented elsewhere in this document for an understanding of the following
discussion and analysis. (Dollar and percentage changes are calculated before
rounding.)
Overview
- --------
The Company continued to experience asset and deposit growth during 2001
and were greater than seen in 2000. This growth was accomplished without
opening any new banking offices during the year. Plans for 2002 include the
construction and opening of a banking office in Brighton. During 2001, the
Company also saw total revenue (net interest income plus other income) growth of
12.8%, while operating expense grew at only 1.5%. The increase in assets and
revenues without attendant growth in operating expenses is reflective of
management's efforts to control expense growth, while continuing to grow the
franchise.
Total assets grew 22.0%, investments grew 44.1%, net loans grew 16.3%,
deposits grew 25.7%, and equity grew 8.73%. The Company's investments in new
banking offices and other expansion activities management began making in 1998
are paying off, with earnings of $5.7 million in 2001, a 62.4% increase over
2000's $3.5 million.
Page 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Year 2001's results of $35.42 diluted earnings per share compare favorably
to budget of $29.17 and to 2000's results of $21.86. The Company anticipates
lower income growth in 2002 than implied in management's five-year accelerated
growth plan developed in late 1998; with a target of $36.52. Management also
anticipates 2002's asset growth will be significantly lower than 2001's at less
than 5%. The economic recession of 2001 and the tragic events of 9/11 could not
have been foreseen in 1998. Consequently, management believes its original
five-year plan may take six years to accomplish. While management anticipates
the aforementioned targets will be met in 2002, it is subject to changes in
economic conditions, the real estate market, interest rates and other factors.
Therefore, actual results may vary materially from projected results.
Positively impacting 2001's pre-tax results was approximately $0.2 million
in reversed contract termination costs. As more fully discussed in Note 2 to
the Consolidated Financial Statements, the sale of the Company's credit card
portfolio will occur later than anticipated and the termination costs are
expected to be lower than originally estimated.
While the quality of the Company's assets remained relatively good with
non-performing loans at December 31, 2001, at less than 1.0% of total loans,
overall quality has declined in both 2001 and 2000. The allowance for loan
losses stood at 104.2% of non-performing loans at year-end 2001 versus 139.7% at
December 31, 2000. In addition, the provision for loan loss increased to $1.4
million in 2001 from $1.0 million in 2000, reflective of portfolio growth and a
decline in asset quality. Other real estate owned declined to $1.4 million in
2001 from $1.5 million in 2000.
Financial Condition
- --------------------
As of December 31, 2001, total assets of the Company were $725.7 million,
up from $594.7 million at year-end 2000. Cash and equivalents increased $10.3
million to $38.5 million. Relative to total assets, this is a higher balance
than historically would be kept in cash, but with the federal funds rate the
same as the rate the Company was receiving on its interest bearing accounts with
other financial institutions, management decided to leave these short-term funds
in deposit accounts rather that move them to the federal funds market and the
end of 2001. Subsequent to year-end 2001, these balances were reduced by normal
liquidity needs such as investment purchases, loan fundings and customer deposit
withdrawals.
Securities showed an increase of $38.0 million to $118.9 million. The
Company's securities, with the exception of a minor amount of equity securities,
are classified as held to maturity debt securities.
The portfolio is comprised mainly of U.S. Treasuries and agencies and
tax-exempt obligations of state and local subdivisions. Nearly all of the
portfolio is pledged to federal financial agencies and to secure municipal
deposits. These deposits, in turn, are used to purchase securities of local
municipalities. Other securities consist mainly of high-grade corporate bonds
and other local investments. The mix of taxable and tax-exempt securities can
vary from time to time depending upon the amount of the Company's taxable
income, the securities' tax-equivalent yield, and the supply of high-grade
municipal securities. During 2001, the Company launched a new deposit product
for municipalities, which provides greater flexibility for funds management,
while producing higher returns.
Page 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Net loans increased $74.2 million to $529.5 million. The majority of the
growth occurred in the commercial-related portfolios. Residential mortgage
originations were also strong, but mostly in the form of loans originated for
sale to Freddie Mac. Consumer loans decreased $5.6 million, driven mainly by a
decrease in indirect automobile loans. Attractive financing, offered by auto
manufacturers late in 2001, caused a sharp decline in the Company's
originations. Net loan growth for 2002 is projected to be only 2.1% as
management focuses on income growth over asset generation to return the Bank to
"well-capitalized" status, in accord with its five-year plan. Refer to "Capital
Resources" section.
All other assets rose $0.3 million, most of which was in premises and
equipment for renovation of existing facilities and the permanent Honeoye Falls
office.
Total non-performing loans increased over the year by $1.9 million to $5.3
million at year-end 2001 as compared to $3.4 million at year-end 2000.
