-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GlxuUV4qmYYNTuEQErtuVW57bjIOChEryaHyX5Og4wf4liCdM0kKI3eXgixl8vfw MIuWgOcZwERO9flaQ1ZRYw== 0000941157-99-000011.txt : 19990325 0000941157-99-000011.hdr.sgml : 19990325 ACCESSION NUMBER: 0000941157-99-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB ROCHESTER CORP CENTRAL INDEX KEY: 0000745087 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161231984 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13423 FILM NUMBER: 99571324 BUSINESS ADDRESS: STREET 1: 35 STATE ST CITY: ROCHESTER STATE: NY ZIP: 14614 BUSINESS PHONE: 7165463300 MAIL ADDRESS: STREET 1: 35 STATE STREET CITY: ROCHESTER STATE: NY ZIP: 14614 10-K 1 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Street, Rochester, New York 14614 ____________________________________ _____ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (716) 546-3300 ______________ Securities registered pursuant to Section 12 (b) of the Act: None None ____ ____ (Title of Each Class) (Name of Each Exchange on Which Registered) Securities registered pursuant to Section 12(g) of the Act Common Stock, $1.00 Par Value Per Share _______________________________________ (Title of Each Class) 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 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 ____ NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.______ The aggregate market value of the 2,532,244 shares of Common Stock-Voting held by non-affiliates of the registrant at March 10, 1999 (based on the average of high and low prices on March 10, 1999) was $79,765,686. Solely for the purposes of this calculation, all persons who are directors and executive officers of the Registrant and all persons who are believed by the Registrant to be beneficial owners of more than 5% of its outstanding common stock have been deemed to be affiliates. Number of shares of Common Stock outstanding as of the close of business on March 10, 1999 was 3,651,093. Documents Incorporated By Reference No part of the following document is incorporated by reference PART I ______ Item 1. Business General FNB Rochester Corp. (the "Company") is a bank holding company. First National Bank of Rochester ("First National" or the "Bank") is its only subsidiary. The Company was organized under the New York Business Corporation Law and commenced operations on September 10, 1984. At December 31, 1998, the Company had consolidated assets and deposits of $587.9 million and $501.4 million, respectively. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was established in 1965, in Rochester, New York as a national bank. It provides a full range of commercial banking, trust, and consumer banking services to businesses and individuals. On December 9, 1998, the Company announced that an Agreement and Plan of Reorganization dated as of December 9, 1998 had been entered into among the Company, M&T Bank Corporation, a New York corporation ("M&T") and Olympia Financial Corp., a Delaware corporation and wholly-owned subsidiary of M&T ("Olympia") pursuant to which the Company will be merged with and into Olympia pursuant to the terms of an Agreement and Plan of Merger dated as of December 9, 1998 between the Company and Olympia and joined in by M&T (the "Merger"). The proposed merger is subject to various conditions, including the approval of the shareholders of the Company and the receipt of all requisite regulatory approvals. It is expected that the Merger will be completed in the second quarter of 1999. Following the consummation of the Merger, the Bank will be merged with and into Manufacturers and Traders Trust Company, a New York State chartered banking subsidiary of Olympia. Market Area The Company's business is conducted from its corporate headquarters located in the Powers Building at the corner of State and Main Streets in downtown Rochester, New York. The Bank's eighteen banking offices are located in Monroe, Ontario, Chemung, Erie, and Onondaga Counties in New York State. The Bank sold its Odessa office in Schuyler County in 1996 and its Shop City office in Onondaga County in 1994, but still provides services in Onondaga County through its Downtown Syracuse office. The Bank expanded into the metropolitan Buffalo area in 1993 with the addition of a loan production office in a suburban section of Erie County. In August 1994, the Buffalo office became a full service branch. A new loan production office was opened in the suburban Buffalo community of Orchard Park in 1997. The Buffalo and Downtown Syracuse offices focus their sales and service efforts on business and professional customers. Three new banking offices were opened in 1998, two in Monroe County and one in Ontario County. In November 1998, the Bank entered into an agreement for the sale of its Southport Community Banking Office in Chemung County to The Elmira Savings Bank, FSB. That transaction is expected to close near the end of the first quarter of 1999. The Bank considers its primary service and market area to be the City of Rochester and surrounding towns, which have a total population of approximately 1 million. Rochester, located in the western part of New York State on the south