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 March 31, 1999
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 May 4, 1999
----------------------------- --------------------------
Common stock, $1.00 par value 3,970,896
<PAGE>
INDEX
Page No.
Part I Financial Information
Item 1.
Condensed consolidated balance sheets -
March 31, 1999 and December 31, 1998 3-4
Condensed consolidated statements of
income for the three months ended March
31, 1999 and 1998 5
Condensed consolidated statement of shareholders'
equity and comprehensive income for the period
ended March 31, 1999 6
Condensed consolidated statements of cash
flows for the three months ended March 31,
1999 and 1998 7-8
Notes to condensed consolidated financial
statements 9-10
Item 2. Management's discussion and analysis of
financial condition and results of operations 11-17
Item 3. Quantitative and qualitative disclosures
about market risk 17
Part II Other information 18-19
Item 1. Legal proceedings 18
Item 2. Changes in securities and use of proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of matters to a vote of security holders 18
Item 5. Other information 19
Item 6. Exhibits and reports on form 8-K 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except per share data)
March 31, December 31,
1999 1998
---- ----
Assets
------
Cash and due from banks $ 17,332 $ 20,031
Interest-bearing deposits with other banks 1,132 1,132
Federal funds sold 7,200 1,500
Securities available-for-sale, at fair value 130,734 132,664
Securities held-to-maturity (fair value of
$21,416 in 1999 and $22,106 in 1998) 21,232 21,862
Loans:
Commercial 232,395 231,716
Mortgage 110,375 109,748
Home Equity 30,671 31,056
Consumer 20,538 22,023
------ ------
Total loans 393,979 394,543
Net deferred loan fees 118 123
Allowance for loan losses (5,512) (5,258)
------- -------
Net loans 388,585 389,408
Premises and equipment, net 11,348 11,673
Accrued interest receivable 4,398 4,069
FHLB and FRB stock 2,669 2,188
Other assets 5,120 3,373
----- -----
Total assets $ 589,750 $ 587,900
======= =======
Liabilities and shareholders' equity Deposits:
Demand:
Non-interest bearing $ 81,984 $ 86,057
Interest bearing 70,347 81,731
Savings and money market 103,319 103,549
Certificates of deposit:
Under $100,000 136,312 142,378
$100,000 and over 109,649 87,646
------- ------
Total deposits 501,611 501,361
Securities sold under agreement to
repurchase and short-term borrowings 23,543 23,840
Accrued interest payable and other liabilities 3,945 4,337
Long-term debt 20,210 20,210
------ ------
Total liabilities 549,309 549,748
------- -------
Shareholders' equity:
Common stock, $1 par value;
authorized 5,000,000 shares;
issued and outstanding 3,819,522
in 1999 and 3,628,618 in 1998
3,820 3,629
Additional paid in capital 15,501 13,751
Undivided profits 21,051 20,145
Accumulated other comprehensive income 69 627
-- ---
Total shareholders' equity 40,441 38,152
------ ------
Total liabilities and shareholders' equity $ 589,750 $ 587,900
======= =======
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)
Three months ended
March 31,
Interest income: 1999 1998
---- ----
Interest and fees on loans:
Commercial $4,895 $4,706
Mortgage 1,986 1,581
Home equity 575 528
Consumer 494 490
--- ---
Total interest and fees on loans 7,950 7,305
Federal funds sold and time deposits 110 129
Securities 2,332 2,476
----- -----
Total interest income 10,392 9,910
------ -----
Interest expense:
Savings, checking and money market accounts 924 850
Certificates of deposit 3,027 3,484
Short-term borrowings and other 510 179
--- ---
Total interest expense 4,461 4,513
----- -----
Net interest income 5,931 5,397
Provision for loan losses 285 90
--- --
Net interest income after provision for loan
losses 5,646 5,307
----- -----
Non-interest income:
Service charges on deposit accounts 567 450
Credit card fees 77 167
Loan servicing fees 78 65
Gain on sale of banking office 1,048 -
Other operating income 408 224
--- ---
Total non-interest income 2,178 906
----- ---
Non-interest expense:
Salaries and employee benefits 2,780 2,533
Occupancy 1,106 921
Marketing and public relations 80 176
Office supplies, printing and postage 182 181
Processing fees 266 258
Legal 211 48
Other 1,058 462
----- ---
Total non-interest expenses 5,683 4,579
----- -----
Income before income taxes 2,141 1,634
Income tax expense 929 502
--- ---
Net income $1,212 $1,132
===== =====
Net income per common share - basic $ .33 $ .31
=== ===
Net income per common share - diluted $ .32 $ .30
=== ===
See accompanying notes to condensed consolidated financial statements.