Commercial loans showed the greatest increase and is due mainly to a few large
relationships. At least one relationship, approximating $0.7 million, is likely
to result in foreclosure in 2002. Also in January 2002 a commercial real estate
loan relationship approximating $3.1 million was placed on non-accrual. This
loan was considered impaired at year-end 2001. Management believes the
underlying collateral value of the loans, and, if necessary, the liquidation
thereof, are sufficient to cover the loan balances.
The allowance for loan losses stood at $5.5 million at December 31, 2001,
up $0.8 million from December 31, 2000; 2001's year-end balance represents
1.02% of total loans, the same ratio as in 2000. Net charge-offs for the year
increased to 0.14% of average loans versus 0.10% in 2000. The largest portion
of net charge-offs continues to be in consumer loans, primarily indirect
automobiles loans. Management anticipates 2002 will bring further increases in
average net charge-offs as the effect of the 2001 recession works its way
through the loan collection process. However, the amount, timing and types of
loans cannot be determined.
Other real estate owned consists of three commercial parcels totaling for
$1.4 million. These are the same three parcels from 2000. However, during 2001,
the Company made progress in plans to liquidate these assets, some of which are
expected to occur in 2002, but may be replaced with new assets, as discussed
above.
In 2001, the Company added approximately $3.5 million in premises and
equipment with most relating to the new and renovated bank offices. With the
planned opening of at least one banking office in 2002, and the replacement of
most older generation computers in 2002 and 2003, more fixed assets additions
can be anticipated, which the Company expects to fund from current operations.
Total deposits at December 31, 2001, were $670.8 million and were up $137.3
million from December 31, 2000. For the same period, borrowings from the FHLB
were down $11.5 million to $1.1 million. Other liabilities increased by $1.3
million to $5.6 million. Deposit growth since December 31, 2000, came in all
account categories: Demand deposits were up $22.2 million, savings and money
market up $113.7 million and time deposits up $1.4 million. Overall, the deposit
growth is attributable to expansion in Monroe County driven by the introduction
of our "CNB Options" accounts and our "Municipal Choice" account. Management
also believes the Bank was the beneficiary of consumers' flight-to-safety as
assets were moved from a falling stock market into more liquid, but stable cash
assets. The Company's Ontario County retail deposits grew approximately 11.0%,
while Monroe County deposits grew 56.7% from 2000. The decrease in borrowings is
a direct result of deposit growth. The Company anticipates deposit growth to
continue into 2002, but at a rate less than 2001's. No FHLB borrowing growth is
projected in 2002.
Page 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
- -----------------------
Net interest income grew $3.0 million or 13.4% for the year 2001, driven
mainly by a $72.4 million increase in average earning assets or 13.9%, while
average interest bearing liabilities grew $63.5 million or 14.3%. During the
year, the Company's tax-equivalent yield on earning assets fell 63 basis points
to 7.60%, while its cost of funds fell 69 basis points to 3.54%. The combination
of these reductions lead to an six basis point increase in net interest spread.
However, the overall drop in rates did lead to some erosion of net interest
margin to 4.56% in 2001 from 4.60% in 2000.
The drop in yields was caused by the Company's reaction to the Federal
Reserve Board Federal Open Market Committee's (FOMC) eleven rate decreases
during 2001, which saw the federal funds target rate fall from 6.50% at the
beginning of the year to 1.75% by year-end 2001.
As noted in last year's report, management anticipated a lowering of the
interest rate spread and interest margin, (down only six basis points from 2000
to 2001 versus eighteen basis points from 1999 to 2000) due to the competitive
Monroe County market. A declining trend will is expected to continue through
2002. Refer to Interest Rate Sensitivity and Asset / Liability Management Review
section for additional discussion.
Other income for the year ended December 31, 2001, increased $1.1 million
or 11.6% over 2000. The increase was reflected in all major sources of
non-interest revenue. Service charges on deposit accounts rose 19.5%
attributable to increased transaction volume and changes in account fee
structures made late in 2000. Other operating income increased a modest 1.0%.
Trust income grew 6.5%, year on year. Growth plans of 17.1% projected for
2001 were stymied by generally poor stock market conditions. The book value of
assets under management increased $9.4 million or 1.5%, nonetheless. However,
management believes the strength of the Company's brand and its growing market
presence in Monroe County are responsible for the positive results in a year
that otherwise would have been negative. The Company continues to see strong
demand for locally managed trust services in its market area. Management is
projecting assets under management for 2002 to grow 15% from year-end 2001. To
accomplish this goal, the Company will expand its sales force and look to add
new products, including expanded financial planning, internet accessible account
statements, and the possible addition of retail brokerage services via the
internet.