shore of Lake Ontario, is the third largest city in New York State. Greater Rochester has a diversified manufacturing base. Four national firms with significant manufacturing facilities and other major business operations in the Greater Rochester area are Eastman Kodak Company, Xerox Corporation, Bausch & Lomb Inc. and General Motors Corporation. Rochester is the home of the corporate headquarters of both Eastman Kodak and Bausch & Lomb. Other institutions that add stability to the area's employment include the University of Rochester, Rochester Institute of Technology, eight other institutions of higher education, and seven large hospitals. Although primarily agricultural and residential in nature, the surrounding communities served by the Company also have office, commercial, educational, retail, and light industrial facilities. Businesses in these communities constitute an important part of the Bank's customer base. Banking Services First National's services are provided through sixteen full-service community banking offices, fourteen of which have drive-up facilities, plus the Buffalo and Syracuse offices. Automated teller machines ("ATMs") are located at thirteen of the fourteen Monroe County banking offices, and customers may use ATMs throughout the United States and abroad through ATM networks. The Bank opened its three newest banking offices in the Rochester area in 1998. They are located in the Town of Victor, the Village of Brockport and in a supermarket in the City of Rochester. The Bank is engaged in general commercial banking, providing a wide range of loan and deposit services. As of December 31, 1998, the Bank had 53,415 deposit accounts and 14,299 loans outstanding. The Bank offers a wide range of retail services, including installment loans, credit cards, checking accounts, savings accounts, money market accounts, and various types of time-deposit instruments. Mortgage lending activities include commercial, industrial, and residential loans secured by real estate. Commercial lending activities include originating secured and unsecured loans and lines of credit and accounts receivable financing services to a variety of businesses. The Bank also provides cash management services to businesses and professionals. The Bank's consumer loan department makes direct auto, home equity, home improvement, and personal loans to individuals. The Bank offers safe deposit box services at fourteen of the banking offices. The Trust & Investment Division of First National was expanded in 1993. The Trust & Investment Division at First National Bank acts as executor and/or trustee and provides administration, record-keeping, and professional portfolio management for individuals, corporations, institutions, and not-for-profits. The market value of assets under management increased $43.8 million, or 62.6%, from $70.0 million at year end 1997 to $113.8 million at year end 1998, through product offerings such as 401(k) plans, investment management, corporate and cash management services, mutual funds, annuities, and traditional trust and record-keeping services. The Trust & Investment Division has established various strategic alliances with service partners to reduce costs, provide better and more efficient services, obtain access to other markets and enhance its capabilities and product offerings. As with any major business expansion, this is a long-term commitment on the part of the Bank. Employees At December 31, 1998, the Company had 279 employees of whom 56 worked on a part-time basis. None of the employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. Competition The Bank is one of approximately twelve commercial and savings institutions competing for deposits and loans in Monroe County. Approximately ten commercial and savings institutions compete in Chemung County. The Bank considers its business to be highly competitive in its service areas. Many of the competitors are larger than First National in terms of number of offices, assets, and resources, and many have higher lending limits than First National. The primary competition for the Trust & Investment Division comes from investment advisory and brokerage firms, as well as other bank trust departments in the Bank's primary market area. In recent years, non-bank financial institutions such as credit unions, money market funds, stock brokerage firms, insurance companies, and mortgage banking firms have been an increased source of competition. Non-bank financial institutions continue to be subject to less regulation than commercial banks in certain areas. Supervision and Regulation As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended (the "Act"), and is required to file annual reports and such additional information as may be required by the Federal Reserve Board (the "FRB") pursuant to the Act. The FRB has the authority to examine the Company and its subsidiaries. The Act and regulations thereunder limit, with certain exceptions, the business which a bank holding company may engage in, directly or indirectly through subsidiaries, to banking, managing or controlling banks, furnishing or performing services for banks controlled by the