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Statement of Shareholders'
Equity and Comprehensive Income
Three Months Ended March 31, 1999
(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, 1998 $ 3,629 $ 13,751 $ 20,145 $ 627 $ 38,152
Comprehensive income:
Net income 1,212 1,212
Change in unrealized gain on
securities available-for-sale
net of taxes of $372 (558) (558)
-----
Total comprehensive income 654
---
Quarterly common stock cash
dividend - $.08 per share (306) (306)
Issuance of common stock 191 1,750 1,941
under option and employee
purchase plans
Balance at March 31, 1999 $ 3,820 $ 15,501 $ 21,051 $ 69 $ 40,441
===== ====== ====== == ======
Disclosure of reclassification amount:
Unrealized holding losses arising during period $558
Less: reclassification adjustment for gains (losses) included in net income -
-
Change in unrealized gain on securities available-for-sale, net of taxes $558
===
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three months ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,212 $ 1,132
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 285 90
Depreciation and amortization 464 396
Gain on sale of banking office (1,048) -
Decrease (increase) in mortgage loans held-for-sale 1,918 (3,280)
Increase in accrued interest receivable (337) (201)
Increase in other assets (1,379) (33)
(Decrease) increase in accrued interest payable and other liabilities (389) 2,131
----- -----
Net cash provided by operating activities 726 235
--- ---
Cash flows from investing activities:
Securities available-for-sale:
Purchase of securities (11,567) (18,095)
Proceeds from maturities 12,567 12,114
Securities held-to-maturity:
Purchase of securities (417) (104)
Proceeds from maturities 1,047 1,146
Loan origination and principal collection, net (2,571) (14,307)
Capital expenditures, net (191) (587)
Net payment for sale of banking office (9,570) -
Increase in FHLB stock (482) (533)
----- -----
Net cash used by investing activities (11,184) (20,366)
Cash flows from financing activities:
Net increase (decrease) in demand, savings, interest
checking and money market accounts (9,946) 1,239
Certificates of deposit accepted and repaid, net 22,052 16,911
Increase (decrease) in short-term borrowing and securities
sold under agreement to repurchase (297) 4,211
Payment of common stock dividend (291) (359)
Issuance of common stock under option and employee
purchase plans 1,941 182
----- ---
Net cash provided by financing activities 13,459 22,184
------ ------
Increase in cash and cash equivalents 3,001 2,053
Provision for loan losses 285 90
Depreciation and amortization 464 396
Gain on sale of banking office (1,048) -
Decrease (increase) in mortgage loans held-for-sale 1,918 (3,280)
Increase in accrued interest receivable (337) (201)
Increase in other assets (1,379) (33)
(Decrease) increase in accrued interest payable and other liabilities (389) 2,131
----- -----
(Decrease) increase in accrued interest payable and other liabilities (389) 2,131
Net cash provided by operating activities 726 235
--- ---
Net cash provided by operating activities 726 235
Cash flows from investing activities:
ash flows from investing activities:
Securities available-for-sale:
Purchase of securities (11,567) (18,095)
Cash and cash equivalents at beginning of year 21,663 30,302
------ ------
Cash and cash equivalents at end of period $ 24,664 $ 32,355
====== ======
The Company paid cash during the three months ended March 31, 1999 and 1998 as
follows:
Interest $ 3,528 $ 4,291
Taxes 1,600 301
</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 (First National or 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, 1998 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 March 31, 1999. 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 three months ended March
31, 1999 and 1998 are as follows:
1999 1998
---- ----
Balance at beginning of period $ 5,258 $ 5,580
Provisions for loan losses 285 90
Loans charged off (57) (192)
Recoveries on loans previously charged-off 26 132
-- ---
Balance at end of period $ 5,512 $ 5,610
===== =====
The principal balance of loans not accruing interest totaled $3,159,000 and
$2,077,000 at March 31, 1999 and 1998 respectively and $2,831,000 at
December 31, 1998.
