FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended June 30, 1998
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 0-13423
FNB Rochester Corp.
(Exact name of registrant as specified in its charter)
New York 16-1231984
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 State St., Rochester. New York 14614
--------------------------------- -------
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 546-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 ______.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 6, 1998
--------------------------- -----------------------------
Common stock, $1.00 par value 3,617,505
<PAGE>
INDEX
Page No.
Part I Financial Information
Condensed consolidated balance sheets -
June 30, 1998 and December 31, 1997 3-4
Condensed consolidated statements of
income for the three months and six months
ended June 30, 1998 and 1997 5
Condensed consolidated statement of changes in
equity for the period ended June 30, 1998 6
Condensed consolidated statements of cash
flows for the six months ended June
30, 1998 and 1997 7-8
Notes to condensed consolidated financial
statements 9-12
Management's discussion and analysis of
financial condition and results of operations 13-18
Part II Other information 19-20
Index of Exhibits 22
<PAGE>
PART I - FINANCIAL INFORMATION
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except per share data)
June 30, December 31,
1998 1997
-------- ------------
Assets
Cash and due from banks $21,227 $17,968
Interest-bearing deposits with other banks 1,106 1,134
Federal funds sold 4,800 12,200
Securities available-for-sale, at fair value 129,804 120,819
Securities held-to-maturity (fair value of
$28,284 in 1998 and $28,323 in
1997) 28,221 28,278
Loans:
Commercial 219,001 201,722
Mortgage 97,292 83,113
Home Equity 27,710 23,516
Consumer 22,817 22,886
------ ------
Total loans 366,820 331,237
Net deferred loan fees 58 283
Allowance for loan losses (5,538) (5,580)
------- -------
Net loans 361,340 325,940
Premises and equipment, net 10,062 8,813
Accrued interest receivable 4,495 3,761
FHLB and FRB stock 2,188 1,655
Other assets 2,318 1,785
----- -----
Total assets $565,561 $522,353
====== =======
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited), continued
(in thousands except per share data)
June 30, December 31,
1998 1997
---- ----
Liabilities and shareholders' equity
Deposits:
Demand:
Non-interest bearing $ 83,510 $ 70,831
Interest bearing 70,513 67,852
Savings and money market 101,376 89,224
Certificates of deposit:
Under $100,000 153,750 149,437
$100,000 and over 95,605 92,477
------ ------
Total deposits 504,754 469,821
Securities sold under agreement to repurchase
and short-term borrowings 20,915 14,236
Accrued interest payable and other liabilities 3,733 4,066
Long-term debt 210 210
--- ---
Total liabilities 529,612 488,333
------- -------
Shareholders' equity:
Common stock, $1 par value; authorized
5,000,000 shares; issued and
outstanding 3,610,887 in 1998 and
3,589,253 in 1997 3,611 3,589
Additional paid in capital 13,559 13,269
Undivided profits 18,021 16,266
Accumulated other comprehensive income 758 896
--- ---
Total shareholders' equity 35,949 34,020
------ ------
Total liabilities and
shareholders' equity $ 565,561 $ 522,353
======= =======
See accompanying notes to condensed consolidated financial statements
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except for share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans:
Commercial $9,648 $8,861 $4,942 $4,524
Mortgage 3,303 2,804 1,722 1,447
Home equity 1,088 968 560 499
Consumer 988 1,012 498 515
--- ----- --- ---
Total interest and fees on loans 15,027 13,645 7,722 6,985
Federal funds sold and time deposits 292 207 163 120
Securities 4,932 3,983 2,456 2,174
----- ----- ----- -----
Total interest income 20,251 17,835 10,341 9,279
------ ------ ------ -----
Interest expense:
Savings, checking and money market accounts 1,793 1,548 943 803
Certificates of deposit 7,056 6,310 3,572 3,320
Short-term borrowings and other 405 62 226 42
--- -- --- --
Total interest expense 9,254 7,920 4,741 4,165
----- ----- ----- -----
Net interest income 10,997 9,915 5,600 5,114
Provision for loan losses 150 0 60 -
--
Net interest income after provision for loan
losses 10,847 9,915 5,540 5,114
