PINX:CNND Canandaigua National Cp Quarterly Report 10-Q/A Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q


[Ö]

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

 

OR

[  ]

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from__________ to__________


Commission File Number: 2-94863


[cnc_10q20120630final002.gif]


CANANDAIGUA NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)


 

 

 

New York
(State or other jurisdiction of
incorporation or organization)

 

16-1234823
(IRS Employer Identification Number)

 

 

 

72 South Main Street
Canandaigua, New York
(Address of principal executive offices)

 


14424
(Zip code)


(585) 394-4260
(Registrant's telephone number, including area code)


    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.


Yes  [Ö]

 

No  [ ]


    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.


Yes  [Ö]

 

No  [ ]


    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.

Large accelerated filer [ ]           Accelerated filer [Ö]            Non-accelerated filer [ ]         Smaller reporting company [ ]


    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]    No [Ö]


    The registrant had 1,887,051 shares of common stock, par value $5.00, outstanding at July 24, 2012.
































Forward-Looking Statements


This report, including information incorporated by reference, contains, and future filings by Canandaigua National Corporation on Forms 10-K, 10-Q and 8-K and future oral and written statements, press releases, and letters to shareholders by Canandaigua National Corporation and its management may contain, certain "forward-looking statements" intended to qualify for the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used or incorporated by reference in the Company's disclosures and documents, the words "anticipate," "believe," "contemplate," "estimate," "expect," "foresee," "project," "target," "goal," "budget" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act. Such forward-looking statements are subject to certain risks discussed within this document and the Company’s most recent Annual Report on Form 10-K, including under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K. These forward-looking statements are based on currently available financial, economic, and competitive data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, so should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, targeted, or budgeted. Certain matters which management has identified, which may cause material variations are noted elsewhere herein and in the Company’s other publicly filed reports. These forward-looking statements speak only as of the date of the document. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein.  We caution readers not to place undue reliance on any of these forward-looking statements.


Some examples of forward-looking statements include statements related to our expectations on the direction of interest rates, demand for our loans, changes in customer transactions types, and the payment performance of our loan portfolio.  Our experience and assumptions we believe are reasonable from the basis of our stated expectations, but results can also be impacted by other factors.


As described in our public filings, factors which may cause our results to vary materiality from our expectations include, among many other,  adverse changes in the global economy which may affect interest rates and as well as the stability of our local service areas, which may affect loan demand and credit quality; changes in fees related to servicing electronic transactions which may affect consumer usage, and continued focus of regulatory authorities at the state, federal and international level on bank regulation.








CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
June 30, 2012


PART I -- FINANCIAL INFORMATION

   

PAGE

 

 

 

Item 1.  Financial Statements (Unaudited)

 

 

 

 

 

  Condensed consolidated balance sheets at June 30, 2012 and December 31, 2011

 

1

 

 

 

  Condensed consolidated statements of income for the three- and six-month periods ended   

 

 

   June 30, 2012 and 2011.

 

2

 

 

 

  Condensed consolidated statements of comprehensive income for the three- and six-month periods ended   

 

 

   June 30, 2012 and 2011.

 

3

 

 

 

  Condensed consolidated statements of stockholders' equity for the six-month periods ended

 

 

  June 30, 2012 and 2011.

 

4

 

 

 

  Condensed consolidated statements of cash flows for the six-month periods ended

 

 

  June 30, 2012 and 2011.

 

5

 

 

 

  Notes to condensed consolidated financial statements

 

6

 

 

 

Item 2.  Management's Discussion and Analysis of Financial

 

 

                Condition and Results of Operations  

 

27

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 


35

 

 

 

Item 4. Controls and Procedures

 

35

 

 

 

PART II -- OTHER INFORMATION

 

 

 

 

 

Item 1.  Legal Proceedings

 

37

 

 

 

Item 1A.  Risk Factors

 

37

 

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

Item 3.  Defaults Upon Senior Securities

 

37

 

 

 

Item 4.  Mine Safety Disclosures

 

37

 

 

 

Item 5.  Other Information

 

37

 

 

 

Item 6.  Exhibits

 

39

 

 

 

SIGNATURES

 

40



PART I  FINANCIAL INFORMATIONItem 1. Financial Statements


CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2012 and December 31, 2011 (Unaudited)
(dollars in thousands, except per share data)





 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

 

 

2012 

 

 

2011 

 

Assets

 

 

 

 

 

Cash and due from banks

$

 40,331 

 

 

 52,715 

Interest-bearing deposits with other financial institutions

 

 8,463 

 

 

 6,490 

Federal funds sold

 

 65,364 

 

 

 67,535 

Securities:

 

 

 

 

 

 

 

  - Available for sale, at fair value

 

 100,087 

 

 

 114,258 

 

 

  - Held-to-maturity (fair value of $172,548 in 2012 and $172,517 in 2011)

 

 168,073 

 

 

 167,225 

Loans - net

 

 1,389,053 

 

 

 1,276,426 

Premises and equipment – net

 

 15,712 

 

 

 16,101 

Accrued interest receivable

 

 6,470 

 

 

 6,627 

Federal Home Loan Bank stock and Federal Reserve Bank stock

 

 2,738 

 

 

 2,656 

Goodwill

 

 15,810 

 

 

 15,810 

Intangible assets – net

 

 6,083 

 

 

 6,787 

Prepaid FDIC assessment

 

 3,389 

 

 

 3,905 

Other assets

 

 26,798 

 

 

 24,935 

 

 

 

Total Assets

$

 1,848,371 

 

 

 1,761,470 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

   

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

 

 

 

 

 

 

Non-interest bearing

$

 266,642 

 

 

 227,284 

 

 

Interest bearing

 

 188,863 

 

 

 175,409 

 

Savings and money market

 

 788,262 

 

 

 745,713 

 

Time

 

 385,810 

 

 

 398,204 

 

 

 

    Total deposits

 

 1,629,577 

 

 

 1,546,610 

Junior subordinated debentures

 

 51,547 

 

 

 51,547 

Accrued interest payable and other liabilities

 

 27,540 

 

 

 27,533 

 

 

 

Total Liabilities

 

 1,708,664 

 

