<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
[ ] Transition report under Section 13 or l5(d) of the Exchange Act
For the transition period from _________ to ____________
Commission file number 000-27481
Rome Bancorp, Inc.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 16-1573070
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 West Dominick Street, Rome, NY 13440-5810
(Address of Principal Executive Offices)
(315) 336-7300
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ____
---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Outstanding at
Class October 6, 1999
----- ---------------
Common Stock, par value $.01 3,400,776
Transitional Small Business Disclosure Format (check one):
Yes ____ No X
---
<PAGE>
ROME BANCORP, INC.
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
Part II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 22
Item 2. Changes in Securities and Use of Proceeds....................... 22
Item 3. Defaults Upon Senior Securities................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............. 22
Item 5. Other Information............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 22
Signatures
</TABLE>
- ------------------------------------------------------------------------------
Forward Looking Statements
- --------------------------
This Quarterly Report on Form 10-QSB contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of Rome Bancorp, Inc. and The Rome Savings
Bank that are subject to various factors which could cause actual results to
differ materially from these estimates. These factors include: changes in
general, economic and market conditions; the development of an adverse interest
rate environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments; depositor and
borrower preferences; and the factors described under "Year 2000."
- ------------------------------------------------------------------------------
<PAGE>
The Rome Savings Bank
Consolidated Statement of Condition
As of September 30, 1999 and December 31, 1998
(Unaudited, Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31
1999 1998
------------ -----------
<S> <C> <C>
Assets
Cash & due from banks $ 6,510 $ 6,136
Federal funds sold & other interest bearing
deposits 24,843 19,078
Securities available for sale, at fair value 53,631 55,036
Securities held to maturity 1,319 1,472
---------- ----------
Total Securities 54,950 56,508
Mortgage loans 95,536 95,642
Other loans 43,299 41,162
Total Loans 138,835 136,804
Less: Allowance for loan loss (1,901) (1,956)
---------- ----------
Net loans 136,934 134,848
Premises and equipment, net 3,843 3,957
Accrued interest receivable 1,593 1,578
Other real estate owned 205 294
Other assets 4,153 2,874
---------- ----------
Total assets 233,031 225,273
========== ==========
Liabilities & Equity
Liabilities :
Deposits:
Savings 80,954 75,935
Money market 5,493 5,423
Time 80,321 84,739
Non-interest bearing 31,631 21,180
Advance payments by borrowers property taxes &
insurance 1,876 1,853
Accrued interest 0 0
---------- ----------
Total deposits 200,275 189,130
Other liabilities 3,552 3,455
Due to broker 0 4,026
---------- ----------
Total liabilities 203,827 196,611
Equity
Surplus 5,687 5,687
Retained earnings 23,590 22,222
Accumulated other comprehensive income (73) 753
---------- ----------
Total Equity 29,204 28,662
Total liabilities & equity $233,031 $225,273
========== ==========
</TABLE>
3
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The Rome Savings Bank
Consolidated Income Statement
For the Three and Nine month periods ended
September 30, 1999 and September 30, 1998
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter to Date Year To Date
------------------------------------- --------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income:
Loans $2,831 $2,842 $8,435 $ 8,515
Securities 724 815 2,156 2,415
Other short-term investments 277 173 669 552
------ ------ ------ -------
Total Interest Income 3,832 3,830 11,260 11,482
Interest expense on deposits 1,722 1,823 5,181 5,406
Interest income before
provision for loan losses 2,110 2,007 6,079 6,076
Provision for loan losses 0 50 0 200
------ ------ ------ -------
Net interest income 2,110 1,957 6,079 5,876
Other Income:
Net gain (loss) on sale of securities 0 0 265 139
Service charges & fees 241 181 692 551
------ ------ ------ -------
Total other income 241 181 957 690
2,351 2,138 7,036 6,566
Non-interest expenses:
Salaries and employee benefits 940 814 2,758 2,356
Building, occupancy and equipment 300 308 953 881
Real estate owned, net (2) 62 (24) 153
ATM service fees 49 43 140 125
Contributions 27 10 43 41
Other 363 346 1,118 1,094
------ ------ ------ -------
Total non-interest expenses 1,677 1,583 4,988 4,650
Income before income taxes 674 555 2,048 1,916
N.Y.S. & Fed. Income taxes 227 186 680 726
------ ------ ------ -------
Net income $ 447 $ 369 $1,368 $ 1,190
====== ====== ====== =======
</TABLE>
4
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The Rome Savings Bank
Consolidated Statements of Equity and Comprehensive Income
For the Nine Months Ended September 30, 1999 and September 30, 1998
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income Surplus Total
<S> <C> <C> <C> <C>
Balance at December 31, 1998 22,222 753 5,687 28,662
Comprehensive income:
Net income 1,368 1,368