Mortgage banking income, which includes the operations of CNB Mortgage
Company and the Bank's mortgage services, increased 5.7% for the year. The
continued fall in interest rates during 2001 led to a significant refinance
boom. The Company was able to take advantage of this and finance over $117
million in residential mortgages for sale to third party investors, in addition
to $10 million in residential mortgages for its own portfolio. While total
originations were up 66.3% from 2000, over 50% of the originations were sold to
Freddie Mac with servicing retained. The Company sells long-term fixed rate
residential mortgages with loan to value less than 80% to Freddie Mac to (1)
provide mortgage financing to homeowners it could not otherwise, because of an
inability to fund such high originations with local deposits and (2) to reduce
its long-term interest rate risk. However, the Company services these loans
locally. Generally all loans with an original loan to value greater than 80%
are sold, with servicing released to third parties.
Operating expenses increased $0.4 million or 1.5% for the year ended
December 31, 2001, much slower than the 16.8% increase seen in 2000. Increases
came in most major expense categories and were attributed to continued growth in
the Company's operations, expansion in Monroe County, and the charges discussed
in the "Overview" section above. Based upon the projected growth in banking
offices in 2002, operating expenses are expected to increase further over 2001.
Management continues to estimate that the Company's new banking offices break
even after about 36 months in operation. Several new offices (Webster, Greece,
and Chili) are at or near this milestone.
Page 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's effective tax rate increased in 2001 to 29.9% from 25.8% in
2000. The primary factor leading to this increase was the lower ratio of
tax-exempt income to taxable income. Management anticipates the effective tax
rate will increase slightly in 2002 due to this same phenomenon. In addition,
should the Company's pre-tax income rise to $10 million, its statutory federal
income tax rate will increase to 35% from 34%. This increase equates to
$100,000 in additional federal income tax expense.
Liquidity
- ---------
The Board of Directors has set general liquidity guidelines for the Bank to
meet which can be summarized as: the ability to generate adequate amounts of
cash to meet the demand from depositors who wish to withdraw funds, borrowers
who require funds, and capital expansion. Liquidity is produced by cash flows
from operating, investing, and financing activities of the Company.
Liquidity needs generally arise from asset origination and deposit
outflows. Liquidity needs can increase when asset generation (loans and
investments) exceed net deposit inflows. Conversely, liquidity needs are
reduced when the opposite occurs. In these instances, the needs are funded
through short-term FHLB borrowings, while excess liquidity is sold into the
Federal Funds market.
The Company has two primary sources of non-customer (wholesale) liquidity:
the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of
New York. At December 31, 2001, residential mortgage loans with a carrying value
of approximately $5.4 million were pledged as collateral for the Bank's advances
from the Federal Home Loan Bank, and an additional $40.7 million was available
for pledging. Indirect automobile loans with a carrying value of approximately
$83.6 million were pledged as collateral for a $66.9 million line of credit from
the Federal Reserve Bank of New York.
Secondarily, the Company uses the liquidity source of time deposit sales in
the national brokered market. This source will be used from time to time to
manage both liquidity and interest rate risk as conditions may require. The
balance of these so-called "brokered deposits" amounted to $28.9 million at
year-end 2001 versus $32.0 million at year-end 2000. However, given the Bank's
current classification as "Adequately Capitalized," an increase or renewal of
brokered deposits requires permission from the FDIC. Management does not
anticipate raising brokered deposits in 2002, as local deposit growth is
expected to outpace asset growth. Should the need arise, management has no
reason to believe permission would be denied.
For the year ended December 31, 2001, the Company generated $18.4 million
in net cash and equivalents versus $1.4 million for the year ended December 31,
2000.
Net cash used by operating activities was $1.5 million in 2001, an increase
over 2000. Both the largest source and use of operating cash in 2001 and 2000
were mortgage banking activity. However, activity in 2001 was much higher than
2000's, and 2001 ended with more loans for sale (not yet funded by third-party
investors) than 2000.
Cash used by investing activities increased substantially in 2001 to $104.0
million from $69.7 million in 2000. This increase in investing activities was
primarily a result of higher security purchases to collateralize municipal
deposits.
Cash provided by financing activities was $123.9 million in 2001 versus
only $68.0 million in 2000. Deposit increases were the main contributor and
reflect the Company's growth in customers and market share.
For 2002, cash for growth is expected to come from both customer and
wholesale sources. Customer deposit growth is mainly expected to come from
Monroe County sources.
Page 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Less material, but a part of the Company's ongoing operations, and expected
to be funded by normal operations, are liquidity uses such as lease obligations,
long-term debt repayments and other funding commitments. A summary is included
in the table below. This information is also available in the Notes to
Consolidated Financial Statements in the 2001 Annual Report to Shareholders.