------ ----- ----- -----
Non-interest income:
Service charges on deposit accounts 933 819 483 428
Credit card fees 371 374 204 181
Gain on sale of mortgages 58 24 54 14
Gain on sale of securities available-for-sale 11 - 11 -
Loan servicing fees 131 131 66 66
Other operating income 449 293 229 145
--- --- --- ---
Total non-interest income 1,953 1,641 1,047 834
----- ----- ----- ---
Non-interest expense:
Salaries and employee benefits 5,204 4,720 2,671 2,348
Occupancy 1,889 1,856 968 953
Marketing and public relations 395 293 219 156
Office supplies, printing and postage 380 314 199 163
Processing fees 555 499 297 230
Legal 96 114 48 57
Other 1,039 844 577 451
----- --- --- ---
Total non-interest expenses 9,558 8,640 4,979 4,358
----- ----- ----- -----
Income before income taxes 3,242 2,916 1,608 1,590
Income tax expense 910 939 408 515
--- --- --- ---
Net income $2,332 $1,977 $1,200 $1,075
===== ===== ----- -----
Net income per common share - basic $ .65 $ .55 $ .33 $ .30
=== === === ===
Net income per common share - diluted $ .61 $ .53 $ .31 $ .29
=== === === ===
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Statement of Changes in Equity
Period Ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid in Undivided Comprehensive
Stock Capital Profits Income Total
------ ---------- --------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $3,589 $13,269 $16,266 $ 896 $34,020
Comprehensive income
Net income 2,332 2,332
Unrealized loss on securities
available-for-sale, net of
taxes of $92 and net of
reclassification adjustment
(see disclosure) (138) (138)
Total comprehensive income 2,194
Common stock cash dividend -
$.08 per share (577) (577)
Option and employee purchase 22 290 312
shares issued
Balance at June 30, 1998 $3,611 $13,559 $18,021 $ 758 $35,949
===== ====== ====== === ======
Disclosure of reclassification amount:
Unrealized holding losses arising during period $ (149)
Less: reclassification adjustment for gains included in net income 11
--
Net unrealized loss on securities $ (138)
===
</TABLE>
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,332 $ 1,977
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 150 -
Depreciation and amortization 800 791
Gain on sales of securities (11) -
Increase in mortgage loans held-for-sale (412) (1,010)
Increase in accrued interest receivable (734) (405)
(Increase) decrease in other assets (524) 230
Increase (decrease) in accrued interest
payable and other liabilities (263) 143
----- ---
Net cash provided by operating activities 1,338 1,726
----- -----
Cash flows from investing activities:
Securities available-for-sale:
Purchase of securities (34,859) (40,195)
Proceeds from maturities 23,787 5,620
Proceeds from sales 1,867 -
Securities held-to-maturity:
Purchase of securities (2,703) (474)
Proceeds from maturities 2,761 2,771
Loan origination and principal collection, net (35,054) (16,410)
Capital expenditures, net (2,049) (334)
Increase in other assets - investing (533) (139)
----- -----
Net cash used by investing activities (46,783) (49,161)
Cash flows from financing activities:
Net increase demand, savings and money
market accounts 27,492 15,323
Certificates of deposit accepted and repaid, net 7,441 33,767
Increase in short-term borrowing and securities
sold under agreement to repurchase 6,679 3,169
Payment of common stock dividend (648) (179)
Employee common stock purchase and exercise
of options to purchase common stock 312 127
--- ---
Net cash provided by financing activities 41,276 52,207
------ ------
Increase (decrease) in cash and cash equivalents (4,169) 4,772
Cash and cash equivalents at beginning of year 30,302 21,681
------ ------
Cash and cash equivalents at end of period $ 26,133 $ 26,453
====== ======
The Company paid cash during the six months ended
June 30, 1998 and 1997 as follows:
Interest $ 9,140 $ 7,635
Taxes 325 1,216
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Summary of Significant Accounting Policies
Basis of Presentation
FNB Rochester Corp. (the Company) operates as a bank
holding company. Its only subsidiary is First National Bank of
Rochester (the Bank). The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, the Bank. All
material intercompany accounts and transactions have been eliminated in
the consolidation.