At March 31, 1999 and 1998, the recorded investment in loans that are
considered to be impaired totaled $2,027,000 and $1,485,000, respectively.
The average recorded investments in impaired loans during the three months
ended March 31, 1999 and 1998 was approximately $1,811,000 and $1,116,000,
respectively. At March 31, 1998 and 1999 the Bank had specific loan loss
reserves for impaired loans of $891,000 and $248,000, respectively. For the
three months ended March 31, 1999 and 1998, the Company recognized $29,000
and $21,000, 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 three months ended March 31, 1999
Basic EPS
Net income applicable to common shareholders $ 1,212 3,648,412 $ .33
===
Effect of assumed exercise of stock options - 167,397
- -------
Diluted EPS
Income available to common shareholders and
assumed exercise of stock options $ 1,212 3,815,809 $ .32
===== ========= ===
For three months ended March 31, 1998
Basic EPS
Net income applicable to common shareholders $ 1,132 3,604,339 $ .31
===
Effect of assumed exercise of stock options - 211,671
- -------
Diluted EPS
Income available to common shareholders and
assumed exercise of stock options $ 1,132 3,816,010 $ .30
===== ========= ===
</TABLE>
(4) Stock Option Plans
The Company has stock option plans which provide for the grant of options
to acquire 525,000 shares of its common stock to key employees and options
to acquire 25,000 shares of its common stock to directors. At March 31,
1999, options to purchase 314,221 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 $14.92 per share. At March 31,
1999, options to acquire 249,446 shares were exercisable. Of the remainder,
options to acquire 11,900 shares become exercisable at various times
through December 2000 and 52,875 become exercisable when the market price
of the Company's common stock reaches $33.50, and remains there for a 30
day period. Since inception of the plans, options to acquire 216,741 shares
have been exercised.
(5) Dividends
The Company declared a quarterly $.08 per share dividend on common stock on
March 23, 1999, payable April 30, 1999 to shareholders of record April 16,
1999.
(6) New Accounting Pronouncements
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage
Backed Securities Retained after the Securitization or Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise, which amends SFAS No. 65,
Accounting for Certain Mortgage Banking Activities. This statement conforms
the subsequent accounting for securities retained after the securitization
of mortgage loans by a mortgage banking enterprise with the accounting for
such securities by a non mortgage banking enterprise. This statement was
adopted by the Company January 1, 1999 and the statement did not have any
impact on the Company's financial position or results of operation as the
Company does not currently securitize mortgage loans.
<PAGE>
FNB ROCHESTER CORP. AND SUBSIDIARY
ITEM 2.- 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, 1998 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.
Proposed Merger
In December 1998 FNB Rochester Corp. entered into a definitive agreement
with M & T Bank Corporation ("M&T") for a merger of the Company into a
subsidiary of M&T (the "Merger"). The Merger is subject to the satisfaction
of certain conditions, including approval by shareholders of FNB Rochester
Corp. at a special meeting to be held May 17, 1999. This transaction is
expected to be completed on or about June 1,1999.
The Merger will result in substantial legal, accounting, professional,
investment advisory and other expense to be incurred by FNB Rochester in
1999. This expense is estimated to be approximately $2.5 to $3 million and
will be recognized prior to the effective date of the Merger. This expense
would also include costs associated with the core banking conversion as
explained in more detail under Results of Operations, Non-interest Income
and Non-interest Expense, below.