 

 1,625,690 

 

 

 

 

 

 

 

 

 

Canandaigua National Corporation stockholders' equity:

 

 

 

 

 

 

Preferred stock, $.01 par value; 4,000,000 shares

 

 

 

 

 

 

 

  authorized, no shares issued or outstanding

 

 - 

 

 

 - 

 

Common stock, $5.00 par value; 16,000,000 shares

 

 

 

 

 

 

 

  authorized, 1,946,496 shares issued in 2012 and 2011

 

 9,732 

 

 

 9,732 

 

Additional paid-in-capital

 

 8,851 

 

 

 8,834 

 

Retained earnings

 

 125,929 

 

 

 120,675 

 

Treasury stock, at cost (60,435 shares at June 30, 2012

 

 

 

 

 

 

 

  and 59,242 at December 31, 2011)

 

 (5,114)

 

 

 (4,912)

 

Accumulated other comprehensive income, net

 

 (2,531)

 

 

 (1,455)

 

  Total Canandaigua National Corporation Stockholders' Equity

 

 136,867 

 

 

 132,874 

 

Non-controlling interests

 

 2,840 

 

 

 2,906 

 

 

Total Equity

 

 139,707 

 

 

 135,780 

 

 

Total Liabilities and Equity

$

 1,848,371 

 

 

 1,761,470 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to condensed consolidated financial statements.


1



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three- and six-month periods ended June 30, 2012 and 2011 (Unaudited)
(dollars in thousands, except per share data)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 

 

 

2011 

 

 

2012 

 

 

2011 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

 16,343 

 

 

 16,177 

 

$

 32,793 

 

 

 32,256 

 

Securities

 

 1,819 

 

 

 2,010 

 

 

 3,722 

 

 

 4,080 

 

Federal funds sold

 

 31 

 

 

 107 

 

 

 66 

 

 

 197 

 

Other

 

 3 

 

 

 8 

 

 

 7 

 

 

 13 

 

 

 

Total interest income

 

 18,196 

 

 

 18,302 

 

 

 36,588 

 

 

 36,546 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 1,456 

 

 

 2,415 

 

 

 2,959 

 

 

 5,091 

 

Junior subordinated debentures

 

 702 

 

 

 742 

 

 

 1,398 

 

 

 1,487 

 

 

 

Total interest expense

 

 2,158 

 

 

 3,157 

 

 

 4,357 

 

 

 6,578 

 

 

 

Net interest income

 

 16,038 

 

 

 15,145 

 

 

 32,231 

 

 

 29,968 

Provision for loan losses

 

 1,150 

 

 

 140 

 

 

 2,300 

 

 

 890 

 

 

 

Net interest income after provision for loan losses

 

 14,888 

 

 

 15,005 

 

 

 29,931 

 

 

 29,078 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 2,854 

 

 

 2,722 

 

 

 5,677 

 

 

 5,307 

 

Trust and investment services income

 

 3,743 

 

 

 3,117 

 

 

 7,553 

 

 

 6,216 

 

Net gain on sale of mortgage loans

 

 970 

 

 

 440 

 

 

 1,569 

 

 

 810 

 

Loan servicing income, net

 

 226 

 

 

 247 

 

 

 430 

 

 

 466 

 

Loan-related fees

 

 171 

 

 

 56 

 

 

 243 

 

 

 165 

 

(Loss) on securities transactions, net

 

 (85)

 

 

 (96)

 

 

 (91)

 

 

 (97)

 

Other operating income

 

 879 

 

 

 433 

 

 

 1,559 

 

 

 1,244 

 

 

 

Total other income

 

 8,758 

 

 

 6,919 

 

 

 16,940 

 

 

 14,111 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 9,417 

 

 

 7,824 

 

 

 20,172 

 

 

 15,825 

 

Occupancy, net

 

 2,058 

 

 

 1,883 

 

 

 4,104 

 

 

 3,716 

 

Technology and data processing

 

 1,342 

 

 

 1,109 

 

 

 2,552 

 

 

 2,151 

 

Professional and other services

 

 955 

 

 

 896 

 

 

 1,881 

 

 

 1,803 

 

Marketing and public relations

 

 745 

 

 

 639 

 

 

 1,354 

 

 

 1,308 

 

Office supplies, printing and postage

 

 425 

 

 

 362 

 

 

 846 

 

 

 776 

 

Intangible amortization

 

 501 

 

 

 222 

 

 

 704 

 

 

 444 

 

Other real estate operations

 

 137 

 

 

 178 

 

 

 455 

 

 

 406 

 

FDIC insurance

 

 284 

 

 

 171 

 

 

 567 

 

 

 850 

 

Other operating expenses

 

 1,379 

 

 

 1,551 

 

 

 2,752 

 

 

 2,877 

 

 

 

Total operating expenses

 

 17,243 

 

 

 14,835 

 

 

 35,387 

 

 

 30,156 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 6,403 

 

 

 7,089 

 

 

 11,484 

 

 

 13,033 

Income taxes

 

 1,955 

 

 

 2,045 

 

 

 3,465 

 

 

 3,650 

 

 

 

Net income attributable to noncontrolling interests and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canandaigua National Corporation

 

 4,448 

 

 

 5,044 

 

 

 8,019 

 

 

 9,383 

Less: Net income (loss) attributable to noncontrolling interests

 

 (108)

 

 

 - 

 

 

 (66)

 

 

 - 

Net income attributable to Canandaigua National Corporation

$

 4,556 

 

 

 5,044 

 

$

 8,085 

 

 

 9,383 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

 2.41 

 

 

 2.67 

 

$

 4.28 

 

 

 4.97 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

 2.36 

 

 

 2.62 

 

$

 4.19 

 

 

 4.88 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to condensed consolidated financial statements.