The financial information is prepared in conformity with generally
accepted accounting principles and such principles are applied on a
basis consistent with those reflected in the December 31, 1997 Form
10-K Report of the Company filed with the Securities and Exchange
Commission. The financial information included herein has been prepared
by management without audit by independent certified public
accountants. The information furnished includes all adjustments and
accruals, solely of a normal recurring nature, that are in the opinion
of management necessary for a fair presentation of results for the
interim period ended June 30, 1998. Amounts in prior periods' financial
statements are reclassified whenever necessary to conform with current
presentation.
(2) Allowance for Loan Losses
Changes in the allowance for loan losses for the six months ended June
30, 1998 and 1997 are as follows:
1998 1997
---- ----
Balance at beginning of period $5,580 $5,696
Provisions for loan losses 150 -
Loans charged off (354) (328)
Recoveries on loans previously charged-off 162 133
--- ---
Balance at end of period $5,538 $5,501
===== =====
The principal balance of loans not accruing interest totaled $1,267,000
and $2,244,000 at June 30, 1998 and 1997 respectively and $2,100,000 at
December 31, 1997.
At June 30, 1998 and 1997, the recorded investment in loans that are
considered to be impaired totaled $1,069,000 and $2,665,000,
respectively. The average recorded investments in impaired loans during
the three months ended June 30, 1998 and 1997 was approximately
$1,209,000 and $2,502,000, respectively. For the six months ended June
30, 1998 and 1997, the Company recognized $37,000 and $112,000,
respectively, in interest income on the impaired loans during the
period in which they were considered impaired.
(3) Earnings per Common Share
Calculation of Basic Earnings Per Share (Basic EPS) and Diluted
Earnings Per Share (Diluted EPS) is as follows (income in thousands):
<TABLE>
<CAPTION>
Average
Net Income Shares Per Share
---------- ------- ---------
<S> <C> <C> <C>
For six months ended June 30, 1998
Basic EPS
Net income applicable to common shareholders $2,332 3,603,209 $.65
===
Effect of assumed exercise of stock options - 199,263
- -------
Diluted EPS
Income available to common shareholders and
assumed exercise of stock options $2,332 3,802,472 $.61
===== ========= ===
For six months ended June 30, 1997
Basic EPS
Net income applicable to common shareholders $1,997 3,573,536 $.55
===
Effect of assumed exercise of stock options - 152,467
- -------
Diluted EPS
Income available to common shareholders and
assumed exercise of stock options $1,997 3,726,003 $.53
===== ========= ===
For three months ended June 30, 1998
Basic EPS
Net income applicable to common shareholders $1,200 3,607,590 $.33
===
Effect of assumed exercise of stock options - 208,815
- -------
Diluted EPS
Income available to common shareholders and
assumed exercise of stock options $1,200 3,816,405 $.31
===== ========= ===
For three months ended June 30, 1997
Basic EPS
Net income applicable to common shareholders $1,075 3,579,099 $.30
===
Effect of assumed exercise of stock options - 145,875
- -------
Diluted EPS
Income available to common shareholders and
assumed exercise of stock options $ 1,075 3,724,974 $.29
====== ========= ===
</TABLE>
(4) Stock Option Plans
The Company has stock option plans under which options to
acquire 525,000 shares of its common stock were available to grant to
key employees and options to acquire 25,000 shares of its common stock
were available to grant to directors. At June 30, 1998, options to
purchase 521,500 shares were held by grantees under the
plans. The range of exercise prices of the options is $5.63 to $21.50
per share with an average exercise price of $13.07 per share. At June
30, 1998, options to acquire 303,100 shares were exercisable. Of the
remaining, options to acquire 27,700 shares become exercisable at
various times through May 2000 and 190,450 become exercisable when the
market price of the Company's common stock reaches certain levels,
ranging from $21.50 to $33.50, and remains there for a 30 day period.
Since inception of the plans, options to acquire 14,425 shares have
been exercised.
(5) Dividends
The Company declared a quarterly $.08 per share dividend on
common stock on June 23 , 1998, payable July 30, 1998 to shareholders
of record July 15, 1998.