Unrealized gains (losses) on Available
for Sale securities (826) (826)
------ --- ----- ------
Comprehensive income 542
------ --- ----- ------
Balances at September 30, 1999 23,590 (73) 5,687 29,204
====== === ===== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
Before tax Tax (expense) Net of tax
amount benefit amount
-------------------------------------------
<S> <C> <C> <C> <C>
Unrealized losses on securities
Unrealized holding gains arising during period (1,112) 445 (667)
Less: reclassification adjustment for gains realized in net income (265) 106 (159)
------ ----- ------
Other comprehensive income, net (1,377) 551 (826)
====== ===== ======
Balance at December 31, 1997 20,697 410 5,687 26,794
Comprehensive income:
Net income 1,190 1,190
Unrealized gains on Available
for Sale securities 294 294
------
Comprehensive income 1,484
Statutory allocation of net income
to surplus (119) 119 0
------ ------ ----- ------
Balance at September 30, 1998 21,768 704 5,806 28,278
====== === ===== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
Before tax Tax (expense) Net of tax
amount benefit amount
-------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding gains arising during period 629 (252) 377
Less: reclassification adjustment for gains realized in net income (139) 56 (83)
--- ----- ------
Other comprehensive income, net 490 (196) 294
=== ===== ======
</TABLE>
5
<PAGE>
The Rome Savings Bank
Statement Of Consolidated Cash Flows
For the Nine Months Ended September 30, 1999 and September 30, 1998
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1999
---- ----
Cash flows operating activities:
<S> <C> <C> <C> <C>
Net Income $1,368 $1,190
Adjustments to reconcile net income to net cash provided by perating
activities:
Depreciation and amortization 391 295
(Increase) decrease in accrued interest receivable (15) (232)
Provision for loan losses 0 200
Net gains on sales of securities (265) (139)
Proceeds from sale of education loans 1,576 0
Net (gains) losses on sale of real estate owned (38) 19
Write down of real estate owned 0 0
Amortization and accretion of premiums and discounts 7 (12)
(Decrease) increase in other liabilities (3,927) 571
Decrease (increase) in other assets (729) $(561)
-------- --------
Net cash provided by operating activities (1,632) 1,331
Cash flows from investing activities:
Net (increase) decrease in loans (3,684) (2,294)
Proceeds from sales of AFS securities 806 304
Proceeds from maturities and principal reductions of AFS
Securities 21,683 10,672
Purchases of AFS securities (22,201) (12,360)
Purchases of HTM securities 0 (32)
Proceeds from maturities and principal reductions of HTM
securities 151 143
Proceeds from sale of real estate owned 148 143
Additions to premises and equipment (277) (570)
-------- --------
Net cash (used in) provided by investing activities (3,374) (3,994)
Cash flows from financing activities:
Increase (decrease) in time deposits (4,418) (942)
Increase (decrease) in other deposits 15,563 4,812
-------- --------
Net cash (used in) provided by financing activities 11,145 3,870
Net increase (decrease) in cash and cash equivalents 6,139 1,207
Cash and cash equivalents at beginning of period 25,214 17,299
Cash and cash equivalents at end of period 31,353 18,506
Supplemental disclosure of cash flow information:
Non-cash investing activities:
Change in securities purchased not settled (4,026) 0
Additions to real estate owned 22 315
Cash paid during the period for:
Interest 5,181 5,406
Income taxes 680 726
</TABLE>
6
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The Rome Savings Bank and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of The Rome Savings Bank and subsidiaries (the "Bank") as of September
30, 1999 and December 31, 1998 and for the three and nine month periods ended
September 30, 1999 and 1998. Material intercompany accounts and transactions
have been eliminated in consolidation. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. In the opinion of management
the unaudited consolidated financial statements include all necessary
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation for the periods presented.
Rome Bancorp, Inc. believes that the disclosures are adequate to make the
information presented not misleading; however, the results for the periods
presented are not necessarily indicative of results to be expected for the
entire fiscal year.
(2) Reorganization to Mutual Holding Company
On October 6, 1999, under the Amended Agreement and Plan of Reorganization
of The Rome Savings Bank, approved by the Bank's depositors at a Special Meeting
held on September 29, 1999, the Bank completed its reorganization from a New
York mutual savings bank to a New York mutual holding company, whereby the Bank
converted to a stock savings bank and became a wholly-owned subsidiary of the
Company, a Delaware corporation and a majority-owned subsidiary of Rome, MHC, a
New York mutual holding company (the "MHC"). In connection with the
reorganization, the Company sold 1,598,355 shares at a price of $7.00 per share
to the Bank's eligible depositors and to the Rome Bancorp, Inc. Employee Stock
Ownership Plan, and issued 1,734,396 shares to the MHC. In addition, 68,015
shares were issued to The Rome Savings Bank Foundation. The Company's common
stock trades on the Nasdaq National Market under the Symbol "ROME."