Overview
Effective with the close of business March 26, 1999 the Bank sold its
Southport Banking Office. The Office was located in a suburb of Elmira, New
York. At closing the Bank transferred approximately $11.9 million of
deposits and $1.2 million in loans to the purchaser.
Total assets increased $1.9 million, or .3% in the first three months of
1999. Loans decreased $569,000, or .1% as compared to December 31, 1998 and
deposits remained the same at $501 million. The decline in loans is in the
consumer portfolio. Commercial and mortgage loans showed small increases,
as did home equity lines when adjusted for the sale of the Southport
Office. New loan originations have declined since the announcement of the
Merger and some loan officers have left the Bank to seek new employment.
Investments in securities available-for-sale declined by $1.9 million, or
1.5%, from the amount at year end. A decline of $15.5 million in interest
bearing and non-interest bearing demand deposits was offset by an increase
in certificates of deposit. Certificates of deposit of $100,000 or more
increased $22 million, or 25.1%, while certificates of deposit of less than
$100,000 declined by $6 million, or 4.3%. The sale of the Southport Office
caused $3.1 million of the decline in demand accounts, savings and money
market accounts. $7.2 million in certificates of deposit were sold with the
Southport Office, and certificates of deposit of less than $100,000 would
have shown a modest increase without the sale. Certificates of deposit of
$100,000 or more are being used as short-term funding to both offset the
loss of the Southport Office deposits as well as the decline in new
deposits. Few new demand, savings or money market accounts are being opened
in the Bank since the announcement of the Merger Agreement and it is
expected this trend will continue.
For the three-month period ended March 31, 1999, net income increased
$80,000, or 7.1%, as compared to the same period in 1998 and diluted income
per share increased $.02, from $.30 to $.32. The increase is primarily due
to increased other income. Other income increased $1.3 million, or 140.4%,
and approximately $1 million of the increase was related to the sale of the
Southport Office. Net interest income increased $534,000, or 9.9% as
compared to the same period in 1998. Other expenses increased $1.1 million,
or 24.1%, for the three-month period as compared to the same period in
1998. $587,000 of the other expenses were merger related.
Net Interest Income
Commercial lending and residential mortgage lending prior to the Merger
announcement provided much of the Company's loan growth as compared to the
period ended March 31, 1998. The increase in net interest income in the
three-month period ended March 31, 1999 as compared to the same period in
1998 is primarily the result of that increased lending activity. The net
interest margin has declined from 4.33% for the quarter ended March 1998 to
4.23% for the quarter ended March 1999.
Increased loan volume resulted in interest and fees on loans increasing
$645,000, or 8.8% for the three-month period ended March 31, 1999, as
compared to the same period in 1998. For the three-month period interest
and fee income on loans was increased $1,214,000 by additional volumes and
reduced $569,000 by lower rates.
Average commercial loans increased $28.5 million, or 14%, from the period
ended March 31, 1998 to the period ended March 31, 1999. The increased
volume contributed $600,000 to income, which was partially offset by rate
declines that reduced income by $411,000. Average mortgage loans increased
$25.4 million, or 29.8%. 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 $405,000 was primarily
the result of the increased volume. Average home equity lines of credit
outstanding increased $7 million with an increase in income of $47,000.
Other consumer loans showed a small decline.
During the three-month period ended March 31, 1999, average securities
increased $3 million, or 2%, and because of declining rates income from
those investments declined $144,000, or 5.8% from the comparable period for
the prior year.
Interest expense declined $52,000, or 1.2%, for the three-month period
ended March 31, 1999 as compared to the period ended March 31, 1998. The
net average balance total of savings, interest checking, and money market
categories have shown an increase of $27.3 million, or 17.5%, as compared
to the first three months of 1998, and the interest expense associated with
those deposits increased $74,000, or 8.7%. Average certificates of deposit
balances declined $7.4 million, or 3%, and expense related with those
deposits declined $457,000, $365,000 from rates and $92,000 from the
decrease in volume.