Contractual Obligations
(Dollars in thousands)
After After
One Year Three years
One through through After
Year or Three Five Five
Less Years Years Years Total
--------- ----------- ------- ----- -----
Long-term debt $ 36 72 72 917 1,097
Operating leases 967 1,739 1,434 3,855 7,995
Monroe Fund commitment 250 -- -- -- 250
--------- ----------- ------- ----- -----
Total $ 1,253 1,811 1,506 4,772 9,342
========= =========== ======= ===== =====
Interest Rate Sensitivity and Asset / Liability Management Review
- -------------------------------------------------------------------------
(Item 7A. Quantitative and Qualitative Disclosures about Market Risk)
The Company realizes income principally from the differential or spread
between the interest earned on loans, investments and other interest-earnings
assets and the interest paid on deposits and borrowings. Loan volumes and
yields, as well as the volume of and rates on investments, deposits and
borrowings, are affected by market interest rates. Additionally, because of the
terms and conditions of many of the Company's loan documents and deposit
accounts, a change in interest rates could also affect the projected maturities
of the loan portfolio and/or the deposit base, which could alter the Company's
sensitivity to future changes in interest rates. Accordingly, management
considers interest rate risk to be the Company's most significant market risk.
Interest rate risk management focuses on maintaining consistent growth in
net interest income within Board approved policy limits while taking into
consideration, among other factors, the Company's overall credit, operating
income, operating cost, and capital profile. The Company's Asset/Liability
Committee (ALCO) includes the Bank's Chief Executive Officer, Chief Economist,
Chief Financial Officer, Senior Vice President of Retail Services and Senior
Vice President of Commercial Services. It reports to the Board of Directors on
its activities to monitor and manage interest rate risk.
Management of the Company's interest rate risk requires the selection of
appropriate techniques and instruments to be utilized after considering the
benefits, costs and risks associated with available alternatives. Since the
Company does not utilize derivative financial instruments, management's
techniques usually consider one or more of the following: (1) interest rates
offered on products, (2) maturity terms offered on products, (3) types of
products offered, and (4) products available to the Company in the wholesale
market such as advances from the FHLB and brokered time deposits.
The Company uses an interest margin simulation model as one method to
identify and manage its interest rate risk profile. The model is based on
expected cash flows and repricing characteristics for all financial instruments
and incorporates market-based assumptions regarding the impact of changing
interest rates on these financial instruments over a twelve-month period.
Assumptions based on the historical behavior of deposit rates and balances in
relation to changes in interest rates are also incorporated into the model.
These assumptions
Page 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
are inherently uncertain and, as a result, the model cannot precisely measure
net interest income or precisely predict the impact of fluctuations in interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes as well as
changes in market conditions and management strategies.
Using the aforementioned simulation model, net interest earnings
projections reflect an increase when applying the rising interest rate
environment management projects for late 2002. Management projects interest
rates to remain stable for at least the first half of 2002 and rise modestly
during the second half of the year as the economy shows signs of recovery and
the need for low cost funds to stimulate the market is reduced. A net interest
income increase is projected as management anticipates the ability to increase
asset yields faster than deposit rates, if and when market rates (federal funds
rate) rise. The table below, which shows the Company's estimated net interest
earnings sensitivity profile as of December 31, 2001, assumes no changes in the
operating environment, but assumes interest rates increase/decrease immediately
(rate shock) and remain unchanged thereafter. The table indicates the estimated
impact on net interest income under the various interest rate scenarios as a
percentage of Base Case earnings projections.
Changes in Interest
Rates Estimated
(basis points) Percentage Change in
- -------------------- Future Net Interest Income
12 Months
--------------------------
Base Case --
+200 13%
+100 7
- -100 (5)
- -200 (10)
A second method used to identify and manage the Company's interest rate
risk profile is the static gap analysis. Interest sensitivity gap ("gap")
analysis measures the difference between the assets and liabilities repricing or
maturing within specific time periods. An asset-sensitive position indicates
that there are more rate-sensitive assets than rate-sensitive liabilities
repricing or maturing within specific time horizons, which would generally imply
a favorable impact on net interest income in periods of rising interest rates
and a negative impact in periods of falling rates. A liability-sensitive
position would generally imply a negative impact on net interest income in
periods of rising rates and a positive impact in periods of falling rates.
The following table presents an analysis of the Company's interest rate
sensitivity gap position at December 31, 2001. All interest-earning assets and
interest-bearing liabilities are shown based on the earlier of their contractual
maturity or repricing date with no adjustment for estimated prepayment and decay
(withdrawal) rates. It should be noted that the interest rate sensitivity levels
shown in the table could be changed by external factors such as loan prepayments
and liability decay rates or by factors controllable by the Company such as
asset sales.