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Rome Bancorp, Inc. (the "Company") is a Delaware stock holding company for
The Rome Savings Bank (the "Bank "), a New York-chartered stock savings bank. On
October 6, 1999, the Bank, under an Amended Agreement and Plan of
Reorganization, reorganized into a "two tiered" mutual holding company structure
(the "Reorganization"). Under the Reorganization, (1) the Bank formed Rome, MHC
(the "MHC"), a New York-chartered mutual holding company, which is the majority
owner of the Company; (2) the Bank converted from a mutual savings bank to a
stock savings bank and issued 100% of its capital stock to the Company; and (3)
the Company issued shares of its common stock, $0.01 per share, at a price of
$7.00 per share, in a stock offering (the "Offering") to eligible members of the
Bank and to the Company's Employee Stock Ownership Plan ("ESOP"). In the
Offering, 1,598,365 shares of the Company's common stock, or 47% shares issued
in the Reorganization, were sold to the Bank's eligible depositors and to the
Company's ESOP, and 1,734,396 shares were issued to the MHC, or 51% of the
shares issued in the Reorganization. In addition, 68,015 shares were issued to a
charitable foundation, The Rome Savings Bank Foundation, which was formed as
part of the Reorganization. Net proceeds of the Offering were approximately $8.8
million.
The Company's sole business activity consists of the business of the Bank.
The Company also invests in long and short-term investment grade marketable
securities and other liquid investments. The Company's common stock is traded on
the Nasdaq National Market System under the symbol "ROME."
The Bank is a New York mutual savings bank, chartered in 1851 and is the
only bank headquartered in Rome, New York. The Bank operates through 4 full
service banking offices in Oneida County, New York - three of which are located
in Rome and one in New Hartford, New York. At September 30, 1999, the Bank had
total assets of $233.0 million, total deposits of $200.3 million and total
equity of $29.2 million. The Bank is a community and customer oriented retail
savings bank offering traditional deposit products, residential mortgage loans,
commercial real estate, commercial and consumer loans. In addition, the Bank
purchases securities issued by the U.S. Government and government agencies,
municipal securities, mortgage-backed securities, and other investments
permitted by applicable laws and regulations. The Bank retains substantially all
of the loans it originates, with the exception of the 30 year fixed-rate
mortgages which it began to originate under a program that was initiated in May,
1999.
The Bank's revenues are derived principally from interest on loans and
interest and dividends on investment securities. Its primary sources of funds
are deposits, scheduled amortization and prepayments of loan principal and
mortgage-backed securities, maturities and calls of investment securities and
funds provided by operations. The Bank has not borrowed funds in recent years.
The Bank's savings deposits are insured up to the maximum allowable amount by
the Bank Insurance Fund of the FDIC and it is regulated by the New York State
Department of Banking and the FDIC. Unless other wise disclosed, the information
presented in this Report on Form 10-QSB represents the activity of the Bank and
its subsidiaries.
9
<PAGE>
The selected financial ratios and other data of the Bank set forth in the
table on the next page are derived in part from, and should be read in
conjunction with, the Unaudited Consolidated Financial Statements of The Rome
Savings Bank and subsidiaries presented elsewhere in this report.
10
<PAGE>
THE ROME SAVINGS BANK
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of
---------------------------------------
September 30, December 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Selected Financial Condition Data (unaudited):
Total assets $233,031 $225,273
Loans, net 136,934 134,848
Securities 54,950 56,508
Total cash and cash equivalents 31,353 25,214
Other Assets 4,153 2,874
Total deposits 200,275 189,130
Total equity 29,204 28,662
Allowance for loan losses 1,901 1,956
Non-performing loans 712 931
Non-performing assets 916 1,225
</TABLE>
<TABLE>
<CAPTION>
For the three Months ended For the nine Months ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Selected Operating Data (unaudited):
Interest and dividend income $3,832 $3,830 $11,260 $11,482
Interest expense 1,722 1,823 5,181 5,406
------ ------ ------- -------
Net interest income 2,110 2,007 6,079 6,076
Provision for loan losses 0 50 0 200
------ ------ ------- -------
Net interest and dividend income after provision for
loan losses 2,110 1,957 6,079 5,876
Non-interest income:
Service charges and other income 241 181 692 551
Net gain on sale of securities 0 0 265 139
------ ------ ------- -------
Total noninterest income: 241 181 957 690
Total noninterest expense 1,677 1,583 4,988 4,650
------ ------ ------- -------
Income before income taxes 674 555 2,048 1,916
Income taxes 227 186 680 726
------ ------ ------- -------
Net Income $ 447 $ 369 $ 1,368 $ 1,190
====== ====== ======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
At or for the three Months At or for the nine Months
ended ended
Selected Financial Ratios and Other Data: September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets 0.78% 0.67% 0.82% 0.73%
Return on average equity 5.92% 5.23% 6.15% 5.76%
Net interest rate spread 3.38% 3.31% 3.31% 3.38%
Net interest margin 4.15% 4.03% 4.07% 4.09%
Non-interest expense to average assets 2.94% 2.86% 2.97% 2.86%
Efficiency ratio 71.33% 72.35% 73.67% 70.16%
Avg interest earning assets to avg interest-bearing
liabilities 123.72% 120.34% 122.95% 119.58%
Capital Ratios:
Average equity to average assets 13.21% 12.77% 13.27% 12.72%
Equity to assets 12.53% 12.85% 12.53% 12.85%
Regulatory Capital Ratios:
Core capital (Tier 1 capital) 13.12% 12.60% 13.12% 12.60%
Total Risk-based capital 21.45% 23.18% 21.45% 23.18%
Asset Quality Ratios:
Nonperforming loans as percent of loans 0.51% 0.54% 0.51% 0.54%
Nonperforming assets as percent of
total assets 0.39% 1.00% 0.39% 1.00%
Allowance for loan losses as a percent
of loans 1.37% 1.31% 1.37% 1.31%
Allowance for loan losses as a percent
of non-performing loans 267% 242% 267% 242%
Other Data:
Number of:
Deposit accounts 33,365 33,022 33,365 33,022
Full service branches 4 4 4 4
</TABLE>
12
<PAGE>
Comparison of Financial Condition at September 30, 1999 and December 31, 1998:
Total assets at September 30, 1999 were $233.0 million versus $225.3 million at
December 31, 1998, an increase of $7.8 million or 3.4%. Cash and cash
equivalents were $31.3 million at September 30, 1999 versus $25.2 million at
December 31, 1998, an increase of $6.1 million or 24.3%. In large part, these
increases reflect funds held in escrow prior to the closing of the stock
offering for the payment of shares issued in the offering.