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 $285,000 was made for the period ended March 31, 1999 and a
provision of $90,000 was made in the period ended March 31, 1998.
The Bank had net charge-offs of $31,000 for the three-month period ended
March 31, 1999 as compared to net charge-offs of $60,000 for the same
period in 1998. Net charge-offs (annualized) as a percent of average loans
were .03% and .07% for the three months ended March 31, 1999 and 1998,
respectively. The ratios of the allowance for possible loan losses as a
percent of period end loans for the comparable periods were 1.40% and
1.61%, respectively. Non performing assets increased $1.4 million, or 53.7%
to $4,132,000 at March 31, 1999 from $2,689,000 at March 31, 1998. $657,000
of the increase is due to one loan relationship. Non performing assets as a
percent of total loans and other real estate increased to 1.05% at March
31, 1999 from .77% at March 31, 1998 and declined from 1.13% at December
31, 1998. 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 March 31,
1999 to absorb anticipated losses inherent in the portfolio.
Internally criticized loans increased $543,000 from $18.7 million at
December 31, 1998 to $19.2 million at March 31, 1999. The increase over the
December 1998 total was primarily caused by one lending relationship. The
relationship appears to be adequately collateralized and is not considered
impaired.
Non-Interest Income and Non-Interest Expense
Non-interest income of $2,178,000 for the first three months of 1999
represents an increase of $1,272,000, or 140.4%, from $906,000 for the
comparable period in 1998. $1,048,000 of the increase was for the gain on
the sale of the Southport Office at the end of March 1999. Service charges
on deposit accounts also increased $117,000 or 26% as compared to
three-month period ended March 31, 1998.
Non-interest expense was $5,683,000 for the first three months of 1999 as
compared to $4,579,000 for the comparable period in 1998, an increase of
$1,104,000, or 24.1%. The largest components of non-interest expense for
the three-month periods ended March 31, 1999 and 1998 were salaries,
employee benefits and occupancy. Salaries and employee benefits increased
$247,000, or 9.8%, while occupancy expense increased $185,000, or 20.1%.
Salaries and employee benefits increased primarily because of annual
increases, a new office which opened in the City of Rochester in early
April 1998 and two new offices which opened in Monroe and Ontario County in
the third quarter of 1998. Occupancy expense increased primarily because of
the new offices.
A new core banking system which was to have become operational in the
fourth quarter of 1998 has been postponed due to the planned Merger of the
Company. If the Merger is approved, much of the cost incurred to date
related to the new system, approximately $774,000, will need to be
recognized as expense rather than be capitalized in that the new core
system will not be utilized. If the Merger does not take place, the Bank
plans to continue with its conversion to the new system.
While operating expenses have continued to increase, the Company's
operating expense as a percent of average assets has declined. The ratio
declined during the last four years from 5.18% in 1994 to 3.57% for 1998.
The ratio for the first three months of 1999 is 3.82%, however, adjusted
for Merger related expenses of $587,000, the 1999 ratio is 3.43%. Merger
expenses in the three-month period ended March 31, 1999 were $135,000 for
legal expense and $452,000 for various other expenses which include
accounting and investment advisory costs.
Provision for Income Taxes
The provision for income tax was $929,000 for the period ended March 31,
1999 as compared to $502,000 at March 31, 1998. The Company's effective tax
rates for the periods were 43.4% and 30.7% for 1999 and 1998 respectively.
The tax treatment of the Merger expense was the primary cause of the
increase in the effective tax rate in 1999.
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 previously
been established, and is adjusted quarterly, for the portion of the
Company's net deductible temporary differences which are not expected to be
realized.
Capital Adequacy
Total shareholders' equity was $40,441,000 at March 31, 1999, which
represents an increase of $2,289,000, or 6% from $38,152,000 at December
31, 1998. Shareholders' equity increased as a result of $1,212,000 in
retained earnings and $1,941,000 in employee stock purchases, offset by
dividends of $306,000 and a decrease of $558,000 in the unrealized net
holding gain on securities available-for-sale, net of taxes. At March 31,
1999, 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 10.64% and 11.89% respectively, at
March 31, 1999. 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 March 31, 1999 was 6.81%. 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 borrowings. 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 1999.