Company, and services incident thereto. In addition, the Act and regulations thereunder require the prior approval of the FRB for the acquisition of a bank or bank holding company if thereafter the bank holding company will, directly or indirectly, control more than 5% of the voting stock of such bank or bank holding company, or substantially all the assets of such bank or bank holding company. Among the activities permitted bank holding companies is the ownership of shares of any company which engages in activities that the FRB determines to be so closely related to banking, managing, or controlling banks as to be a proper incident thereto. The FRB has determined a number of activities to be closely related to banking, and has proposed others for consideration. Such activities include leasing real or personal property under certain conditions; operating as a mortgage financing or factoring company; servicing loans and other extensions of credit; acting as a fiduciary; acting as an investment or financial advisor under certain conditions; acting as an insurance agent or broker principally in connection with the extension of credit by the bank holding company or any subsidiary; acting as underwriter for credit life insurance and credit accident and health insurance that is directly related to extension of credit by the bank holding company or any subsidiary; providing bookkeeping or data processing services for the bank holding company, its affiliates, other financial institutions and others, with certain limitations; making certain equity and debt investments in community rehabilitation and development corporations; and providing certain kinds of management consulting advice to unaffiliated banks. The Federal Reserve Act imposes restrictions on extensions of credit by subsidiary banks of a bank holding company to the bank holding company or any of its subsidiaries, or investments in the stock or other securities of the holding company, and on the use of such stock or securities as collateral for loans to any borrower. Further, under the FRB's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. From time to time the FRB may adopt further regulations pursuant to the Act. The Company cannot predict whether any further regulations will be adopted or how such regulations will affect the consolidated operating results or business of the Company. The primary supervisory authority of the Bank is the Office of the Comptroller of the Currency (the " OCC"), which regularly examines such risk areas as capital adequacy, reserves, loans, investments, management practices, and other aspects of the Bank's operations. In addition to these regular examinations, the Bank must furnish quarterly and annual reports to the OCC. The OCC has the authority to issue cease-and-desist orders to prevent a bank from engaging in an unsafe or an unsound practice or violating the law in conducting its business. The Bank is also a member of the Federal Reserve System, and as such, is subject to certain laws and regulations administered by the FRB. As a member of the Federal Reserve System, the Bank is required to maintain non-interest bearing reserves against certain accounts. The amount of reserves required to be maintained is established by regulations of the FRB and is subject to adjustment from time to time. The Bank's deposits are insured by the Bank Insurance Fund (BIF) of the FDIC up to a maximum of $100,000 per insured deposit account, subject to the rules and regulations of the FDIC. For this protection, the Bank pays a quarterly statutory assessment. The policies of regulatory authorities have had a significant effect on the operating results of commercial banks in the past, and are expected to do so in the future. An important function of the Federal Reserve System is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on bank borrowing, changes in reserve requirements against bank deposits, and limitations on the deposits on which a bank may pay interest. Policies of these agencies may be influenced by many factors including inflation, unemployment, short-term and long-term changes in the international trade balance, and fiscal policies of the United States Government. Supervision, regulation, or examination of the Company by bank regulatory agencies is not intended for the protection of the Company's shareholders. Loans made by the Bank are also subject to numerous other federal and state laws and regulations, including the Truth in Lending Act, the Community Reinvestment Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The United States Congress has periodically considered and adopted legislation that has resulted in deregulation of both banks and other financial institutions. Congress has adopted further legislation to modify or eliminate geographic restrictions on banks and bank holding companies, and could modify or eliminate current prohibitions against banks engaging in one or more non-banking activities. Such legislative changes could place the Bank in more direct competition with other financial institutions including mutual funds, securities brokerage firms, insurance companies, and investment banking firms. The