Securities were $55.0 million versus $56.5 million at December 31, 1998, a
decrease of $1.6 million or 2.8%. In part, the decrease was due to a change in
the unrealized gains-losses in the Bank's available for sale securities
portfolio. At September 30, 1999 the Bank had an unrealized loss of $122,000
versus an unrealized gain of $1.3 million at December 31, 1998, which resulted
in a $1.4 million decrease in the market value of these securities. This
decrease was caused by the general increase in market interest rates during this
period which had an adverse impact on the price of the Bank's investment
securities. During the nine month period ending September 30, 1999 the Bank also
sold $806,000, at market, of its holdings in one institutional stock market fund
for a gain of $265,000.
Net loans increased $2.1 million or 1.6% to $136.9 million at September 30, 1999
versus $134.9 million at December 31, 1999. Most of this growth occurred in the
consumer loan portfolio and commercial loan portfolios. The consumer loan
portfolio increased by $762,000 or 3.2% to $24.7 million while the commercial
loan portfolio increased $1.4 million or 8.0% to $18.7 million.
Total deposits increased $11.1 million or 5.6% to $200.3 million at September
30, 1999 versus $189.1 million at December 31, 1998. Funds held in escrow prior
to the closing of the stock offering for payment of shares issued in the
offering, represented $8.4 million, or 75.7%, of the increase. Savings deposits
increased $5.0 million or 6.6% to $81.0 million. The increase in savings
deposits was partially offset by a $4.4 million or 5.2% decrease in time
deposits to $80.3 million at September 30, 1999. Non-interest bearing demand
deposits increased 10.5 million or 49.3% primarily as a result of the $8.4
million of funds held prior to the closing of the stock offering.
Total equity increased $542,000 or 1.9% to $29.2 million from $28.7 million at
December 31, 1998 as a result of earnings of $1.4 million for the nine months
ended September 30, 1999, which was partially offset by a $826,000 after-tax
decrease in the unrealized gain / loss in our available for sale securities for
the nine month period.
13
<PAGE>
Comparison of Operating Results for the Three Months Ended September 30, 1999
and September 30, 1998
General
Net income for the three months ended September 30, 1999 was $447,000 which
was an increase of $79,000 or 21.1% from $369,000 for the three months ended
September 30, 1998. This increase resulted primarily from a $153,000 increase in
net interest income after provision for loan losses and a $60,000 increase in
service charges and other income partially offset by a $94,000 increase in
non-interest expense. The increase in net interest income after provision for
loan losses was caused by a $101,000 decrease in interest expense resulting from
the declining interest rate environment and a $50,000 decrease in the provision
for loan losses. The decrease in the Bank's provision for loan losses reflects
the decline in non-performing loans held by the Bank at September 30, 1999
compared to September 30, 1998. The increase in non-interest expenses primarily
reflects increased salary and employee benefit costs.
Interest Income
Total interest income was essentially unchanged at $3.8 million for both
the three months ended September 30, 1999 and the three months ended September
30, 1998. Total interest income increased $39,000 or 1.0% to $3.93 million, from
$3.89 million for the three months ended September 30, 1998 after giving effect
to the reduction of state and federal income taxes from municipal securities.
The increase in interest income occurred as a result of an increase in average
earning assets of $7.8 million to $211.2 million at September 30, 1999 versus
$203.4 million at September 30, 1998. The increase in interest income from the
increase in average earning assets was partially offset by a decline in the
yield on the Bank's earning assets to 7.38% for the three months ended September
30, 1999 from 7.59% for the three months ended September 30, 1998. The decline
in the yield on the Bank's earning assets reflected the general decline in
market yields over the last several years.
Interest Expense
Total interest expense decreased $101,000 or 5.5% to $1.72 million for the
three months ended September 30, 1999 in comparison to the same period last
year. The decrease in interest expense was primarily attributable to a decline
in the cost of interest bearing liabilities from 4.28% for the three months
ended September 30, 1998 to 4.00% for the same three months in 1999. The
decrease in the cost of interest bearing liabilities was partially offset by a
$1.7 million increase in their average balance to $170.7 million for the three
months ended September 30, 1999 from $169.1 million for the same period in 1998.