2



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

[WITH RESPECTIVE TAX INFORMATION PRESENTED PARENTHETICALLY]
For the three- and six-month periods ended June 30, 2012 and 2011 (Unaudited)
(dollars in thousands)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 

 

2011 

 

Net income

$

 4,448 

 

 5,044 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Change in fair value of

 

 

 

 

 

 

 

 

interest rate swaps,

 

 

 

 

 

 

 

 

net of taxes of ($1,059) and ($304)

 

 (1,568)

 

 (525)

 

 

 

Change in unrealized gain on

 

 

 

 

 

 

 

 

securities available for sale,

 

 

 

 

 

 

 

 

net of taxes of ($45) and $232

 

 37 

 

 460 

 

 

 

Plus reclassification adjustment

 

 

 

 

 

 

 

 

for realized gains and losses included in

 

 

 

 

 

 

 

 

net income on called securities,

 

 

 

 

 

 

 

 

net of taxes of $13 and $6

 

 40 

 

 13 

 

 

 

 

 

Other comprehensive income

$

 (1,491)

 

 (52)

 

Total comprehensive income

 

 2,957 

 

 4,992 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable

 

 

 

 

 

 

 

 to the noncontrolling interest

$

 (108)

 

 - 

 

 

Comprehensive income attributable to the Company

$

 2,849 

 

 4,992 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 

 

2011 

 

Net income

$

 8,019 

 

 9,383 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Change in fair value of

 

 

 

 

 

 

 

 

interest rate swaps,

 

 

 

 

 

 

 

 

net of taxes of ($629) and $113

 

 (896)

 

 178 

 

 

 

Change in unrealized gain on

 

 

 

 

 

 

 

 

on securities available for sale,

 

 

 

 

 

 

 

 

net of taxes of ($183) and $153

 

 (182)

 

 297 

 

 

 

Plus reclassification adjustment

 

 

 

 

 

 

 

 

for realized gains and losses included in

 

 

 

 

 

 

 

 

net income on called securities,

 

 

 

 

 

 

 

 

net of taxes of $1 and $12

 

 2 

 

 26 

 

 

 

 

 

Other comprehensive income

$

 (1,076)

 

 501 

 

Total comprehensive income

 

 6,943 

 

 9,884 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable

 

 

 

 

 

 

 

 to the noncontrolling interest

$

 (66)

 

 - 

 

 

Comprehensive income attributable to the Company

$

 7,009 

 

 9,884 



See accompanying notes to condensed consolidated financial statements.


3



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the six-month periods ended June 30, 2012 and 2011 (Unaudited)
(dollars in thousands, except share data)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

 

 

 

 

 

Shares

 

Common

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

controlling

 

 

 

 

 

 

 

 

Outstanding

 

Stock

 

Capital

 

Earnings

 

Stock

 

Income (Loss)

 

Interest

 

 

Total

Balance at December 31, 2011

 

 1,887,254 

 

$

 9,732 

 

 

 8,834 

 

 

 120,675 

 

 

 (4,912)

 

 

 (1,455)

 

 

 2,906 

 

 

 135,780 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate swaps,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of ($629)

 

 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (896)

 

 

 - 

 

 

 (896)

 

 

Change in unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on securities available for sale,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of ($183)

 

 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (182)

 

 

 - 

 

 

 (182)

 

 

Plus reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for realized gains and losses included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net income on called securities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $1

 

 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 2 

 

 

 - 

 

 

 2 

 

 

Net income (loss) attributable to non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

controlling interest and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canandaigua National Corporation

 

 

 

 

 - 

 

 

 - 

 

 

 8,085 

 

 

 - 

 

 

 - 

 

 

 (66)

 

 

 8,019 

 

Total comprehensive income

 

 

 

 

 - 

 

 

 - 

 

 

 8,085 

 

 

 - 

 

 

 (1,076)

 

 

 (66)

 

 

 6,943 

 

Purchase of treasury stock

 

 (1,436)

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (222)

 

 

 - 

 

 

 - 

 

 

 (222)

 

Shares issued as compensation

 

 243 

 

 

 - 

 

 

 17 

 

 

 - 

 

 

 20 

 

 

 - 

 

 

 - 

 

 

 37 

 

Cash dividend - $ 1.50 per share

 

 

 

 

 - 

 

 

 - 

 

 

 (2,831)

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (2,831)

Balance at June 30, 2012

 

 1,886,061 

 

$

 9,732 

 

 

 8,851 

 

 

 125,929 

 

 

 (5,114)

 

 

 (2,531)

 

 

 2,840 

 

 

 139,707 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

 1,888,748 

 

$

 9,732 

 

 

 8,823 

 

 

 109,768 

 

 

 (4,728)

 

 

 199 

 

 

 - 

 

 

 123,794 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate swaps,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $113

 

 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 178 

 

 

 - 

 

 

 178 

 

 

Change in unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on securities available for sale,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $153

 

 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 297 

 

 

 - 

 

 

 297 

 

 

Plus reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for realized gains and losses included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net income on called securities,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $12

 

 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 26 

 

 

 - 

 

 

 26 

 

 

Net income attributable to non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

controlling interest and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canandaigua National Corporation

 

 

 

 

 - 

 

 

 - 

 

 

 9,383 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 9,383 

 

Total comprehensive income

 

 

 

 

 - 

 

 

 - 

 

 

 9,383 

 

 

 - 

 

 

 501 

 

 

 - 

 

 

 9,884 

 

Purchase of treasury stock

 

 (1,048)

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (107)

 

 

 - 

 

 

 - 

 

 

 (107)

 

Shares issued as compensation

 

 192 

 

 

 - 

 

 

 3 

 

 

 - 

 

 

 16 

 

 

 - 

 

 

 - 

 

 

 19 

 

Cash dividend - $ 1.43 per share

 

 

 

 

 - 

 

 

 - 

 

 

 (2,691)

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (2,691)

Balance at June 30, 2011

 

 1,887,892 

 

$

 9,732 

 

 

 8,826 

 

 

 116,460 

 

 

 (4,819)

 

 

 700 

 

 

 - 

 

 

 130,899 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to condensed consolidated financial statements.