effect of any such legislation on the business of the Bank cannot be predicted. Statistical data required to be disclosed by bank holding companies is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 hereof. Item 2. Properties The Bank operates eighteen banking offices and one loan production office. Ten of the offices are owned (seven are on leased land) and eight are leased, including an office in a City of Rochester supermarket. The loan production office is leased for one year. The Bank also owns the building at 35 State Street, Rochester, New York and leases additional office space in the adjacent Powers Building. The leases are long-term and non-cancelable and expire at various dates from 2000 through 2018 with optional renewal terms of five to ten years and rent escalation clauses. Some of the leases also provide for contingency rent to be paid annually based upon increases in deposits or the cost of living. The properties are as follows:
Owned (O) Leased (L) Lease Location Principal Use Leased Land (LL) Exp Date ________ _____________ ________________ ________ 35 State St., Rochester, NY Bank Office Space O Powers Building, Rochester, NY Four Corners Banking Office L 12/31/09 Bank Office Space L 06/30/09 1 E. Main St., Rochester, NY Sublet L 08/31/01 3140 Monroe Ave., Rochester, NY Pittsford Banking Office O 2147 W. Ridge Rd., Rochester, NY Greece Banking Office O Hard & Ridge Rd., Webster, NY Webster Banking Office O 1000 E. Ridge Rd., Rochester, NY Irondequoit Banking Office LL 11/30/02 28 N. Main St., Honeoye Falls, NY Honeoye Falls Banking Office L 01/31/11 3333 W. Henrietta Rd., Rochester, NY Henrietta Banking Office L 01/07/16 Warren & Washington Sts., Syracuse, NY Syracuse Banking Office L 05/31/05 Miracle Mile, Elmira, NY Horseheads Banking Office LL 06/30/03 Broadway & Pennsylvania Ave., Elmira, NY Southport Banking Office L 02/28/00 Snyder Square, Amherst, NY Buffalo Banking Office L 08/31/03 6435 W. Quaker St, Orchard Park, NY Buffalo Loan Office L 03/15/99 214 W. Commercial St., E. Rochester, NY E. Rochester Banking Office L 02/28/03 3175 Chili Ave., Rochester, NY Chili Banking Office LL 09/09/15 Penfield Rd. & Rt. 250, Rochester, NY Penfield Banking Office LL 10/24/15 Pittsford/Palmyra Rd. & Rt. 250 Perinton Banking Office LL 03/31/16 Rochester, NY 6660 Fourth Section Rd., Brockport, NY Brockport Banking Office LL 3/31/18 Rt 96, Victor-Pittsford Rd., Victor, NY Victor Banking Office LL 6/30/18 289 Upper Falls Blvd., Rochester, NY Upper Falls Banking Office L 3/31/03
The Banking Offices in the above table range in size from approximately 285 square feet to 4,500 square feet. The Bank took occupancy of 36,000 square feet in the Powers Building during 1994 and vacated two floors (approximately 9,800 square feet) in the Wilder Building at 1 E. Main Street, consolidating all operations including the banking office into the Powers Building and the adjacent 35 State Street Building. These consolidated facilities have increased efficiency and are strategically located in downtown Rochester. With new leases signed in the first quarter of 1998 the Powers Building space has increased to approximately 44,000 square feet. The space in the Wilder Building that the Bank continues to lease is approximately 4,700 square feet and all of that space is sublet. Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1998, no matter was submitted for a vote of Company's shareholders. PART II _______ Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Dividends Paid and Market Prices of Registrant's Stock The following table displays the range of bid price quotations and dividends declared for the Company's common stock for the years ended December 31, 1998 and December 31, 1997. The dividends were declared during the last month of the applicable fiscal quarters indicated and were paid to shareholders of record during the calendar month following such quarter. The Company's common stock is listed on the Nasdaq National Market System under the symbol FNBR. Price Quotations Dividends Bid Price (low-high) Declared ____________________ _________ 1998 ____ First quarter $ 15.25 - 22.75 $ .08 Second quarter 19.75 - 24.50 .08 Third quarter 16.00 - 24.88 .08 Fourth quarter 16.38 - 33.00 $ .08 _____ _____ $ 15.25 - 33.00 ===== ===== 1997 ____ First quarter $ 12.00 - 15.75 n/a Second quarter 12.25 - 15.13 $ .07 Third quarter 14.00 - 17.50 n/a Fourth quarter 16.00 - 20.25 $ .10 _____ _____ $ 12.00 - 20.25 ===== ===== The above prices were furnished by Nasdaq, and such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions. The prices may not reflect actual transactions. At the close of business on March 10, 1999, the Company had 694 shareholders of record. Item 6. Selected Financial Data Five-Year Summary of Selected Financial Information This table represents a summary of selected components of the Company's consolidated statements of financial condition and consolidated statements of operations for each of the years in the five-year period ended December 31, 1998. All information concerning the Company should be read in conjunction with consolidated financial statements and related notes included elsewhere herein.