Page 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Canandaigua National Corporation
Interest Rate Sensitivity Gap
December 31, 2001
(Dollars in thousands)
Maturity/Repricing Period
----------------------------------------
Within 3 4 to 12 1 to 5 Over 5
Months Months Years Years
---------- -------- --------- -------
Interest-earning assets:
Interest-bearing deposits
and federal funds sold $ 16,363 -- -- --
Securities 38,686 18,526 48,404 15,380
Loans 160,075 57,741 276,505 40,640
--------- --------- -------- -------
Total interest-earnings
assets 215,124 76,267 324,909 56,020
--------- --------- -------- -------
Interest-bearing liabilities:
NOW accounts 69,156 -- -- --
Money market 133,753 -- -- --
Savings 142,936 -- -- --
Time deposits 76,059 110,039 44,969 --
Borrowings 12 36 192 857
---------- --------- -------- -------
Total interest-bearing
liabilities 421,916 110,075 45,161 857
---------- --------- -------- -------
Interest rate sensitivity gap $ (206,792) (33,808) 279,748 55,163
========== ========= ======== =======
Cumulative gap $ (206,792) (240,600) 39,148 94,311
========== ========= ======== =======
Cumulative gap ratio(1) 51.0% 54.8% 106.8% 116.3%
========== ========= ======== =======
Cumulative gap as percent of
Total assets (28.5%) (33.2%) 5.4% 13.0%
========== ========= ======== =======
(1)Cumulative total interest-earning assets divided by cumulative total interest-bearing
liabilities.
The chart indicates that $206.8 million more of interest-bearing
liabilities will reprice than interest-earning assets in the 0-3 month range.
For the 4-12 month period, the Company is also liability sensitive, as $33.8
million more of interest-bearing liabilities are repricing than interest-earning
assets. For the entire one year range, the Company is repricing $240.6 million
more interest-bearing liabilities than assets, and at 54.8% is within Company
gap ratio targets of 30% to 125%. The Company is asset sensitive at $279.7
million for the one-to-five-year range and $55.2 million over five years. For
the entire portfolio range, the Company is asset sensitive at $94.3 million
versus asset sensitivity of $85.9 million last year, mostly reflecting a modest
growth in non-interest-bearing demand accounts.
The Company's product mix is such that nearly all assets and liabilities
reprice or mature within five years of origination, with most at three years.
With such a balance sheet profile, the Company faces interest rate risk over the
short term. The Company considers interest rate gap manageable, as substantially
all of the NOW accounts and savings balances are not considered sensitive to
rate changes. However, the Company has seen a declining trend in net interest
margin (2001: 4.41%, 2000: 4.44%, 1999: 4.60%) as a result of local competitive
pricing pressure. This trend is expected to continue into 2002. Management will
continue to focus on improving the cumulative gap ratio, especially in light of
expected market interest rate increases for 2002, and reducing erosion of
interest rate margin.
Page 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Capital Resources
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios. As
disclosed in Note 16 to the Consolidated Financial Statements, as of December
31, 2001, all minimum capital adequacy requirements were met.
As of December 31, 2001, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as "adequately" capitalized
under the regulatory framework for prompt corrective action. This
classification is lower than "well" capitalized, the categorization of the Bank
last year. As reported in prior filings, the Bank's asset growth in 2001 was
anticipated to exceed its capital formation, which would result in a continuing
trend toward declining capital ratios. The decline from well- to
adequately-capitalized primarily has two impacts on the Bank and Company: (1)
FDIC insurance is expected to increase on an annual basis by approximately $0.1
million; and (2) For the Bank to renew or reissue brokered deposits, it will be
required to obtain approval from the FDIC. Management does not believe either
of these items will materially impact the Company's or Bank's financial
condition, operations or liquidity.
Dividends
Payment of dividends by the Bank to the Company is limited in certain
circumstances. According to federal banking law, the approval of the Office of
the Comptroller of the Currency (OCC) is required for the declaration of
dividends in any year in which dividends exceed the total of net income for that
year plus retained income for the preceding two years. At December 31, 2001,
$6.3 million was available for payment by the Bank to the Company without the
approval of the OCC.
Cash dividends paid to shareholders in 2001 were $1.9 million or $12.10 per
outstanding share versus $1.9 million or $11.90 per outstanding share in 2000.