4



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six-month periods ended June 30, 2012 and 2011 (Unaudited)
(dollars in thousands)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 

 

 

2011 

Cash flow from operating activities:

 

 

 

 

 

 

Net income attributable to Canandaigua National Corporation

$

 8,085 

 

 

 9,383 

 

Adjustments to reconcile net income to

 

 

 

 

 

 

 

Net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 3,502 

 

 

 2,739 

 

 

 

Provision for loan losses

 

 2,300 

 

 

 890 

 

 

 

Gain on sale of premises and equipment and other real estate, net

 

 95 

 

 

 (21)

 

 

 

Writedown of other real estate

 

 73 

 

 

 25 

 

 

 

Deferred income tax benefit

 

 (1,320)

 

 

 (328)

 

 

 

Loss (Income) from equity-method investments, net

 

 (16)

 

 

 (365)

 

 

 

Loss on calls of securities and write-down, net

 

 91 

 

 

 97 

 

 

 

Gain on sale of mortgage loans, net

 

 (1,569)

 

 

 (810)

 

 

 

Originations of loans held for sale

 

 (124,864)

 

 

 (63,357)

 

 

 

Proceeds from sale of loans held for sale

 

 122,227 

 

 

 72,471 

 

 

 

Increase in other assets

 

 (1,016)

 

 

 (1,303)

 

 

 

Increase (decrease) in all other liabilities

 

 (1,518)

 

 

 422 

 

 

 

 

Net cash provided by operating activities

 

 6,070 

 

 

 19,843 

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

Proceeds from maturities and calls

 

 57,108 

 

 

 27,082 

 

 

Purchases

 

 (43,391)

 

 

 (31,023)

 

Securities held to maturity:

 

 

 

 

 

 

 

Proceeds from maturities and calls

 

 25,668 

 

 

 28,173 

 

 

Purchases

 

 (27,300)

 

 

 (23,124)

 

Loan originations in excess of principal collections, net

 

 (111,986)

 

 

 19,622 

 

Purchase of premises and equipment, net

 

 (971)

 

 

 (1,537)

 

Calls of FHLB stock, net of purchases of FHLB and FRB stock

 

 (86)

 

 

 (196)

 

Other investments  - net

 

 75 

 

 

 (3)

 

Proceeds from sale of other real estate

 

 2,346 

 

 

 605 

 

 

 

 

Net cash (used) provided by investing activities

 

 (98,537)

 

 

 19,599 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

Net increase in demand, savings and money market deposits

 

 95,361 

 

 

 57,722 

 

Net decrease in time deposits

 

 (12,394)

 

 

 (36,464)

 

Principal repayments of term borrowings

 

 - 

 

 

 (330)

 

Proceeds from sale of treasury stock

 

 37 

 

 

 19 

 

Payments to acquire treasury stock

 

 (222)

 

 

 (107)

 

Change in noncontrolling interest, net

 

 (66)

 

 

 - 

 

Dividends paid

 

 (2,831)

 

 

 (2,691)

 

 

 

 

Net cash provided by financing activities

 

 79,885 

 

 

 18,149 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 (12,582)

 

 

 57,591 

 

  Cash and cash equivalents - beginning of period

 

 126,740 

 

 

 138,229 

 

  Cash and cash equivalents - end of period

$

 114,158 

 

 

 195,820 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

$

 4,406 

 

 

 6,825 

 

Income taxes paid

 

 3,653 

 

 

 4,100 

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing activities

 

 

 

 

 

 

Real estate acquired in settlement of loans

$

 1,265 

 

 

 304 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to condensed consolidated financial statements.


5



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    


(1)   Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable regulations of the Securities and Exchange Commission (SEC) and with generally accepted accounting principles for interim financial information. Such principles are applied on a basis consistent with those reflected in the 2011 Annual Report (defined below) of the Company filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Management has prepared the financial information included herein without audit by an independent registered public accounting firm.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three- and six- month periods ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”).


Amounts in prior periods' condensed consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation.


Management has evaluated the impact of subsequent events on these financial statements to the date of filing of this Form 10-Q with the Securities and Exchange Commission.


(2) Securities


Amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2012 are summarized as follows:


 

 

   

 

June 30, 2012

 

 

   

 

 

 

Gross Unrealized

 

 

 

 

 

   

 

Amortized

 

 

 

 

 

 

 

Fair

 

 

   

 

Cost

 

Gains

 

 

Losses

 

 

Value

 

 

   

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury  

$

 501 

 

 - 

 

 

 - 

 

 

 501 

 

U.S. government sponsored enterprise obligations

 

 51,820 

 

 260 

 

 

 (44)

 

 

 52,036 

 

State and municipal obligations  

 

 42,671 

 

 1,490 

 

 

 (16)

 

 

 44,145 

 

Corporate obligations (1)

 

 1,094 

 

 3 

 

 

 (193)

 

 

 904 

 

Equity securities  

 

 2,292 

 

 209 

 

 

 - 

 

 

 2,501 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

    Total Securities Available for Sale

$

 98,378 

 

 1,962 

 

 

 (253)

 

 

 100,087 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 (1)Amortized cost includes cumulative $360,000 write-down prior to 2010 for other-than-temporary impairment.


 

 

  

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored enterprise obligations

$

 6 

 

 - 

 

 

 - 

 

 

 6 

 

State and municipal obligations  

 

 167,248 

 

 4,235 

 

 

 (118)

 

 

 171,365 

 

Corporate obligations

 

 819 

 

 358 

 

 

 - 

 

 

 1,177 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

    Total Securities Held to Maturity

$

 168,073 

 

 4,593 

 

 

 (118)

 

 

 172,548 



























6



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    



(2) Securities (continued)


The amortized cost and fair value of debt securities by years to maturity as of June 30, 2012, follow (in thousands). Maturities of amortizing securities are classified in accordance with their contractual repayment schedules. Expected maturities will differ from contractual maturities since issuers may have the right to call or prepay obligations without penalties.


  

 

Available for Sale

 

 

Held to Maturity

 

  

 

Amortized  

 

 

 

 

 

Amortized

 

 

 

 

  

 

Cost (1)

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 Years

 

  

 

 

 

 

 

 

 

 

 

 

 Under 1

$

 14,549 

 

 

 14,782 

 

 

 31,191 

 

 

 31,704 

 

 1 to 5

 

 31,686 

 

 

 32,910 

 

 

 125,802 

 

 

 129,149 

 

 5 to 10

 

 46,976 

 

 

 47,071 

 

 

 10,244 

 

 

 10,498 

 

 10 and over

 

 2,875 

 

 

 2,823 

 

 

 836 

 

 

 1,197 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 Total

$

 96,086 

 

 

 97,586 

 

 

 168,073 

 

 

 172,548 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 (1)Amortized cost includes a cumulative $360,000 write-down prior to 2010 for other-than-temporary impairment.