(6) New Accounting Pronouncements
Effective January 1, 1998 the Company adopted the remaining provisions
of SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which relate to the
accounting for securities lending, repurchase agreements, and other
secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, are not expected to have a material
impact on the Company. In addition, the Financial Accounting Standards
Board is considering certain amendments and interpretations of SFAS No
125 which, if enacted in the future, could affect the accounting for
transactions within their scope.
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (FASB) No. 130, entitled "Reporting
Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries
to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income represents
net income plus other comprehensive income, which consists of the net
change in unrealized gains or losses on securities available for sale
for the period. Accumulated other comprehensive income represents the
net unrealized gains or losses on securities available for sale as of
the balance sheet dates.
Comprehensive income for the six-month period ended June 30, 1998 is
shown in the consolidated statement of changes in equity. Comprehensive
income for the six-month period ended June 30, 1997 was $2,026,000.
FASB Statement No. 131 entitled "Disclosures about Segments of an
Enterprise and Related Information" was issued in June 1997. This
Statement is effective for fiscal years beginning after December 15,
1997. This Statement establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products, services, geographic areas, and
major customers. This Statement may increase the Company's financial
disclosures but will have no impact on operating results. FASB issued
Statement No. 132, "Employers' Disclosures about Pensions and Other
Post Retirement Benefits" in February 1998. This statement revises
employer's disclosures about pension and other post retirement benefit
plans. It does not change the measurement or recognition of these
plans. The statement is effective for the Company in 1998 and will not
impact the Company's financial position or results of operations.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued in June 1998. This statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that all derivatives be recognized as
either assets or liabilities in the balance sheet and that those
instruments be measured at fair value. The accounting for changes in
the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. This
statement is effective for all fiscal quarters beginning January 1,
2000. Earlier adoption, however, is permitted. The Company anticipates,
based on current activities, that the adoption of SFAS No. 133 will not
have a material effect on the results of its operations.
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this
document that do not relate to present or historical conditions are
"forward looking statements" within the meaning of that term in Section
27A of the Securities Act of 1933, as amended, and of Section 21F of
the Securities Exchange Act of 1934, as amended. Additional oral or
written forward looking statements may be made by the Company from time
to time, and such statements may be included in documents that are
filed with the Securities Exchange Commission. Such forward looking
statements involve risks and uncertainties which could cause results or
outcomes to differ materially from those expressed in such forward
looking statements. Among the important factors on which such
statements are based are assumptions concerning the business
environment in those counties in New York State where the Bank
operates, changes in interest rates, changes in the banking industry in
general and particularly in the competitive environment in which the
Bank operates, changes in inflation, and assumptions concerning the
year 2000.
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
position and operating results during the periods included in the
accompanying condensed consolidated financial statements. Management's
discussion and analysis supplements management's discussion and
analysis for the year ended December 31, 1997 contained in the
Company's Form 10-K for the period then ended and includes certain
known trends, events and uncertainties that are reasonably expected to
have a material effect on the Company's Financial position or operating
results.
OVERVIEW
Total assets increased $43.2 million, or 8.3% in the first six months
of 1998. Loans increased $35.4 million, or 10.7% as compared to
December 31, 1997 and deposits increased $34.9 million, or 7.4%. The
loan growth has been primarily in commercial loans and residential
mortgages. Investments in securities available-for-sale increased by $9
million, or 7.4%, over the amount at year end. Deposits increased to
$504.8 million as compared to $469.8 million at December 31, 1997. $3.1
million of the increase was in certificates of deposit of $100,000 or
more. Other deposit increases from December 31, 1997 were $12.2 million
for Savings and Money Market, and $4.3 million for certificates less
than $100,000. Demand and interest checking deposits increased $12.7
million and $2.7 million, respectively. The growth in demand deposits
has been primarily in the three months ended June 30, 1998 and the
growth has been a combination of new relationships and increases in
existing relationships. The number of new demand accounts increased by
1,364, or 11.9% from December 31, 1997 to June 30, 1998. Securities
sold under agreement to repurchase and short-term borrowings increased
$6.7 million or 46.9%.
For the six-month period ended June 30, 1998, net income increased
$355,000, or 18%, as compared to the same period in 1997 and diluted
income per share increased $.08, from $.53 to $.61. The increase is
primarily due to increased net interest income. Net interest income
increased $1,082,000, or 10.9% as compared to the same period in 1997.