2000 versus 1999
Year 2000 was one of continued growth as the Company furthered its
investments in new offices and expanded its market reach throughout the
metropolitan Rochester area. During 2000, the Company opened four banking
offices in Irondequoit, Perinton, Bushnell's Basin and downtown Rochester. The
Company was making plans to open an office in Brighton later in 2001 as well as
relocating its Honeoye Falls office to a permanent site. Year 2000 saw strong
asset growth, albeit lower than 1999's levels: 13.9% growth in assets, 15.5%
growth in loans, 17.5% growth in deposits, and 4.2% in equity. Net income was
$3.5 million in 2000, a 47.9% increase over 1999's $2.4 million.
Page 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
2000 versus 1999 (continued)
Year 2000's results of $21.86 per diluted share compared favorably to
budget of $15.24 and to 1999's results of $14.78. The Company anticipated
continued income growth in 2001 with a target of $29.17. This was in line with
a five-year plan laid out in late 1998 resulting from the accelerated expansion.
Impacting 2000's pre-tax results was approximately $0.1 million in
severance costs and $0.4 million in contract termination costs. These costs
were a result of the Company's efforts to slow the rate of expense growth during
the expansion plan and a realignment of the Company's credit card operations.
Management estimated that approximately $1.0 million in salary and benefits
(prior to annual raises) was eliminated. Annual operating expenses
approximating $0.4 million were expected to be eliminated from the Company's
realignment of its credit card activities. Another $0.5 million in revenue
increases were projected due to changes in deposit account and other fees, and
at least $0.1 million in cost reduction was expected to come from the
consolidation of the Company's mortgage businesses. The combined impact of
these changes totaled $2.0 million (pre-tax) and was consistent with the target
set out by management in early 2000.
While management anticipated the aforementioned targets would be met, they
were subject to changes in economic conditions, the real estate market, interest
rates and other factors. Therefore, actual results could vary materially.
The quality of the Company's assets remained good with non-performing loans
at December 31, 2000, at less than 1.0% of total loans. The allowance for loan
losses stood at 139.7% of non-performing loans at year-end 2000 versus 235.7% at
December 31, 1999. However, the provision for loan loss decreased to $1.0
million in 2000 from $1.2 million in 1999 reflective of slower loan growth and
good asset quality. Other real estate owned declined to $1.5 million in 2000
from $1.7 million in 1999.
Financial Condition
- --------------------
As of December 31, 2000, total assets of the Company were $594.7 million,
up from $522.1 million at year-end 1999. Cash and equivalents increased $1.4
million to $28.3 million in connection with the growth in customer deposits.
Securities showed an increase of $5.7 million to $80.9 million. The
Company's securities, with the exception of a minor amount of equity securities,
were held to maturity. The portfolio was comprised mainly of U.S. Treasuries
and agencies and tax-exempt obligations of state and local subdivisions. Nearly
all of the portfolio was pledged to federal financial agencies and to secure
municipal deposits. These deposits, in turn, were used to purchase securities
of local municipalities. Other securities consisted mainly of high-grade
corporate bonds and other local investments. During much of 2000, management
replaced maturing tax-exempt municipal bonds with U.S. Treasury securities.
Net loans increased $61.0 million to $455.3 million. The growth in loans
came mostly in the first half of the year, having reached the year-end target by
June. Management slowed loan growth during the second half of the year to
ensure the Company and Bank remained well-capitalized. (Refer to "Capital
Resources" section). Nearly all of 2000's loan growth came from commercial
loans, which was consistent with projected results.
All other assets rose $5.1 million, most of which was in premises and
equipment for expansion.
Page 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
2000 versus 1999 (continued)
Total non-performing loans increased over the twelve-month period ended
December 31, 2000, by $1.6 million to $3.4 million at year-end 2000 as compared
to $1.8 million at year-end 1999. All categories showed an increase. However,
commercial loans increased the most and was due mainly to one relationship,
which was expected to result in foreclosure in 2001, but did not. Management
expects foreclosure in 2002.
The allowance for loan losses stood at $4.7 million at December 31, 2000,
up $0.6 million from December 31, 1999; 2000's year-end balance represented
1.02% of total loans versus 1.04% for 1999. Net charge-offs for the year
remained favorable at 0.10% of average loans versus 0.11% in 1999.
Other real estate owned consisted of three parcels, all commercial, for
$1.5 million. These are the same three parcels from 1999.
In 2000, the Company added approximately $4.9 million in premises and
equipment with most relating to the new bank offices. With the planned opening
of at least two banking offices in 2001, more fixed assets additions were
anticipated, which the Company expected to fund from current operations.
Total deposits at December 31, 2000, were $533.5 million and were up $79.2
million from December 31, 1999. For the same period, borrowings from the FHLB
were down $9.6 million to $12.6 million. Other liabilities increased by $1.2
million to $4.3 million. Deposit growth in 2000, came in all account categories:
Demand deposits were up $19.7 million, savings and money market up $6.9 million,
and time deposits up $52.6 million. Overall, the deposit growth was attributable
to expansion in Monroe County. The Company's Ontario County retail deposits
grew approximately 3.7%, while Monroe County deposits grew 49.1% from 1999. The
decrease in borrowings was a direct result of deposit growth. The Company
anticipated both loan and deposit growth to continue into 2001, but at a rate
less than 2000's.