Net Interest Income
Net interest income for the three months ended September 30, 1999 increased
$103,000 or 5.1% to $2.1 million. Net interest income on a tax equivalent basis
for the three months ended September 30, 1999 increased $140,000 or 6.8% to $2.2
million from $2.1 for the same period
14
<PAGE>
in 1998. This occurred as a result of the increase in the Bank's net interest
margin to 4.15% for the three months ended September 30, 1999 versus 4.03% for
the same period in 1998. The increase in the Bank's net interest margin was
caused by an increase in the spread between the yield on its earning assets and
the cost of its interest bearing liabilities to 3.38% for the three months ended
September 30, 1999 versus 3.31% for the same period last year, as well as an
increase in the ratio of interest-earning assets to interest-bearing liabilities
to 123.7% for the three months ended September 30, 1998 versus 120.3% for the
same period in 1998.
Provision for Loan Losses
The Bank did not make any provision for loan losses in the third quarter of
1999 in comparison to $50,000 for the third quarter of 1998. Management's
decision not to add to its loan loss allowance was based on the relatively low
levels of non performing loans in comparison to recent years, the relatively
high level of the allowance to non-performing loans and total loans at September
30, 1999 and other factors. Management believes the September 30, 1999 allowance
for loans losses to be adequate at 1.37% of total loans.
Noninterest Income
Noninterest income increased $60,000 or 33.7% to 241,000 for the three
months ended September 30, 1999 in comparison to $181,000 for the same period in
1998, principally as a result of higher ATM and demand deposit fees.
Noninterest Expense
Noninterest expense increased $94,000 or 5.93% to $1.7 million for the
three months ended September 30, 1999 in comparison to $1.6 million for the same
period in 1998. Salaries and employee benefits increased $126,000 or 15.5% to
$940,000 for the third quarter of 1999 versus $814,000 for the third quarter of
1998. Higher salaries accounted for $48,000 or approximately 38% of the total
increase in this category while employee benefits accounted for the remaining
increase of $78,000. The latter included an increase in pension costs of $48,000
caused by the full utilization of transition assets that reduced pension
expenses for 1998 and earlier years. A decrease in expenses of real estate owned
of $64,000 more than offset increases in all other non-interest expenses of
$39,000. The decline in expenses of real estate owned was a result of a decline
in the value of properties held from $1.5 million as of September 30, 1998 to
$205,000 as of September 30, 1999.
Income Taxes
Income tax expense increased $41,000 to $227,000 for the three months ended
September 30, 1999 in comparison to the same period last year. This increase
reflected the higher pretax income for the third quarter of 1999 of $674,000
versus $554,000 for the same period of 1998.
15
<PAGE>
Comparison of Operating Results for the Nine Months Ended September 30, 1999 and
September 30, 1998:
Net income for the nine months ended September 30, 1999 totaled $1.4
million which was an increase of $178,000 or 15.0%, from $1.2 million for the
nine months ended September 30, 1998. This increase resulted primarily from a
$203,000 increase in net interest income after provision for loan losses, a
$140,000 increase in service charges and other income and a $126,000 increase in
net gain on the sale of securities, partially offset by a $338,000 increase in
non-interest expense. The increase in net interest income after provision for
loan losses was due to a $225,000 decrease in interest expense resulting from
the declining interest rate environment and a $200,000 decrease in the provision
for loan losses. The decrease in the Bank's provision for loan losses reflects
the decline in non-performing loans held by the Bank at September 30, 1999
compared to September 30, 1998. The increase in non-interest expenses
principally reflects increased salary and employee benefit costs.
Interest Income
Total interest income decreased by $222,000 or 1.9% for the nine months
ended September 30, 1999 to $11.3 million, from $11.5 million for the nine
months ended September 30, 1998. Total interest income decreased only $24,000 or
.2% to $11.5 million for the nine months ended September 30, 1999 compared with
$11.6 million for the same period in 1998 after giving effect to the reduction
of state and federal income taxes from municipal securities. The decrease in
interest income occurred as the yield on earning assets declined 29 basis points
to 7.36% for the nine months ended September, 1999 from 7.65% for the same
period in 1998. As noted earlier, the decline in the yield on the Bank's earning
assets reflected the general decline in market yields over the last several
years. The reduction in interest income from the decline in yield was in large
part offset by a $7.6 million or 3.7% increase in average earning assets to
$209.0 million for the nine months ended September 30, 1999 from $201.4 million
for the nine months ended September 30, 1998.
Interest Expense
Total interest expense decreased $225,000 or 4.2% to $5.2 million for the
nine months ended September 30, 1999 compared with $5.4 million for the nine
months ended September 30, 1998. This occurred despite a $1.5 million increase
in the average balance of interest bearing liabilities to $170.0 million from
$168.5 million for the year earlier period because of a 22 basis point decline
in their cost to 4.06% for the nine months ended September 30, 1999 from 4.28%
for the same period in 1998. The decline in their cost followed the general
decline in interest rates.