Net income for the three-month period ended June 30, 1998 increased
$125,000, or 11.6%, as compared to the same period in 1997. Diluted
income per share increased to $.31, up $.02 in comparison to $.29 for
the three months ended June 30, 1997. As with the six month period, the
increase is primarily due to increased net interest income. Net
interest income increased $486,000, or 9.5% as compared to the same
period in 1997.
NET INTEREST INCOME
Commercial lending and residential mortgage lending continue to provide
much of the Company's loan growth. The increase in net interest income
in the six-month period ended June 30, 1998 as compared to the same
period in 1997 is primarily the result of the increased lending
activity and increased securities available-for-sale, with offsetting
interest expense from increased certificate of deposit and securities
sold under agreement to repurchase volumes. After remaining fairly
stable in 1997 the net interest margin has declined from 4.50% for the
quarter ended December 1997 to 4.33% for the quarter ended March 1998
and to 4.26% for the June 1998 quarter. As the Company continues to
meet its growth objectives and increases its market share much of the
deposit growth continues to be in certificates of deposit. The decline
in margin is primarily caused by the increases in the relative amount
of certificates of deposit and of lower yielding assets such as
residential mortgage loans and securities available-for-sale. This
along with increasing price competition on loans and further interest
rate declines may mean further decreases in net interest margin.
Increased loan volume resulted in interest and fees on loans increasing
$1,382,000, or a 10.1% increase for the six-month period and $737,000,
or 10.6%, for the three-month period ended June 30, 1998, as compared
to the same periods in 1997. For the six-month period interest and fee
income on loans was increased $1,632,000 by additional volumes and was
reduced $250,000 by lower rates.
Average commercial loans increased $20.9 million, or 11%, from the
period ended June 30, 1997 to the period ended June 30, 1998. The
increased volume contributed $960,000 to income, which was partially
offset by rate declines that reduced income by $173,000. Average
mortgage loans increased $13.4 million, or 17.7%. The increase in the
mortgage portfolio was primarily made up of fixed rate mortgages with
maturities of 15 years or less. The increase in mortgage interest
income of $499,000 was the result of the increased volume. Average home
equity lines of credit outstanding increased $4 million with an
increase in income of $120,000. Other consumer loans showed a small
decline. Average securities increased $34 million and income from those
investments increased $949,000, or 23.8%. Because of the additional
deposits and securities sold under agreement to repurchase generated by
our banking offices, the rate of available funds growth has exceeded
loan growth, and management has purchased additional securities
available-for-sale in order to maximize earnings. The securities sold
under agreement to repurchase are used in conjunction with deposit
sweep accounts.
Interest expense increased $1,334,000, or 16.8%, for the six-month
period ended June 30, 1998 as compared to the period ended June 30,
1997, and $576,000, or 13.8% for the comparative three-month period.
The net average balance total of savings, interest checking, and money
market categories have shown an increase of $17.2 million, or 12%, as
compared to the first six months of 1997, and the interest expense
associated with those deposits increased $245,000, or 15.8%. Average
balances for certificates of deposit increased $26.5 million for the
six-month period as compared to the first six months of 1997, and the
Bank's deposit growth in certificates of deposit resulted in $737,000
additional interest expense due to increased balances and $9,000
because of increased rates.
PROVISION FOR LOAN LOSSES
The Bank provides for loan losses by a charge to current operations.
The provision is based upon discretionary adjustments which, in the
opinion of management, are necessary to bring the allowance to an
appropriate level considering the character of the loan portfolio,
current economic conditions, analyses of specific loans, and historical
loss experience. A provision for $150,000 was made for the period ended
June 30, 1998 and no provision was made in the period ended June 30,
1997.
The Bank had net charge-offs of $192,000 for the six-month period ended
June 30, 1998 as compared to net charge-offs of $195,000 for the same
period in 1997. Net charge-offs (annualized) as a percent of average
loans were .11% and .13% for the six months ended June 30, 1998 and
1997. The ratios of the allowance for possible loan losses as a percent
of period end loans for the comparable periods were 1.51% and 1.71%,
respectively. Non performing assets decreased $202,000, or 7.6% to
$2,440,000 at June 30, 1998 from $2,642,000 at June 30, 1997.