Quantitative and Qualitative Disclosures About Market Risk
On a quarterly basis, sensitivity to changes in interest rates is 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. The
simulation indicates a 100 basis point change in rates over a two year
period would not impact net income by more than .09% and a 200 basis point
change would not have an impact greater than 3%. These simulations are
based on numerous assumptions regarding the timing and extent of repricing
characteristics. Actual results may differ significantly.
Year 2000
For quite some time, First National has been aware of the complexity and
magnitude of the Year 2000 (Y2K) issue. As a result, First National, with
the support and direction of its Board of Directors and Senior Management,
has dedicated resources and formally adopted strategies to work towards
resolving all potential Year 2000 issues.
On December 9, 1998, the proposed Merger of First National into M & T Bank
was announced. The Merger is subject to shareholder approval and is
expected to be completed on or about June 1, 1999 at which time all First
National systems will be converted into M & T Bank systems. First National,
however, is continuing its preparations for the Year 2000 date change in
the event the Merger is not completed.
Since October 1996, First National has been developing its strategy to
address the data processing and business impacts that are expected to be
encountered. First National is also including environmental systems in its
analysis. As is the case with many other financial institutions, First
National has opted to follow the six phase format suggested by the Federal
Financial Institutions Examination Council (FFIEC). The FFIEC is a joint
effort of the Comptroller of the Currency, Federal Reserve, Office of
Thrift Supervision and the Federal Deposit Insurance Corporation, the
primary regulators of financial institutions in the United States. These
phases are discussed below.
Awareness Phase - This is an ongoing phase to educate employees, customers
and the community to year 2000 issues, FNB's strategies and plans for
renovation. First National created a Y2K task force in October 1996 which
consists of the Electronic Data Processing Auditor, Senior Vice President
of Operations, Vice President of Information Services, Vice President of
Risk Management and the Year 2000 Project Coordinator. This task force is
charged with developing and implementing an overall strategy to review
systems, services and conduct continuing education. In March 1998, First
National held a Year 2000 seminar for customers of the Business &
Professional Lending division. Each customer attending was given a "Year
2000 Awareness Kit." In the last quarter of 1998, First National updated
customers and shareholders on the progress of the Year 2000 efforts in the
quarterly publication, "FNB Focus".
Assessment Phase - In this phase, First National has determined the size
and complexity of the problem by identifying all hardware, software,
networks, ATMs, facilities and other devices that may be affected by the
Y2K date change. An initial inventory was taken starting in October 1996.
At the same time, preliminary correspondence was sent to vendors advising
the vendors of First National's concerns about the Y2K issue and the
possible impact of Y2K on the vendors. In July 1997, a second (updated)
inventory was performed and a second letter with an attached survey was
sent to vendors as part of continuing efforts to assess the Y2K
preparedness of vendors. Based on the results of the inventory process,
First National has prioritized its list of applications and systems to be
addressed in the Y2K project. To date, First National believes that
substantially all possible Year 2000 situations have been identified. First
National has started a "due diligence process" for assessing the Year 2000
customer impact. The results of that review are being used to monitor risks
to the Bank presented by customers who might be adversely affected by Year
2000 issues.
A Year 2000 uncertainty that could have a material effect on the Bank's
results of operations or financial condition is the risk associated with
commercial borrowers. A risk assessment for commercial borrowers is
substantially complete with 94% of the borrowers evaluated and rated as
either high, moderate, or low risk. For purposes of Year 2000, the Bank has
defined large commercial borrowers as those with relationships at or above
$500,000. Relationships below $500,000 are considered low risk. Certain
industries, such as residential construction were also evaluated and
classified as low risk for Year 2000. Surveys sent to large commercial
borrowers will be rated high risk until information is received. Of the
respondents, 11 totaling $7.6 million were rated high risk. Management
intends to follow the progress of each high and moderate risk customer and
to update risk ratings throughout 1999. New and renewed commercial
borrowers are also being assigned a risk rating and are being required to
sign a Y2K addendum where the borrower agrees to take all measures
necessary to assure information technology utilized by the borrower is Y2K
compliant.