(In thousands, except share data and ratios) 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ Statement of operations information Interest income $ 41,362 $ 37,506 $ 32,245 $ 29,235 $ 23,012 Interest expense 18,640 16,721 13,559 12,250 7,950 ______ ______ ______ ______ _____ Net interest income 22,722 20,785 18,686 16,985 15,062 Provision for loan losses (recovery) 150 55 - - (43) Non- interest income 4,330 3,409 3,807 2,640 2,785 Non-interest expense 20,138 17,494 16,650 15,577 16,236 ______ ______ ______ ______ ______ Income before income taxes 6,764 6,645 5,843 4,048 1,654 Income tax expense (benefit) 1,728 2,126 1,710 1,194 (283) _____ _____ _____ _____ ___ Net income $ 5,036 $ 4,519 $ 4,133 $ 2,854 $ 1,937 ===== ===== ===== ===== ===== Period end balance sheet information Securities available-for-sale at fair value$ 132,664 $ 120,819 $ 72,318 $ 73,527 $ 48,942 Securities held-to-maturity 21,862 28,278 29,532 31,780 52,997 Total loans, net of deferred loan costs (fees) 394,666 331,520 303,660 254,003 202,437 Allowance for loan losses 5,258 5,580 5,696 5,776 6,452 Total assets 587,900 522,353 437,898 391,320 329,262 Deposits: Non-interest bearing demand 86,057 70,831 56,111 46,061 37,887 Savings, interest checking, and money market 185,280 157,076 144,720 144,326 146,464 Certificates of deposit 230,024 241,914 203,940 167,488 111,030 Total deposits 501,361 469,821 404,771 357,875 295,381 Short-term borrowing 23,840 14,236 786 4,986 9,875 Long-term debt 20,210 210 210 - - Total shareholders' equity 38,152 34,020 29,231 25,846 21,360 Per common share data Net income: Basic $ 1.39 $ 1.26 $ 1.16 $ 0.80 $ 0.58 Diluted 1.32 1.21 1.13 0.79 0.58 Cash dividends 0.32 0.17 0.05 - - Book value 10.51 9.48 8.19 7.24 5.99 Operating ratios: Net income as a percent of: Average total assets 0.90% 0.93% 1.00% 0.78% .62% Average common shareholders' equity 13.94 14.36 15.21 12.17 10.15 Net interest margin 4.30 4.53 4.79 4.92 5.10 Interest rate spread 3.60 3.85 4.19 4.34 4.69 Non-performing assets ratio (1) 1.13 .81 .69 .67 1.77 Allowance for loan losses as a percent of period-end loans 1.33 1.68 1.88 2.27 3.19 Net charge-offs as a percent of average loans .13 .05 .03 .29 .19 Total equity as a percent of total assets at year end 6.49 6.51 6.68 6.60 6.49 Cash dividend on common stock payout ratio $ 0.32 $ 0.17 $ 0.05 $ - $ -
Notes: (1) Non-performing assets (non-accrual loans, loans past due 90 days or more, and real estate acquired by foreclosure) divided by total loans and real estate acquired by foreclosure. Item 7. 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, and changes in inflation. 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. and various regulatory agencies. This transaction is expected to be completed in the second quarter of 1999. The merger will result in substantial legal, accounting, professional, investment advisory and other expense to be incurred by FNB Rochester Corp. 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 Expense, below. Overview On November 30, 1998, First National announced an agreement for the sale of its Southport Office. At December 31, 1998, the office had deposits of approximately $14 million. The closing is expected to take place before the end of the first quarter of 1999. The Company has continued its growth in 1998, and much of the growth is the result of banking office expansion in the Rochester area. Three new banking offices were opened in 1998 and four new banking offices were opened in 1995 and 1996. Two existing facilities were also replaced with new "customer friendly" facilities. The Company continues to emphasize a high level of customer service, establishing total financial service relationships with customers, and providing convenience through location and extended hours. The new banking offices were opened with modern technology, on-line teller automation, as well as new automated teller machines. On-line teller systems were installed in all other banking offices during 1996. With the use of new technology and more efficient systems, the Company has been able to continue to expand with only a minimal increase in the number of employees. Net income increased $517,000, or 11.4%, in 1998. The Company's deposits increased $31.5 million, or 6.7%, from December 31, 1997 to December 31, 1998, and the Bank's sweep product increased securities sold under agreement to repurchase by $10.1 million, or 75.4%. Loan growth was strong in 1998 although with lower interest rates more businesses and consumers opted for fixed rate rather than variable rate loans. At December 