Management undertakes a quarterly analysis to assess the adequacy of
the allowance for possible loan losses taking into account
non-performing and delinquent loans, internally criticized loans,
historical trends, economic factors, and overall credit administration.
Based on this analysis, the allowance is considered adequate at June
30, 1998 to absorb anticipated losses. Management believes that the
inherent risk in the current portfolio is being adequately provided
for, and because of credit standards that the Bank has implemented, new
loans are expected to be of high quality.
Internally criticized loans increased $7.6 million from $15.2 million
at December 31, 1997 to $22.8 million at March 31, 1998 and declined
$.6 million to $22.3 at June 30, 1998. The increase over the December
1997 total was primarily caused by two lending relationships. Both
relationships appear to be adequately collateralized and are not
considered impaired.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income of $1,953,000 for the first six months of 1998
represents an increase of $312,000, or 19%, from $1,641,000 for the
comparable period in 1997. Most non-interest income categories showed
increases in the six-month period. The largest increase was $114,000,
or 13.9% as a result of increases in service charges on deposit
accounts. The three-month period reflected similar results.
Non-interest expense was $9,558,000 for the first six months of 1998 as
compared to $8,640,000 for the comparable period in 1997, an increase
of $918,000, or 10.6%. The largest components of non-interest expense
for the six-month periods ended June 30, 1998 and 1997 were salaries,
employee benefits and occupancy. Salaries and employee benefits
increased $484,000, or 10.3% and occupancy expense showed little
change.
Salaries and employee benefits increased primarily because of annual
increases, a new office which opened in the City of Rochester in early
April and additional personnel who are being hired and trained for two
new suburban offices that are expected to be opened in the third
quarter of 1998. Both Salaries, employee benefits and occupancy
expenses are expected to increase in 1998 as the Bank opens the new
banking offices and replaces its core banking system. While operating
expenses have continued to increase, the Company's operating expense as
a percent of average assets is declining. The ratio has declined during
the last four years from 5.18% in 1994 to 3.60% in 1997 and to 3.54%
for six-month period ended June 30, 1998.
PROVISION FOR INCOME TAXES
The provision for income tax was $910,000 for the period ended June 30,
1998 as compared to $939,000 at June 30, 1997. The Company's effective
tax rates for the periods were 28% and 32% for 1998 and 1997
respectively. During each of the periods ended June 30, 1998 and 1997
the Company reduced its effective tax rate by recognizing deductible
temporary differences for which a valuation allowance had previously
been established. Some New York State tax benefit has also been
recognized in 1998 due to tax planning strategies.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income for the period that includes the enactment
date.
The realization of deductible temporary differences depends on the
Company having sufficient taxable income within the carry back period
permitted by the tax law to allow for utilization of deductible
amounts. A valuation allowance has been established for the portion of
the Company's net deductible temporary differences which are not
expected to be realized.
CAPITAL ADEQUACY
Total shareholders' equity was $35,949,000 at June 30, 1998, which
represents an increase of $1,929,000, or 5.7% from $34,020,000 at
December 31, 1997. Shareholders' equity increased as a result of
$2,332,000 in retained earnings and $312,000 in employee common stock
purchases, offset by dividends of $577,000 and a decrease of $138,000
in the unrealized net holding gain on securities available-for-sale,
net of taxes.
At June 30, 1998, the Company and its banking subsidiary exceeded the
minimum guidelines for Tier 1 and Total Risk-Based Capital of 4% and
8%, respectively. The Company's ratios were 9.86% and 11.12%
respectively, at June 30, 1998. Banking organizations must also
maintain a minimum Tier 1 Leverage Ratio of 3% of assets, while banking
organizations that are not top-rated according to regulators' "Camels"
ratings, must meet leverage ratios of at least 100 basis points above
the 3% standard. The Company's Tier 1 Leverage Ratio at June 30, 1998
was 6.36%. At 5% the Company would be considered to be well
capitalized.