Net Interest Income
Net interest income for the first nine months of 1999 was $6.1 million,
essentially unchanged from the same period in 1998. Net interest income on a tax
equivalent basis increased $201,000 or 3.3% to $6.4 million versus $6.2 million
for the first nine months of
16
<PAGE>
1998. Net interest rate spread decreased 7 basis points to 3.30% for the first
nine months of 1999 from 3.37% for the same period in 1998. Net interest margin
fell only 2 basis points to 4.07% from 4.09% during the same time periods as a
result of an increase in the ratio of average interest earning assets to average
interest bearing liabilities from 1.20 times for the first nine months of 1998
to 1.23 times for the first nine months of 1999.
Provision for Loan Losses
The Bank did not make any provision for loan losses in the first nine
months of 1999 in comparison to $200,000 for the first nine months of 1998.
Management's decision not to add to it loan loss allowance was based on the
relatively low levels of non performing loans in comparison to recent years, the
relatively high level of the allowance to non-performing loans and total loans
at September 30, 1999 and other factors.
Noninterest Income
Total noninterest income increased $265,000 or 38.4% to $957,000 for the
nine months ended September 30, 1999 from $691,000 for the nine months ended
September 30, 1998. This was primarily attributable to net gain on the sale of
securities of 265,000 for the nine months ended September 30, 1999 compared with
$139,000 for the same nine months in 1998. These gains reflect realized gains on
the sale of a portion of the Bank's investment in an institutional mutual fund.
Service charges and fees increased $139,000 or 20.1% to $691,000 from $552,000
for the same period in 1998 primarily attributable to surcharges implemented
this year on non-bank customers using our ATM machines.
Noninterest Expense
Total noninterest expense increased $338,000 or 7.3% to $5.0 million for
the nine months ended September 30, 1999 from $4.7 million for the nine months
ended September 30, 1998. Salaries and employee benefits increased $402,000 or
17.1%. Higher salaries accounted for $207,000 or approximately 51.4% of the
total increase in this expense category. Of this, $55,000 was related to a
vacation accrual for all employees while the balance represented routine salary
increases. Increased employee benefit costs of $195,000 accounted for the rest
of the increase in this expense category. As previously noted, employee benefits
costs included an increase in pension costs of $140,000 which was caused by the
full utilization of transition assets that reduced pension expenses for 1998 and
earlier years. The balance of the increase in employee benefits of $55,000 was
primarily attributable to the expense of the Bank's supplemental executive
retirement plan which was established in 1999. Building, occupancy and equipment
expenses increased $72,000 or 8.2% principally as a result of higher
depreciation charges related to the Bank's acquisition of new computer equipment
to replace aging equipment, ensure Year 2000 readiness and improve customer
service. All other expenses combined decreased $136,000 primarily from of a
$177,000 decrease in expenses of real estate owned as a result of the heretofore
noted decline in the amount of properties held from $1.5 million as of September
30, 1998 to $205,000 as of September 30, 1999.
17
<PAGE>
Income Taxes
Income tax expense decreased $46,000 to $680,000 for the nine months ended
September 30, 1999 in comparison with $726,000 for the nine months ended
September 30, 1998 reflecting a decline in the Bank's effective tax rate from
37.9% to 33.2%. The decline in the effective tax rate is a result of
management's decision to invest in nontaxable securities.
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by our
operations. We also have a written agreement that allows us to borrow up to
$25.0 million in federal funds from a correspondent bank. In addition, we may
enter into reverse repurchase agreements with approved broker-dealers. Reverse
repurchase agreements are agreements which allow us to borrow money using our
securities as collateral. At September 30, 1999, the Bank had no outstanding
borrowings.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
The Bank's primary investing activities are the origination of
one-to four-family real estate loans, commercial real estate, commercial,
consumer installment loans, and to a lesser extent, the purchase of investment
securities. For the quarter ended September 31, 1999, we originated loans of
approximately $8.1 million. Purchases of investment securities were $5.6 million
for the quarter ended September 30, 1999.
At September 30, 1999, the Bank had loan commitments to borrowers of
approximately $8.4 million, and available letters and lines of credit of
approximately $6.4 million. Total deposits increased $8.0 million during the
quarter. Deposit flows are affected by the level of interest rates, the interest
rates and products offered by competitors and other factors. Time deposit
accounts scheduled to mature within one year were $59.2 million at September 30,
1999. Based on our deposit retention experience and current pricing strategy, we
anticipate that a significant portion of these time deposits will remain with
the Bank. We are committed to maintaining a strong liquidity position;
therefore, we monitor our liquidity position on a daily basis. We anticipate
that we will have sufficient funds to meet our current funding commitments.
At September 30, 1999, we exceeded each of the applicable regulatory
capital requirements. Our leverage (Tier 1) capital was $29.3 million, or 13.1%
of average assets, at September 30, 1999. In order to be classified as
"well-capitalized" by the FDIC we were
18
<PAGE>
required to have leverage (Tier 1) capital of $11.2 million, or 5.0%. To be
classified as a well-capitalized bank by the FDIC, we must also have a risk-
based total capital ratio of 10.0%. At September 30, 1999 we had a risk-based
total capital ratio of 21.5%.