31, 1998, total loans were up $63.1 million, or 19%, as compared to an increase of $27.9 million from 1996 to 1997. $30 million of the 1998 increase was in commercial loans, $26.6 was in residential mortgages, and home equity lines of credit outstanding ("home equity") increased $7.5 million. Consumer loans showed a slight decline. The Company's investments in securities available-for-sale increased by $11.8 million, or 9.8% from year end 1997 to year end 1998. Growth objectives are expected to be realized in 1999 by continuing to increase the Company's deposit base, continuing to make high-quality loans, and using the available-for-sale securities portfolio and short term borrowing to provide liquidity and improve margins. In order to accomplish its growth objectives, the Company must continue to increase its market share. The additional new banking offices have helped the Company attain its goals. The growth in deposits in 1998 has been in demand, savings and money market accounts. During the third and fourth quarters of 1998 the Bank borrowed $20 million from the Federal Home Loan Bank to help interest rate sensitivity and match fund longer term assets. This has lessened the Bank's dependency on certificates of deposit and as a result certificates of less than $100,000 declined $7.1 million, or 4.7%, during the year and certificates over $100,000 declined $4.8 million, or 5.2%. Results of Operations Net Interest Income ___________________ The following table reflects the net interest margin and interest rate spread for the years shown. Average amounts are based upon average daily balances. No tax equivalent adjustments have been made because they are not considered material.
Average Balance Sheet and Analysis of Net Interest Margin Years Ended December 31, (in thousands) 1998 1997 1996 ____ ____ ____ Amount Amount Amount Average Paid or Average Average Paid or Average Average Paid or Average Balance Earned Rate Balance Earned Rate Balance Earned Rate _______ ______ _______ _______ _______ _______ _______ _______ _______ Assets: Interest-earning assets: Interest-bearing deposits with other financial institutions $ 1,155 $ 59 5.11% $ 1,138 $ 59 5.18% $ 1,090 $ 59 5.41% Federal funds sold 8,104 445 5.49 8,072 446 5.53 4,773 254 5.32 Securities: (2) Taxable 150,871 9,682 6.42 128,693 8,678 6.74 97,267 6,420 6.60 Tax Exempt 4,959 219 4.42 2,302 104 4.52 2,730 122 4.47 Net loans (1) 363,156 30,957 8.52 318,254 28,219 8.87 283,958 25,390 8.94 Non-interest earning assets 30,921 26,996 25,066 ______ ______ ______ Total assets 559,166 484,734 414,316 Total earning-assets $ 528,245 $ 41,362 7.83% $ 458,459 $37,506 8.18% $389,818 $ 32,245 8.27% ======= ______ ===== ======= ______ ==== ======= ====== ==== Liabilities and shareholders' equity: Interest bearing liabilities Savings, interest checking and money market deposits $ 169,335 $ 3,822 2.26% $ 146,660 $ 3,231 2.20% $143,890 $ 3,093 2.15% Certificates of deposit 247,087 13,583 5.50 234,782 13,169 5.61 187,426 10,348 5.52 Short-term borrowings 18,270 896 4.90 5,901 301 5.10 1,790 99 5.53 Long-term debt 6,155 339 5.51 210 20 10.00 193 19 10.00 Non-interest bearing liabilities and shareholders' equity 118,319 97,181 81,017 _______ ______ ______ Total liabilities and shareholders' equity 559,166 484,734 414,316 _______ _______ _______ Total interest bearing liabilities $ 440,847 $ 18,640 4.23% $ 387,553 $16,721 4.31% $333,299 $13,559 4.07% ======= ====== ==== ======= ====== ==== ======== ====== ===== Interest rate spread 3.60% 3.87% 4.20% Total earning-assets/ ==== ==== ===== Net interest margin $ 528,245 $ 22,722 4.30% $ 458,459 $20,785 4.53% $389,818 $18,686 4.79% ======= ====== ==== ======= ====== ===== ======= ====== =====
Notes:(1) Non-accrual loans have been included in the average balances. (2) Securities available-for-sale are included at amortized cost. Net interest income, the difference between interest income and interest expense, increased $1,937,000, or 9.3%, from 1997, which had an increase of $2,099,000, or 11.2%, over 1996's net interest income. Average earning assets increased $69,786,000, or 15.2%, from 1997 to 1998 and increased $68,641,000, or 17.6%, from 1996 to 1997. The growth in assets was funded by growth in deposits, borrowings and retained earnings. Loans represent the majority of the Company's interest-earning assets. The increases in interest income noted in both 1998 and 1997 were primarily due to both loan and investment security volume increases. Loan increases were primarily in commercial real estate, conventional commercial loans and