A large deposit outflow in the year 2000 could impact First National's
liquidity. A review of large depositors indicates approximately $40 million
in balances that could be at risk due to Y2K. However, First National does
not believe that the loss of any one single deposit balance could have a
material impact on liquidity. First National has borrowing lines and
unencumbered investments that could be used to offset these deposits should
they leave the Bank.
Renovation Phase - 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. First National has implemented an
aggressive vendor contact schedule and maintains all vendor correspondence
to monitor vendor progress.
Validation Phase - This 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 entirely on
vendor testing or third party certification as acceptable validation for
systems processed in-house. As vendors provide upgraded software or
enhancements, testing will be conducted to determine if the software or
enhancements meet First National's requirements for Year 2000 readiness.
Test plans have been written for mission critical systems and testing is in
process. First National intends to review proxy testing completed for
service bureau arrangements and certain purchased software and use those
results to the extent proxy testing is appropriate and reliable. Additional
independent critical testing will be completed as necessary based on proxy
test results. In view of the proposed merger of the Bank, validation of
several mission critical systems has been rescheduled. In the event that
the proposed merger with M&T Bank is not completed by May 31, 1999, the
validation of all mission critical systems will be scheduled so that the
validation can be completed by June 30, 1999.
Implementation Phase - By the time we reach January 1, 2000, First National
will have tested each mission critical application. In addition, First
National will have contingency plans in place for any application that does
not meet Year 2000 compliance. 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.
Business Resumption Continuity and Planning Phase - The Bank has contracted
with a technology consulting firm to develop a business resumption plan
that can be implemented in the event the Bank experiences failures to
systems or other interruptions to services as a result of Year 2000 issues.
Management has successfully completed organizational planning guidelines
and business impact analysis concerning the Y2K business resumption
contingency plan. The Bank will have finalized the business recovery
contingency plan by June 30, 1999 if the pending merger with M&T Bank is
delayed or does not occur.
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.
For 1998, the Bank incurred expense of approximately $147,000. In addition,
management has identified probable expense for the years 1999 and 2000 of
approximately $395,000 and $67,000, respectively. The $67,000 expense for
the year 2000 is primarily for contingency planning. Of the total projected
expense of $609,000, testing, remediation and staff expense is projected to
be $225,000, or 37%. Software and equipment purchases are expected to be
approximately $192,000, or 31.5% of the total and contingency planning is
projected at $192,000, or 31.5%. All expenses related to the year 2000 are
expected to be paid out of First National's earnings.
First National's objective is to migrate to the year 2000 with minimal
impact on its customers and to achieve compliance with the ultimate
deadline of January 1, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to the information contained in Part I, Item 2 of this
Form 10-Q under the caption "Quantitative and Qualitative Disclosures
about Market Risk", which is incorporated herein by reference.
<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
None
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 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 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 Registrant, as Exhibit 3.3 to Annual Report on Form
amended. 10-K for the year ended December 31,
1992
(2.1) Agreement and Plan of Exhibit 2.1 to Form 8-K filed
Reorganization, dated as of December 17, 1992
December 9, 1998, among FNB
Rochester Corp., M&T Bank
Corporation and Olympia
Financial Corp.
(27) Financial Data Schedule Page 22
(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 May 5 , 1999 s\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 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 Registrant, as Exhibit 3.3 to Annual Report on Form
amended. 10-K for the year ended December 31,
1992
(2.1) Agreement and Plan of Exhibit 2.1 to Form 8-K filed
Reorganization, dated as of December 17, 1992
December 9, 1998, among FNB
Rochester Corp., M&T Bank
Corporation and Olympia
Financial Corp.
(27) Financial Data Schedule Page 22
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