Results of Operations
- -----------------------
With a $97.5 million or 23.1% growth in average earning assets for 2000 and
a corresponding $89.1 million or 25.1% growth in average interest-bearing
liabilities, net interest income increased $3.6 million or 18.6%. The Company's
cost of funds increased 50 basis points to 4.23% for the year ended December 31,
2000, as compared to 1999. This
resulted from the combined factors of an increasing interest rate environment
brought on by the Federal Reserve's Open Market Committee and increased
competitive pressure in the Company's market area, particularly Monroe County.
The tax-equivalent yield on assets increased 30 basis points, resulting in a
spread reduction of 20 basis points.
Other income for the year ended December 31, 2000, increased $1.5 million
or 18.5% over 1999. The increase was reflected in all major sources of
non-interest revenue. Service charges on deposit accounts rose 38.8%
attributable to increased transaction volume and changes in account fee
structures. Trust income grew 19.1%, year on year, due to the growth in assets
under management. The book value of assets under management increased 9.9% to
$645.1 million at year-end 2000. The Company saw strong demand for locally
managed trust services in its market area.
To take advantage of the Company's expanded market presence, it opened its
Basin Park Financial Center. This state-of-the-art space is dedicated to trust,
investment and commercial services. This new office allows the Company to offer
more financial services, while providing a comfortable environment in which to
conduct business. Its location in Bushnell's Basin was chosen for its proximity
to the Company's Ontario County and growing number of Monroe County customers.
Page 32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
2000 versus 1999 (continued)
Other operating income increased overall, but mortgage banking income was
lower than 1999's as market rate increases lowered the demand for mortgage
refinancings. Loans originated for sale decreased 34.1% from 1999.
Operating expenses increased $3.9 million or 16.8% for the year ended
December 31, 1999. Increases came in all major expense categories and were
attributed to growth in the Company's operations, expansion in Monroe County,
and the charges discussed in the "Overview" section above.
The Company's effective tax rate decreased in 2000 to 25.8% from 27.5% in
1999. The primary factor leading to this decrease was the higher percentage of
tax-exempt income to taxable income. Management anticipated the effective tax
rate to increase in 2001 to at least 1999's level.
New Accounting Pronouncements
- -------------------------------
On December 12, 2001, the Securities and Exchange Commission (SEC) issued
Release 33-8040; "FR-60 -- Cautionary Advice Regarding Disclosure About Critical
Accounting Policies." The release identifies "critical" accounting policies,
(including the methods and practices of applying them) as "both most important
to the portrayal of the company's financial condition and results, and they
require management's most difficult, subjective, or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain." Management considers the "Allowance for Loan Losses" as
the Company's critical accounting policy. Refer to page 16.
Several new accounting pronouncements were issued by the Financial
Accounting Standard Board (FASB) during 2001. A summary of each and the
anticipated impact on the Company are discussed in Note 1 to the Consolidated
Financial Statements on page 16 of the 2001 Annual Report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company, together with a
report thereon of KPMG LLP dated February 1, 2002, appearing on pages 8 to 32 of
the 2001 Annual Report to Stockholders are incorporated herein by reference. A
reference index to the consolidated financial statements and accompanying notes
presented in the Annual Report to Stockholders is shown in Item 14 of this
filing.
Supplementary data: Selected Quarterly Financial Data
Page 33
The following tables present selected quarterly financial data for the
Company for each of the quarters in the years ended December 31, 2001 and 2000.
The sum of each quarters' earnings per share data for 2000 differs from the full
year's results due to rounding (in thousands except share data).
Supplementary data: Selected Quarterly Financial Data (continued)
1st 2nd 3rd 4th
------ ------ ------ ------
2001 QUARTERS:
Net interest income $6,119 $6,153 $6,750 $7,092
Provision for loan losses 438 360 379 254
Non-interest income 2,562 2,989 2,622 2,372
Non-interest expense 6,598 6,709 6,341 7,499
Income taxes 486 618 775 540
------ ------ ------ ------
Net income $1,159 $1,455 $1,877 $1,171
====== ====== ====== ======
Basic earnings per share $ 7.30 $ 9.17 $11.82 $ 7.38
====== ====== ====== ======
Diluted earnings per share $ 7.26 $ 9.10 $11.74 $ 7.32
====== ====== ====== ======
2000 QUARTERS:
Net interest income $5,322 $5,703 $6,039 $5,970
Provision for loan losses 250 308 270 200
Non-interest income 1,980 2,309 2,404 2,759
Non-interest expense 6,210 6,372 6,412 7,762
Income taxes 230 260 347 378
------ ------ ------ ------
Net income $ 612 $1,072 $1,414 $ 389
====== ====== ====== ======
Basic earnings per share $ 3.86 $ 6.76 $ 8.92 $ 2.45
====== ====== ====== ======
Diluted earnings per share $ 3.84 $ 6.72 $ 8.87 $ 2.44
====== ====== ====== ======
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information with respect to the directors and certain executive
officers of the Company, which is required to be included herein pursuant to
Items 401 and 405 of Regulation S-K, is included in the Proxy Statement, dated
February 25, 2002, and is incorporated herein from the Proxy Statement by
reference.