residential mortgage loans and the securities increases were in available-for-sale securities. Average net loan balances increased $44,902,000 from 1997 to 1998, while they increased $34,296,000 from 1996 to 1997. The loan volume increases in 1997 and 1998 are related to sales efforts and emphasis on making new loans. The average rate earned on loans in 1998 was 8.52% compared to 8.87% in 1997 and 8.94% in 1996. Average investment securities volumes increased $24,835,000 from 1997 to 1998 and increased $30,998,000 from 1996 to 1997. The average rate earned on taxable securities, which makes up most of the portfolio, declined from 6.74% in 1997 to 6.42% in 1998. Average Federal Funds Sold remained constant through 1997 and 1998. The decline in net interest margin is primarily the result of lower rates for both loans and investments. Interest expense is a function of the volume of, and rates paid for, interest-bearing liabilities. Interest expense increased in 1998 primarily because of an increase in average interest bearing liabilities. Interest rates on interest bearing liabilities declined only slightly in 1998. The interest spread is the difference between average rates earned on assets and average rates paid on interest-bearing sources of funds. Interest spread declined in 1998 to 3.60% from 3.87% in 1997 and 4.20% in 1996. The interest margin, which is the difference between interest income and interest expense divided by average interest-earning assets, was 4.30% in 1998, 4.53% in 1997, and 4.79% in 1996. The decline in both the spread and the margin from 1997 is primarily due to lower earning asset rates. The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates. Volume changes are computed by multiplying the volume difference by the prior year's rate. Rate changes are computed by multiplying the rate difference by the prior year's balance. The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
Volume and Rate Variances _________________________ 1998 Compared to 1997 1997 Compared to 1996 Increase/Decrease Increase/Decrease Due to Change In Due to Change In Total Total Average Average Increase Average Average Increase Balance Rate (Decrease) Balance Rate (Decrease) _______ ____ ________ _______ ____ ________ (in thousands) Federal funds sold and interest-bearing deposits $ 3 $ (4) $ (1) $ 184 $ 8 $ 192 Taxable securities 1,386 (382) 1,004 2,119 139 2,258 Tax-exempt securities 117 (2) 115 (19) 1 (18) Loans, net 3,801 (1,063) 2,738 3,025 (196) 2,829 _____ _____ _____ _____ ___ _____ Interest income 5,307 (1,451) 3,856 5,309 (48) 5,261 _____ _____ _____ _____ __ _____ Savings, interest checking and money market 502 89 591 63 75 138 Certificates of deposit 661 (247) 414 2,650 171 2,821 Other interest-bearing liabilities and long-term debt 926 (12) 914 390 (187) 203 ___ __ ___ ___ ___ ___ Interest expense 2,089 (170) 1,919 3,103 59 3,162 _____ ___ _____ _____ __ _____ Net interest income $ 3,218 $(1,281) $ 1,937 $ 2,206 $(107) $ 2,099 ===== ===== ===== ===== === =====
Non-interest Income Non-interest income is comprised of service charges, trust fees, credit card fees, loan servicing fees, and gains on sales of securities, mortgages, and other assets. The following table sets forth certain information on non-interest income for the years indicated: Non-Interest Income 1998 1997 1996 ____ ____ ____ (in thousands) Service charges on deposit accounts $ 2,110 $ 1,720 $ 1,547 Credit card fees 690 715 740 Gain on sale of mortgages 159 73 65 Gain (loss) on sale of securities available-for-sale 24 (8) (45) Loan servicing fees 266 262 263 Gain on sale of banking office - - 621 Other operating income 1,081 647 616 _____ ___ ___ Total non-interest income $ 4,330 $ 3,409 $ 3,807 ===== ===== ===== Non-interest income increased $921,000, or 27%, from 1997 to 1998 and declined $398,000, or 10.5%, from 1996 to 1997. 1996 non-interest income included a $621,000 gain on the sale of the Odessa banking office. Without the 1996 gain, 1997 would have reflected an increase of $223,000, or 7.0%, in non-interest income. Service charges on deposit accounts showed improvement in 1998 with an increase of $390,000, or 22.7%, over 1997 resulting from both increased volumes and increased pricing. Loan servicing fees have remained relatively constant over the three-year period. $143,000 of the increase in other operating income from 1997 to 1998 was the result of an increase in trust commissions and fees. The Company continues to explore new ways to increase non-interest income and to monitor fees and service charges. Non-interest Expense