 


The following table presents the fair value of securities with gross unrealized losses at June 30, 2012, aggregated by category and length of time that individual securities have been in a continuous loss position (in thousands).


 

 

Less than 12 months

 

 

Over 12 months

 

 

Total

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

Securities Available for Sale:

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. government sponsored enterprise obligations

$

 16,441 

 

 

 44 

 

 

 - 

 

 

 - 

 

 

 16,441 

 

 

 44 

 

State and municipal obligations

 

 330 

 

 

 1 

 

 

 996 

 

 

 15 

 

 

 1,326 

 

 

 16 

 

Corporate obligations

 

 - 

 

 

 - 

 

 

 863 

 

 

 193 

 

 

 863 

 

 

 193 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

$

 16,771 

 

 

 45 

 

 

 1,859 

 

 

 208 

 

 

 18,630 

 

 

 253 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored enterprise obligations

$

 6 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 6 

 

 

 - 

 

State and municipal obligations

$

 18,515 

 

 

 95 

 

 

 3,870 

 

 

 23 

 

 

 22,385 

 

 

 118 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

$

 18,521 

 

 

 95 

 

 

 3,870 

 

 

 23 

 

 

 22,391 

 

 

 118 


Substantially all of the unrealized losses on the Company's securities were caused by market interest rate changes from those in effect when the specific securities were purchased by the Company. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than par value. Except for certain corporate obligations, all securities rated by an independent rating agency carry an investment grade rating. Because the Company does not intend to sell the securities and it believes it is not likely to be required to sell the securities before recovery of their amortized cost basis, which may be, and is likely to be, maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012, except as discussed below.


In the available-for-sale portfolio, the Company holds approximately $0.9 million of bank trust-preferred securities with an adjusted cost basis of $1.1 million.  These securities are backed by debt obligations of banks, with approximately $0.8 million of the securities backed by two of the largest U.S. banks and $0.1 million backed by a pool of banks’ debt in the form of a collateralized debt obligation (CDO). As a result of market upheaval, a lack of regular trading market in these securities, and bank failures, the fair value of these securities had fallen sharply in 2008 and continued to fall in the first half of 2009.  The Company recognized cumulative other-than-temporary-impairment (OTTI) amounting to $0.9 million on one CDO over several years. Management sold a portion of this security in 2011 and intends to sell the remainder in whole or in part over time. If the financial condition of the underlying banks deteriorates, further write-downs could occur before a sale, which would be reflected in the statement of operations. The maximum potential write-down would be its current carrying value of less than $0.1 million.



























7



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    



(2) Securities (continued)


Amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2011 are summarized as follows:


 

 

  

 

December 31, 2011

 

 

  

 

 

 

 

Gross Unrealized

 

 

 

 

 

  

 

Amortized

 

 

 

 

 

 

 

Fair

 

 

  

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

$

 502 

 

 

 - 

 

 

 - 

 

 

 502 

 

U.S. government sponsored enterprise obligations

 

 55,766 

 

 

 377 

 

 

 (18)

 

 

 56,125 

 

State and municipal obligations

 

 53,531 

 

 

 1,917 

 

 

 (23)

 

 

 55,425 

 

Corporate obligations

 

 1,093 

 

 

 2 

 

 

 (296)

 

 

 799 

 

Equity securities

 

 1,295 

 

 

 112 

 

 

 - 

 

 

 1,407 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total securities Available for Sale

$

 112,187 

 

 

 2,408 

 

 

 (337)

 

 

 114,258 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 (1)Amortized cost includes cumulative write-downs of $360,000 prior to 2010 for other-than-temporary impairment.


Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored enterprise obligations

$

 1,007 

 

 

 1 

 

 

 - 

 

 

 1,008 

 

State and municipal obligations

 

 165,348 

 

 

 5,113 

 

 

 (135)

 

 

 170,326 

 

Corporate obligations

 

 870 

 

 

 313 

 

 

 - 

 

 

 1,183 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total Securities Held to Maturity

$

 167,225 

 

 

 5,427 

 

 

 (135)

 

 

 172,517 


The following table presents the fair value of securities with gross unrealized losses at December 31, 2011, aggregated by category and length of time that individual securities have been in a continuous loss position (in thousands).


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

Over 12 months

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

Securities Available for Sale:

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. government sponsored enterprise obligations

$

 7,610 

 

 

 18 

 

 

 - 

 

 

 - 

 

 

 7,610 

 

 

 18 

 

State and municipal obligations

 

 355 

 

 

 3 

 

 

 996 

 

 

 20 

 

 

 1,351 

 

 

 23 

 

Corporate obligations

 

 - 

 

 

 - 

 

 

 759 

 

 

 296 

 

 

 759 

 

 

 296 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

$

 7,965 

 

 

 21 

 

 

 1,755 

 

 

 316 

 

 

 9,720 

 

 

 337 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

$

 7,886 

 

 

 80 

 

 

 4,647 

 

 

 55 

 

 

 12,533 

 

 

 135 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

$

 7,886 

 

 

 80 

 

 

 4,647 

 

 

 55 

 

 

 12,533 

 

 

 135 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(3) Loans and Allowance for Loan Losses


Loans, other than loans designated as held for sale, are stated at the principal amount outstanding net of deferred origination costs. Interest and deferred fees and costs on loans are credited to income based on the effective interest method. Loans held for sale are carried at the lower of cost or fair value.


The accrual of interest on commercial and real estate loans is generally discontinued, and previously accrued 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



8



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    


are returned to accrual status when the doubt no longer exists about the loan's collectability and the borrower has demonstrated a sustained period of timely payment history. Specifically, the borrower will have resumed paying the full amount of scheduled interest and principal payments; all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period (six months); and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms involving payments of cash or cash equivalents.  Interest on consumer loans is accrued until the loan becomes 120 days past due at which time principal and interest are generally charged off.