Year 2000
Background. A significant challenge that is confronting the business
community, including the Bank and its competitors, centers on the inability of
many computer systems and software applications to recognize the Year 2000
(referred to as the "Y2K issue"). Many existing computer systems and software
applications originally were programmed to provide only two digits to identify
the calendar year. With the Year 2000 (Y2K) approaching, these systems and
applications may recognize "00" as 1900 rather than the Year 2000. If the Y2K
issue is not resolved, our operations could be adversely affected due to the
date-sensitive nature of much of our financial information.
Risk. Similar to other financial institutions and companies that utilize
computer technology, our operations may be significantly affected by the Y2K
issue because of our reliance on electronic data processing technology and date-
sensitive information. The Y2K issue also impacts other aspects of our non-
technical business processes, including telephone systems and copiers. If the
Y2K issue is not adequately addressed, and systems are not modified to properly
identify the Year 2000, computer systems and software applications may fail or
create erroneous information.
If we are affected by the Y2K issue, information that relies on dates, such
as interest calculations, loan payment schedules and other operating functions,
could be significantly incorrect. We may not be able to process withdrawals or
deposits, prepare account statements, or engage in any of the many transactions
that constitute our normal operations. Our inability to adequately address the
Y2K issue could also have a significant adverse effect on our suppliers and
service providers. Should we experience a Y2K failure that cannot readily be
fixed, it may result in a significant adverse impact on our financial condition
and results of operations.
State of Readiness. In order to address the Year 2000 issue, we have
identified the areas that will be affected by the Year 2000 problem. We formed a
basic action plan in September 1997 to evaluate the effects of the Year 2000 on
The Bank and to formulate a contingency plan for any critical systems which are
not effectively reprogrammed. As discussed below, we believe that we have
considered all material Year 2000 issues and that we are taking the proper
action to correct them.
Our action plan for the Year 2000, in accordance with regulatory guidance,
outlines our plans to achieve a successful transition to the Year 2000. The
following summarizes the various phases of our Y2K plan:
Awareness Phase - This initial phase of the Y2K project involved
---------------
defining the problem, obtaining executive level support and developing an
overall strategy. This phase was completed in September, 1997.
19
<PAGE>
Assessment Phase - During this phase, we developed an inventory
----------------
listing of all internal computer systems and software applications, as well
as third-party vendors and suppliers upon whom we rely for goods and
services. We decided to fix, upgrade, replace or abandon any systems that
we identified as having Y2K issues. The status of individual items changes
as systems go through subsequent phases. This assessment phase of the
project is substantially complete.
We have reviewed our customer base to determine if they pose any
significant Y2K risks. Our customer base consists primarily of individual
depositors and residential mortgage borrowers. We also have commercial
borrowers in our customer base. We do not anticipate any significant Y2K
risks posed by our potential borrowers, as many of our loans are
collateralized by the underlying property. These customers are not likely
to pose significant Y2K risks to our operations. However, it is not
possible at this time to evaluate the indirect costs which could be faced
if the employers of our individual customers encounter unresolved Y2K
issues.
Renovation Phase - As previously discussed, our most mission critical
----------------
system is the integrated financial systems software package that includes
our loans, deposits, general ledger and other miscellaneous applications.
This integrated main frame software system was developed by Data
Dimensions, Inc. ("DID"), and is currently maintained and supported by, a
recognized provider. The mainframe computer system was also manufactured
by, and is currently maintained by, a well-known national computer hardware
company.
We continue to monitor the Y2K progress of those third-parties who
provide us with services or products to ensure that they are taking
adequate measures in addressing the Y2K issue. We are seeking written
assurances from these third-parties as to their current Year 2000
compliance or that they are in the process of addressing the Y2K issue.
However, we can not assure you that these third-parties will be prepared
for the Y2K issue. The failure of these third-parties to achieve Y2K
compliance may have an adverse impact on our operations.
Validation/Implementation Phases - The validation phase is considered
--------------------------------
to be the most critical stage of the Y2K readiness process. It is designed
to test the ability of the renovated systems to accurately process date
sensitive data. All Y2K compliant upgraded systems have been installed and
put into production. This phase was substantially completed as of March
31, 1999.
Use of Resources. Managing the Year 2000 project has resulted in additional
direct and indirect costs. Direct costs include charges by third-party software
vendors for product replacements, upgrades and enhancements, costs involved in
testing for Y2K compliance, costs for customer awareness programs, etc. Indirect
costs consist primarily of time devoted to the project by existing employees for
project development and implementation, the testing of systems, monitoring
third-party vendor and service provider progress, and the development of
contingency plans. We currently estimate that the total cost of the Y2K project,
excluding the
20
<PAGE>
reallocation of internal resources, will be approximately $575,000, of which we
have already incurred $565,000. We cannot guarantee that the Y2K costs would not
result in additional costs to the Bank or the Company in the future.
Contingency Planning. Regulatory guidance requires that we consider two
types of contingency planning:
(1) remediation contingency planning, which addresses the failure of an
institution to successfully fix, test or implement its Y2K readiness
plan; and
(2) business resumption contingency planning, which addresses the risks
associated with the failure of systems at critical dates, such as
January 1, 2000.
The regulatory guidance provides that if a mission critical application or
system has been remediated, tested and implemented, a remediation contingency
plan is not required. Based on the overall progress of our Y2K project,
specifically the testing and implementation results relative to the integrated
financial systems software package, our Review Team has concluded that a
remediation contingency plan is not required for mission critical applications.