LIQUIDITY
Liquidity measures the ability to meet maturing obligations and
existing commitments, to withstand fluctuations in deposit levels, to
fund operations, and to provide for customers' credit needs. Management
carefully monitors its liquidity position and seeks to maintain
adequate liquidity to meet its needs. The fundamental source of
liquidity will continue to be deposits. Available sources of asset
liquidity include short-term investments, loan repayments, and
securities held in the available-for-sale portfolio. Additionally, the
Bank has the ability to pledge securities to secure short-term
borrowing. The Bank is a member of the Federal Home Loan Bank which
provides an additional source of funding.
The vast majority of the assets of the Company are held by the Bank.
Dividends and cash advances to the Company from the Bank are subject to
standard bank regulatory constraints. An analysis of projected expenses
and cash flows indicates that the Company has sufficient cash to meet
its anticipated cash obligations through 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On a quarterly basis, sensitivity to changes in interest rates is also
measured using a simulation model. The model estimates changes in net
interest income and net income under a variety of possible interest
rate scenarios. By performing these simulations and comparing them to
established policy limits, management has an opportunity to plan for
changes in the asset/liability mix, or to take other steps that may be
necessary to lessen interest rate risk. Based on management's
assumptions built into the simulation model and the current mix of the
Company's assets and liabilities, management's assessment is that there
will not be a material adverse effect on its operating results or
liquidity in the event of reasonably foreseeable changes in interest
rates through 1999. These simulations are based on numerous assumptions
regarding the timing and extent of repricing characteristics. Actual
results may differ significantly.
YEAR 2000
The Company is aware that many existing systems and services were
designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000. The Year
2000 issue affects virtually all companies and organizations.
The Company has been aware of the complexity and magnitude of the Year
2000 (Y2K) issue and since October 1996 has been developing its
strategy to address the data processing and business impacts that are
expected to be encountered. As part of the assessment phase of our five
part process, First National has prioritized its list of applications
and systems to be addressed in the Y2K project. To date, First National
believes that the majority of all systems and services that may be
affected by the Y2K date change have been identified.
First National does not write programs or create its own software,
therefore, it must rely on vendors and software suppliers to provide
appropriate enhancements in a timely manner. As First National
continues to monitor the progress of vendors, it has also begun the
process of creating contingency plans for all applications that do not
meet First National's deadline for compliance.
The validation phase is the most labor intensive and critical phase and
requires a written test plan for each system that will be in use at the
turn of the century. First National has opted not to rely on vendor or
third party certification as acceptable validation. As vendors provide
upgraded software or enhancements, the Bank is conducting tests in
house to determine if the software or enhancements meet First
National's requirements for Y2K readiness. This validation phase is
targeted for completion by December 31, 1998.
Prior to January 1, 2000, First National expects to have tested each
mission critical application. In addition, First National will have
contingency plans in place for each of these applications. The
contingency plans will address key dates such as 12/31/1999, 1/01/2000
and 2/29/2000. Throughout the year 2000, First National will be
conducting a quality review to insure that its systems are functioning
properly.
Management continues to quantify the expenses of resolving Year 2000
problems, including problems relating to its own systems and those
relating to third party customers and vendors, or the materiality of
the effect of such expenses on its results of operations, capital
resources or liquidity. To date management has identified expenses for
years 1998, 1999 and 2000 of approximately $158,000, $387,000 and
$89,000, respectively.