Management, considering current information and events regarding the borrower’s ability to repay its 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, and sufficient information exists to make a reasonable estimate of the inherent loss, 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 fair value or the fair value of underlying collateral if the loan is collateral-dependent.  In the absence of sufficient, current data to make a detailed assessment of collateral values or cash flows, management measures impairment on a pool basis using historical loss factors equivalent to similarly impaired loans. Impairment reserves are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on impaired loans are generally applied to reduce the principal balance outstanding. In considering loans for evaluation of specific impairment, management generally excludes smaller balance, homogeneous loans: residential mortgage loans, home equity loans, and all consumer loans, unless such loans were restructured in a troubled debt restructuring. These loans are collectively evaluated for risk of loss on a pool basis.


Loans


The Company's market area is generally Ontario County and Monroe County of New York State. Substantially all loans are made in this market area. Accordingly, the ultimate collectability of a substantial portion of the Company's loan portfolio is susceptible to changes in the economic conditions in this area. The Company's concentrations of credit risk are as disclosed in the following table of loan classifications. The concentrations of credit risk in related loan commitments and letters of credit parallel the loan classifications reflected. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.


The major classifications of loans at June 30, 2012 and December 31, 2011, follow (in thousands), along with a description of their underwriting and risk characteristics:


 

 

 

2012

 

2011

 

 

 

 

 

 

Commercial and industrial

$

 212,451 

 

 198,744 

Mortgages:

 

 

 

 

 

Commercial

 

 504,284 

 

 467,413 

 

Residential  - first lien

 

 272,165 

 

 256,173 

 

Residential  - second lien

 

 104,184 

 

 101,877 

Consumer:

 

 

 

 

 

Automobile - indirect

 

 275,862 

 

 227,541 

 

Other

 

 16,430 

 

 25,583 

Loans held for sale

 

 11,762 

 

 7,556 

 

 

 

 

 

 

 

  Total loans

 

 1,397,138 

 

 1,284,887 

Plus - Net deferred loan costs

 

 9,188 

 

 7,634 

Less - Allowance for loan losses

 

 (17,273)

 

 (16,095)

 

 

 

 

 

 

 

  Loans - net

$

 1,389,053 

 

 1,276,426 


Commercial and Industrial Loans: These loans generally include term loans and lines of credit.  Such loans are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and equipment purchases. As a general practice, a collateral lien is placed on equipment or other assets owned by the borrower.  These loans carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to secure secondary collateral, such as real estate, and obtain personal guarantees of the borrowers.  To further reduce risk and enhance liquidity, these loans generally carry variable rates of interest, repricing in three- to five-year periods, and have a maturity of five years or less. Lines of credit generally have terms of one year or less and carry floating rates of interest (e.g., prime plus a margin).


Commercial Mortgages: Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may



9



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    


include apartments, commercial structures housing businesses, healthcare facilities, and other non-owner occupied facilities.  These loans are considered by the Company to be less risky than commercial and industrial loans, since they are secured by real estate and buildings. The loans typically have adjustable interest rates, repricing in three- to five-year periods, and require principal payments over a 10- to 25-year period.  Many of these loans include call provisions within 10 to 15 years of their origination. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and the underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property serving as collateral.


Residential First-Lien Mortgages: We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage.  These loans are collateralized by owner-occupied properties located in the Company’s market area. They are amortized over five to 30 years. Substantially all residential loans secured by first mortgage liens are originated by CNB Mortgage and sold to either the Bank or third-party investors.  Generally, fixed-rate mortgage loans with a maturity or call date of ten years or less and a rate of 5% or more are retained in the Company’s portfolio.  For longer term, fixed-rate residential mortgages without escrow, the Company generally retains the servicing, but sells the right to receive principal and interest to Federal Home Loan Mortgage Company, also known as Freddie Mac.  All loans not retained in the portfolio or sold to Freddie Mac are sold to unrelated third parties with servicing released.  This practice allows the Company to manage interest rate risk, liquidity risk, and credit risk.  From time to time, the Company may also purchase residential mortgage loans which are originated and serviced by third parties. In an effort to manage risk of loss and strengthen secondary market liquidity opportunities, management typically uses secondary market underwriting, appraisal, and servicing guidelines.  Loans on one-to-four-family residential real estate are mostly originated in amounts of no more than 85% of appraised value or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including at each loan draw period.


Residential Second-Lien Mortgages: The Company originates home equity lines of credit and second mortgage loans (loans secured by a second [junior] lien position on one-to-four-family residential real estate).  These loans carry a higher risk than first mortgage residential loans as they are in a second position relating to collateral.  Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows.  A security interest, with title insurance when necessary, is taken in the underlying real estate.


Consumer Loans:  The Company funds a variety of consumer loans, including direct and indirect automobile loans, recreational vehicle loans, boat loans, aircraft loans, home improvement loans, and personal loans (collateralized and uncollateralized). Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed or a customer's deposit account. A small amount of loans are unsecured, which carry a higher risk of loss.


Loans Held for Sale:  These are the Residential First-Lien Mortgages, discussed above, which are sold to Freddie Mac and other third parties. These loans are carried at their lower of cost or fair value, calculated on a loan-by-loan basis.


Allowance for Loan Losses


The allowance for loan losses is a valuation reserve for probable and inherent losses 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 expected. 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 in the loan portfolio. This process consists of the identification of specific reserves for impaired loans and, for all other loans, pool-based general reserves, which is a formula-driven allocation.


The calculation of the general reserve involves several steps. A historical loss factor is applied to each loan by loan type and loan classification. The historical loss factors are calculated using a loan-by-loan, trailing eight-quarter net loss migration analysis for commercial loans. For all other loans, a portfolio-wide, trailing eight-quarter net loss migration analysis is used. Adjustments are then made to the historical loss factors based on current-period quantitative objective elements (delinquency, non-performing assets, classified/criticized loan trends, charge-offs, concentrations of credit, recoveries, etc.) and subjective elements (economic conditions, portfolio growth rate, portfolio management, credit policy, and others). This methodology is applied to the commercial, residential mortgage, and consumer portfolios, and their related off-balance sheet exposures. Any allowance for off-balance sheet exposures is recorded in Other Liabilities.