Item 11. Executive Compensation
The information required to be included herein regarding executive
compensation pursuant to Item 402 of Regulation S-K is included in the Proxy
Statement, dated February 25, 2002, and is incorporated herein from the Proxy
Statement by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be included herein regarding security ownership
and certain beneficial owners and management pursuant to Items 403 of Regulation
S-K is included in the Proxy Statement, dated February 25, 2002, and is
incorporated herein from the Proxy Statement by reference.
Item 13. Certain Relationships and Related Transactions
The information required to be included herein regarding certain
relationships and related transactions pursuant to Items 404 of Regulation S-K
is included in the Proxy Statement, dated February 25, 2002, and is incorporated
herein from the Proxy Statement by reference.
Page 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements are contained in the Company's 2001
Annual Report to Shareholders which, as indicated below, is included as Exhibit
13 of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the Years Ended December 31, 2001,
2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
(2) Schedules
Schedules are omitted because of the absence of conditions under which they
are required or because the required information is provided in the consolidated
financial statements or notes thereto.
(3.a) Exhibits
Exhibit Incorporation by Reference or page in
sequential numbering where exhibit may be
found:
(3.i.) Certificate of Incorporation, of the Exhibit A on Form 10-K
Registrant, as amended for the year ended
December 31, 1994
(3.ii.) By-laws of the Registrant, Exhibits B on Form 10-K
as amended for the year ended
December 31, 1994
(13) Annual Report to Shareholders for
the year ended December 31, 2001 Page 38
(20) Definitive Proxy Statement to
Shareholders dated February 25, 2002 Page 74
(21) Subsidiaries Page 91
(27) Financial Data Schedule Page 92
(b) Reports on Form 8-K:
None
Page 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANANDAIGUA NATIONAL CORPORATION
March 12, 2002 By: /s/ George W. Hamlin, IV
George W. Hamlin, IV, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- ----------------------- --------------
/s/ George W. Hamlin, IV President/Director March 12, 2002
- ----------------------------
(George W. Hamlin, IV)
/s/ Robert G. Sheridan Secretary/Director March 12, 2002
- ----------------------------
(Robert G. Sheridan)
/s/ Gregory S. MacKay Treasurer March 12, 2002
- ----------------------------
(Gregory S. MacKay)
/s/ Lawrence A. Heilbronner Principal Financial and March 12, 2002
- ---------------------------- Accounting Officer
(Lawrence A. Heilbronner)
/s/ Patricia A. Boland Director March 12, 2002
- ----------------------------
Patricia A. Boland
/s/ James S. Fralick Director March 12, 2002
- ----------------------------
James S. Fralick
/s/ Daniel P. Fuller Director March 12, 2002
- ----------------------------
Daniel P. Fuller
/s/ David Hamlin, Jr. Director March 12, 2002
- ----------------------------
David Hamlin, Jr.
/s/ Stephen D. Hamlin Director March 12, 2002
- ----------------------------
Stephen D. Hamlin
/s/ Richard P. Miller, Jr. Director March 12, 2002
- ----------------------------
Richard P. Miller, Jr.
/s/ Caroline C. Shipley Director March 12, 2002
- ----------------------------
Caroline C. Shipley
/s/ Sue S. Stewart Director March 12, 2002
- ----------------------------
Sue S. Stewart
/s/ Alan J. Stone Director March 12, 2002
- ----------------------------
Alan J. Stone
Page 36
INDEX OF EXHIBITS
Exhibit
(3.i.) Certificate of Incorporation, of the Exhibit A on Form 10-K
Registrant, as amended for the year ended
December 31, 1994
(3.ii.) By-laws of the Registrant, Exhibit B on Form 10-K
as amended for the year ended
December 31, 1994
(13) Annual Report to Shareholders for
the year ended December 31, 2001
(20) Definitive Proxy Statement to
Shareholders dated February 25, 2002
(21) Subsidiaries
(27) Financial Data Schedule