The Bank has also held a Business Advisory Services seminar on the Year
2000 that was attended primarily by corporate customers. Year 2000
Awareness Kits and Questionnaires have been distributed to major
commercial customers and the Bank has made a Year 2000 Project Manager
available for further technical assistance. The Bank has recently begun
evaluating Year 2000 readiness of its commercial loan applicants as
part of the loan underwriting process and is calling upon major
existing borrowers to assess their readiness and identify potential
problems and the related impact on the Bank.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
a) An Annual Meeting of Shareholders of FNB Rochester Corp. was
held May 19, 1998 for the following purpose:
1) Nine directors were elected for the ensuing year and votes
were cast as follows:
<TABLE>
<CAPTION>
Votes Broker Other
Name For Withheld Abstain Against Non-Vote Non-Vote
---- --- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
R. Carlos Carballada 2,871,683 174,854 0 0 0 0
Michael J. Falcone 2,871,019 175,518 0 0 0 0
Gail C. Johnston 2,868,303 178,234 0 0 0 0
Joseph M. Lobozzo II 2,865,009 181,528 0 0 0 0
Francis T. Lombardi 2,870,787 175,750 0 0 0 0
Carl R. Reynolds 2,864,340 182,197 0 0 0 0
H. Bruce Russell 2,869,519 177,018 0 0 0 0
James D. Ryan 2,867,085 179,452 0 0 0 0
Linda Cornell Weinstein 2,866,821 179,716 0 0 0 0
</TABLE>
<PAGE>
2) Approval of amendment to 1992 Stock Option Plan to increase
number of shares available under options from 325,000 to
525,000
Votes Broker Other
For Against Abstain Non-Vote Non-Vote
----- ------- ------- -------- --------
1,583,272 731,039 75,427 656,799 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Incorporation by Reference or page
in sequential numbering where
exhibit may be found:
(3.1) Certificate of Exhibits 4.2-4.5 to Registration
Incorporation as amended, of Statement No. 33-7244, filed July
the Registrant 22, 1986
(3.2) Amendment to Certificate of Exhibit 3 to Form 10-Q for period
Incorporation of Registrant dated ended June 30, 1992
August 6, 1992
(3.3) By-laws of the Exhibit 3.3 to Annual Report on
Registrant, as amended Form 10-K for the year ended
December 31, 1992
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FNB ROCHESTER CORP.
Date August 10 , 1998 /s/ Stacy C. Campbell
---------------- ---------------------
Stacy C. Campbell
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
<PAGE>
INDEX OF EXHIBITS
Exhibit Incorporation by Reference or page in
sequential numbering where exhibit
may be found:
(3.1) Certificate of Incorporation Exhibits 4.2-4.5 to Registration
as amended, of the Registrant. Statement No. 33-7244, filed July 22,
1986
(3.2) Amendment to Certificate Exhibit 3 to Form 10-Q for period
of Incorporation of Registrant ended June 30, 1992
dated August 6, 1992
(3.3) By-laws of the Registrant, Exhibit 3.3 to Annual Report on Form
as amended. 10-K for the year ended December 31,
1992
(27) Financial Data Schedule Page 23
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 21,227 20,764
<INT-BEARING-DEPOSITS> 1,106 1,089
<FED-FUNDS-SOLD> 4,800 5,600
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 129,804 106,975
<INVESTMENTS-CARRYING> 28,221 27,235
<INVESTMENTS-MARKET> 28,284 27,057
<LOANS> 366,878 320,875
<ALLOWANCE> 5,538 5,501
<TOTAL-ASSETS> 565,561 492,275
<DEPOSITS> 504,754 453,861
<SHORT-TERM> 20,915 3,955
<LIABILITIES-OTHER> 3,733 3,115
<LONG-TERM> 210 210
0 0
0 0
<COMMON> 3,611 3,581
<OTHER-SE> 32,338 27,553
<TOTAL-LIABILITIES-AND-EQUITY> 565,561 492,275
<INTEREST-LOAN> 15,027 13,645
<INTEREST-INVEST> 4,932 3,983
<INTEREST-OTHER> 292 207
<INTEREST-TOTAL> 20,251 17,835
<INTEREST-DEPOSIT> 8,849 7,858
<INTEREST-EXPENSE> 9,254 7,920
<INTEREST-INCOME-NET> 10,997 9,915
<LOAN-LOSSES> 150 0
<SECURITIES-GAINS> 11 0
<EXPENSE-OTHER> 9,558 8,640
<INCOME-PRETAX> 3,242 2,916
<INCOME-PRE-EXTRAORDINARY> 2,332 1,977
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,332 1,977
<EPS-PRIMARY> 0.65 0.55
<EPS-DILUTED> 0.61 0.53
<YIELD-ACTUAL> 4.30 4.54
<LOANS-NON> 1,267 2,244
<LOANS-PAST> 1,051 388
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 5,580 5,501
<CHARGE-OFFS> 354 328
<RECOVERIES> 162 133
<ALLOWANCE-CLOSE> 5,538 5,696
<ALLOWANCE-DOMESTIC> 5,538 5,501
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