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.



























10



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    



A summary of the changes in the allowance for loan losses follows (in thousands). Notwithstanding the estimated allocations set forth in any table, the entirety of the allowance is available to absorb losses in any portfolio:


 

 

For the Three-Month Periods

 

For the Six-Month Periods

 

 

Ended June 30,

 

Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

2011

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of period

$

 16,841 

 

 

 15,910 

 

 16,095 

 

 

 15,635 

Loans charged off

 

 (955)

 

 

 (581)

 

 (1,665)

 

 

 (1,286)

Recoveries of loans charged off

 

 237 

 

 

 368 

 

 543 

 

 

 598 

Provision charged to operations

 

 1,150 

 

 

 140 

 

 2,300 

 

 

 890 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

 17,273 

 

 

 15,837 

 

 17,273 

 

 

 15,837 


The following tables, for each of the three- month periods presented, provide an analysis of the allowance for loan losses by loan type (in thousands):


Three months ended June 30, 2012

 

 

 

 

 

Residential

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgage  -

 

mortgage  -

 

 

 

 

 

Loans

 

 

 

 

 

 

Commercial

 

Commercial

 

first

 

second

 

Consumer -

 

Consumer -

 

held for

 

 

 

 

 

 

 and industrial

 

mortgage

 

position

 

position

 

 indirect

 

other

 

sale

 

Unallocated

 

Total

Beginning Balance

$

 4,878 

 

 1,282 

 

 1,907 

 

 534 

 

 5,861 

 

 1,222 

 

 - 

 

 1,157 

 

 16,841 

Charge-offs

 

 (240)

 

 (278)

 

 (154)

 

 - 

 

 (165)

 

 (118)

 

 - 

 

 - 

 

 (955)

Recoveries

 

 39 

 

 1 

 

 4 

 

 10 

 

 135 

 

 48 

 

 - 

 

 - 

 

 237 

Provision

 

 (394)

 

 675 

 

 362 

 

 (62)

 

 686 

 

 (198)

 

 - 

 

 81 

 

 1,150 

Ending Balance

$

 4,283 

 

 1,680 

 

 2,119 

 

 482 

 

 6,517 

 

 954 

 

 - 

 

 1,238 

 

 17,273 


Three months ended June 30, 2011

 

 

 

 

 

Residential

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgage  -

 

mortgage  -

 

 

 

 

 

Loans

 

 

 

 

 

 

Commercial

 

Commercial

 

first

 

second

 

Consumer -

 

Consumer -

 

held for

 

 

 

 

 

 

 and industrial

 

mortgage

 

position

 

position

 

 indirect

 

other

 

sale

 

Unallocated

 

Total

Beginning Balance

$

 5,876 

 

 1,671 

 

 1,666 

 

 587 

 

 4,141 

 

 811 

 

 - 

 

 1,158 

 

 15,910 

Charge-offs

 

 (196)

 

 (43)

 

 (16)

 

 - 

 

 (206)

 

 (120)

 

 - 

 

 - 

 

 (581)

Recoveries

 

 96 

 

 - 

 

 19 

 

 1 

 

 174 

 

 78 

 

 - 

 

 - 

 

 368 

Provision

 

 (1,004)

 

 (290)

 

 (37)

 

 (18)

 

 492 

 

 (18)

 

 - 

 

 1,015 

 

 140 

Ending Balance

$

 4,772 

 

 1,338 

 

 1,632 

 

 570 

 

 4,601 

 

 751 

 

 - 

 

 2,173 

 

 15,837 


The balance in the allowance for loan losses increased to $17.3 million at June 30, 2012 compared to $16.8 million at March 31, 2012 and from $15.8 million at June 30, 2011. In determining the level of allowance necessary, we considered a number of factors.  The most significant factor in the second quarter of 2012 was growth in the portfolio, which amounted to an annualized rate of 13.4% for the three-month period from March 31, 2012.  The balance in the allowance increased by a similar annualized rate.  The allocation of the allowance changed in the second quarter generally due to the respective loan portfolio’s growth rates with the exception of Commercial and industrial loans, wherein the allowance was reduced due to a reduction in the quantitative loss factor with improvements in the historical eight-quarter net loss migration factor, new loan growth receiving a lower, Pass-rated loss factor, the upgrades of previously criticized loans, and a lower level of internally classified loans and impaired loans.


In determining the level of allowance necessary as of June 30, 2012, we considered a number of factors.  The most significant factor in the first half of 2012 was growth in the portfolio.  In addition to the impact of loan growth, specific portfolio factors impacted the allowance, which included, (a) a reduction in the quantitative loss factor applied to Substandard-rated Commercial and Industrial Loans, (b) a decline in annualized net charge-offs, and (c) a decline in the ratio of non-performing loans to total loans.  The increase in the Consumer indirect allowance for both three and six month periods is due to the portfolio’s growth and not due to changes in underlying credit quality.  Economic conditions were also considered in our determination of the allowance.  Given improvements we have seen in our local economy, we have reduced our economic qualitative factors by two basis points.



























11



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    



The following tables, for each of the six- month periods presented, provide an analysis of the allowance for loan losses by loan type, including a summary, as of the period end, of the loan types individually and collectively evaluated for impairment (in thousands):


Six months ended June 30, 2012

 

 

 

 

 

Residential

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgage  -

 

mortgage  -

 

 

 

 

 

Loans

 

 

 

 

 

 

Commercial

 

Commercial

 

first

 

second

 

Consumer -

 

Consumer -

 

held for

 

 

 

 

 

 

 and industrial

 

mortgage

 

position

 

position

 

 indirect

 

other

 

sale

 

Unallocated

 

Total

Beginning Balance

$

 6,393 

 

 994 

 

 1,786 

 

 521 

 

 4,839 

 

 916 

 

 - 

 

 646 

 

 16,095 

Charge-offs

 

 (431)

 

 (278)

 

 (229)

 

 (3)

 

 (448)

 

 (276)

 

 - 

 

 - 

 

 (1,665)

Recoveries

 

 77 

 

 3 

 

 10 

 