While we expect to complete our Y2K project in a timely manner, we can not
guarantee that the systems of companies with whom we conduct business, will also
be completed in a timely manner. The failure of these entities to adequately
address the Y2K issue could adversely affect our ability to conduct business. In
the event that these entities do not adequately address the Y2K issue, we do not
believe that we will have enforceable actions against them.
To address the risks associated with the failure of mission critical
systems at critical dates, we are currently developing a business resumption
contingency plan. We are developing contingency or alternate plans for our
mission critical systems on a department-by- department basis in anticipation of
potential unplanned system difficulties or third-party failures at January 1,
2000 or dates beyond. However, we understand that certain events beyond our
control, such as extended power outages and loss of telecommunications, may
diminish our ability to provide minimum levels of service. Failure of these
services will affect companies, individuals and the government, and can not be
remedied by anyone other than the responsible party. For some systems,
contingency plans will consist of using or reverting to manual systems until the
problems can be corrected. In accordance with regulatory guidance, we completed
our business resumption contingency plan as of June 30, 1999. We do not
anticipate any adverse material impact on our operations as a result of the Y2K
issue.
Significant Y2K failures in the our systems or in the system's third
parties (or third parties upon whom they depend) could have a material adverse
effect on our financial condition and results of operation. The Bank believes
that its reasonably likely worst-case Y2K scenario is (i) a material increase in
the our credit losses due to Y2K problems for the Bank' borrowers and obligors,
and (ii) disruption in financial markets causing liquidity stress to The Bank.
The magnitude of these potential credit losses and disruption cannot be
determined at this time.
21
<PAGE>
Financial Services Modernization Bill
In October 1999, the U.S. Congress overwhelmingly passed the Gramm-Leach-
Bliley Financial Services Modernization Act of 1999, federal legislation
intended to modernize the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. The
legislation has been forwarded to the President for his approval. Generally, the
legislation would (i) repeal the historical restrictions and eliminate many
federal and state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers, (ii) provide a
uniform framework for the functional regulation of the activities of banks,
savings institutions and their holding companies, (iii) broaden the activities
that may be conducted by national banks, banking subsidiaries of bank holding
companies and their financial subsidiaries, (iv) provide an enhanced framework
for protecting the privacy of consumer information, (v) adopt a number of
provisions related to the capitalization, membership, corporate governance and
other measures designed to modernize the Federal Home Loan Bank system, (vi)
modify the laws governing the implementation of the Community Reinvestment Act
and (vii) address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
Bank holding companies, such as the Company, would be permitted to engage
in a wider variety of financial activities than permitted under current law,
particularly with respect to insurance and securities activities. In addition,
in a change from current law, bank holding companies will be in a position to be
owned, controlled or acquired by any company engaged in financially related
activities.
Further, the pending legislation would restrict the authority of unitary
savings and loan holding companies under current law to engage in non-
financially related activities. Unitary savings and loan holding companies that
are "grandfathered," i.e., became a unitary savings and loan holding company
pursuant to an application filed with the OTS before May 4, 1999, (such as the
Company) would retain this authority. All other savings and loan holding
companies would be limited to financially related activities permissible for
financial holding companies, as defined under the new law. The proposed
legislation would also prohibit non-financial companies from acquiring savings
and loan holding companies.
We do not believe that the proposed legislation, as publicly reported,
would have a material adverse effect on our operations in the near term.
However, to the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve.
22
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on Form 8-K
None
*Submitted only with filing in electronic format.
23
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, therunto duly
authorized.
ROME BANCORP, INC.
By: /s/ Charles M. Sprock
----------------------------------------
Charles M. Sprock
President and Chief Executive Officer
By: /s/ David C. Nolan
----------------------------------------
David C. Nolan
Treasurer and Chief Financial Officer
Date: November 15, 1999
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Rome Bancorp, Inc.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,510,000
<INT-BEARING-DEPOSITS> 5,643,000
<FED-FUNDS-SOLD> 19,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,631,000
<INVESTMENTS-CARRYING> 1,363,000
<INVESTMENTS-MARKET> 1,319,000
<LOANS> 138,835,000
<ALLOWANCE> 1,901,000
<TOTAL-ASSETS> 233,031,000
<DEPOSITS> 200,275,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,552,000
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 29,204,000
<TOTAL-LIABILITIES-AND-EQUITY> 233,031,000
<INTEREST-LOAN> 8,435,000
<INTEREST-INVEST> 2,825,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,260,000
<INTEREST-DEPOSIT> 5,181,000
<INTEREST-EXPENSE> 5,181,000
<INTEREST-INCOME-NET> 6,079,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 265,000
<EXPENSE-OTHER> 4,988,000
<INCOME-PRETAX> 2,048,000
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,368,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.15
<LOANS-NON> 661,000
<LOANS-PAST> 50,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,956,000
<CHARGE-OFFS> 274,000
<RECOVERIES> 219,000
<ALLOWANCE-CLOSE> 1,901,000
<ALLOWANCE-DOMESTIC> 1,901,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