 12 

 

 310 

 

 131 

 

 - 

 

 - 

 

 543 

Provision

 

 (1,756)

 

 961 

 

 552 

 

 (48)

 

 1,816 

 

 183 

 

 - 

 

 592 

 

 2,300 

Ending Balance

$

 4,283 

 

 1,680 

 

 2,119 

 

 482 

 

 6,517 

 

 954 

 

 - 

 

 1,238 

 

 17,273 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of which:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount for loans individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 912 

 

 221 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 1,133 

Amount for loans collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 3,371 

 

 1,459 

 

 2,119 

 

 482 

 

 6,517 

 

 954 

 

 - 

 

 1,238 

 

 16,140 

Balance of loans individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 3,746 

 

 10,490 

 

 - 

 

 83 

 

 - 

 

 - 

 

 - 

 

 - 

 

 14,319 

Balance of loans collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 208,705 

 

 493,794 

 

 272,165 

 

 104,101 

 

 275,862 

 

 16,430 

 

 11,762 

 

 9,188 

 

 1,392,007 


Six months ended June 30, 2011

 

 

 

 

 

Residential

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgage  -

 

mortgage  -

 

 

 

 

 

Loans

 

 

 

 

 

 

Commercial

 

Commercial

 

first

 

second

 

Consumer -

 

Consumer -

 

held for

 

 

 

 

 

 

 and industrial

 

mortgage

 

position

 

position

 

 indirect

 

other

 

sale

 

Unallocated

 

Total

Beginning Balance

$

 6,364 

 

 1,371 

 

 1,304 

 

 563 

 

 4,196 

 

 1,155 

 

 - 

 

 682 

 

 15,635 

Charge-offs

 

 (351)

 

 (43)

 

 (16)

 

 - 

 

 (608)

 

 (268)

 

 - 

 

 - 

 

 (1,286)

Recoveries

 

 111 

 

 - 

 

 19 

 

 2 

 

 315 

 

 151 

 

 - 

 

 - 

 

 598 

Provision

 

 (1,352)

 

 10 

 

 325 

 

 5 

 

 698 

 

 (287)

 

 - 

 

 1,491 

 

 890 

Ending Balance

$

 4,772 

 

 1,338 

 

 1,632 

 

 570 

 

 4,601 

 

 751 

 

 - 

 

 2,173 

 

 15,837 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of which:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount for loans individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 2,250 

 

 330 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 2,580 

Amount for loans collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 2,522 

 

 1,008 

 

 1,632 

 

 570 

 

 4,601 

 

 751 

 

 - 

 

 2,173 

 

 13,257 

Balance of loans individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 2,888 

 

 1,376 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 4,264 

Balance of loans collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

 196,512 

 

 432,073 

 

 240,163 

 

 95,588 

 

 169,126 

 

 27,189 

 

 5,809 

 

 5,214 

 

 1,171,674 


In determining the level of allowance necessary as of June 30, 2012, we considered a number of factors.  The most significant factor in the first half of 2012 was growth in the portfolio.  In addition to the impact of loan growth, specific portfolio factors impacted the allowance, which included, (a) a reduction in the quantitative loss factor applied to Substandard-rated Commercial and Industrial Loans, (b) a decline in annualized net charge-offs, and (c) a decline in the ratio of non-performing loans to total loans.  Economic conditions were also considered in our determination of the allowance.  Given improvements we have seen in our local economy, we have reduced our economic qualitative factors by two basis points.  


In monitoring the credit quality of the portfolio, management applies a credit quality indicator to substantially all commercial loans. These quality indicators, as more fully described in the 2011 Annual Report, range from one through eight in increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Loans rated 1 through 4 are generally allocated a lesser percentage allocation in the allowance for loan losses than loans rated from 5 through 8. Residential Mortgage Loans are generally rated 9, unless they are used to partially collateralize commercial loans, in which case they carry the rating of the respective commercial loan relationship, or if management wishes to recognize a well defined weakness or loss potential to more accurately reflect credit risk. Unrated loans are allocated a percentage of the allowance for loan losses on a pooled basis.



























12



CANANDAIGUA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

    



The following tables present the loan portfolio as of June 30, 2012 and December 31, 2011 by credit quality indicator (in thousands). Except for loans in the 9 and unrated categories, credit quality indicators are reassessed for each applicable loan at least annually, generally upon the anniversary of the loan’s origination or receipt and analysis of the borrower’s financial statements, when applicable, or in the event that information becomes available that would cause us to re-evaluate.

Loans in category 9 and unrated are evaluated for credit quality after origination based upon delinquency status. (See Aging Analysis table).


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicator Analysis as of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgage  -

 

mortgage  -

 

 

 

 

 

Loans

 

Deferred

 

 

 

 

Commercial

 

Commercial

 

first

 

second

 

Consumer -

 

Consumer -

 

held for

 

Fees and

 

 

 

 

 and industrial

 

mortgage

 

position

 

position

 

 indirect

 

other

 

sale

 

Costs

 

Total

1-Superior

$

 12,310 

 

 - 

 

 - 

 

 - 

 

 - 

 

 137 

 

 - 

 

 - 

 

 12,447 

2-Good

 

 12,881 

 

 26,246 

 

 1,577 

 

 3,492 

 

 - 

 

 1,054 

 

 - 

 

 - 

 

 45,250 

3-Satisfactory

 

 78,469 

 

 210,744 

 

 1,267 

 

 278 

 

 - 

 

 - 

 

 - 

 

 - 

 

 290,758 

4-Watch

 

 38,532 

 

 204,992 

 

 5,942 

 

 404 

 

 - 

 

 - 

 

 - 

 

 - 

 

 249,870 

5-Special Mention

 

 12,351 

 

 17,086 

 

 1,005 

 

 - 

 

 - 

 

 - 

 

 - 

 

 - 

 

 30,442 

6-Substandard

 

 21,693 

 

 22,710 

 

 5,888 

 

 254 

 

 - 

 

 - 

 

 - 

 

 - 

 

 50,545 

7-Doubtful

 

 - 

 

 - 

 

 7 

 

 - 

 

 - 

 

 -