Non-interest expense, or overhead, consists of salaries and benefits, occupancy, insurance, and other operating costs. The following table sets forth certain information on operating expenses for the years indicated: Non-Interest Expense 1998 1997 1996 ____ ____ ____ (in thousands) Salaries and employee benefits $ 10,915 $ 9,618 $ 9,227 Occupancy 4,008 3,561 3,448 Marketing and public relations 721 610 489 Office supplies, postage and printing 771 624 637 Processing fees 1,184 1,075 1,018 FDIC assessments 57 52 2 Net cost of operation of other real estate 26 16 2 Legal 240 192 190 Other 2,216 1,746 1,637 _____ _____ _____ Total non-interest expense $ 20,138 $ 17,494 $ 16,650 ====== ====== ====== Non-interest expense for 1998 increased $2,644,000, or 15.1%, from 1997 when it increased $844,000, or 5.1%, from 1996. The increases in 1997 and 1998 are primarily due to the growth of the Company. Much of the increase in both years is attributable to the salaries, benefits, occupancy expenses and other expenses associated with the new banking offices and the increased volume of business they have generated. Salaries and benefits are the largest component of non-interest expense. The Bank operates in a metropolitan market unlike most community banks of similar size, and its cost for personnel tends to exceed that of typical community banks. Salaries and benefits increased $1,297,000, or 13.5%, from 1997, and $391,000, or 4.2%, from 1996 to 1997. The 1998 increase was primarily caused by the addition of personnel to staff the new offices opened in 1998 and additional operational support and lending staff needed for the increasing volume of business. The 1997 increase was primarily caused by normal raises, promotions and some staff additions. Occupancy expense, the other significant non-interest expense, increased $447,000, or 12.6%, in 1998 as compared to $113,000, or 3.3%, from 1996 to 1997. Occupancy expense is expected to continue to increase with the addition of additional leased space at the Bank's headquarters and as the Bank has expanded its service delivery network with three new community banking offices opened in 1998. The full annual expense effect of these new offices will not be realized until 1999 and beyond. 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 as 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. Marketing expense increased $111,000, or 18.2%, from 1997 to 1998. The Bank continued radio, television, and newspaper advertising in 1998. Marketing efforts were focused on the annual "Money Sale", home equity loans, grand openings for the new offices, image enhancement and customer awareness of the Bank as well as extended business hours. Also, as part of its sales efforts, the Company has continued with its interdivisional sales teams which conduct sales "blitzes" throughout the year. Office supplies, printing and postage increased $147,000, or 23.6%, in 1998 as a result of increased business after a small decline from 1996 to 1997. Other operating expense increased $470,000, or 26.9%, from 1997 to 1998. Among the largest other operating expense increases were telephone, ATM, travel and entertainment costs, and loan filing fees. Income Taxes The Company and the Bank file a consolidated tax return. The provision for 1998 income taxes was $1,728,000, compared to $2,126,000 and $1,710,000 in 1997 and 1996, respectively. The Company's effective tax rates were 25.5%, 32% and 29% for 1998, 1997 and 1996, respectively. 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 temporary 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 in the period that includes the enactment date. Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry back period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance of $54,000 at December 31, 1998. Income tax expense was affected in 1998, 1997 and 1996 by reductions in the valuation allowance of $722,000, $469,000 and $660,000 respectively due to the generation of sufficient taxable income to support the realization of differences. At December 31, 1998, the Company had a net deferred tax asset of $1,356,000 as compared to a net deferred tax asset of $554,000 at December 31, 1997. The 1997 deferred tax asset is attributable principally to the difference between book and tax allowance for loan losses. Analysis of Financial Condition Securities Portfolio The primary purposes of the securities portfolio are to produce interest income and provide liquidity through structured maturities. Investments in securities are also made to provide collateral to secure local municipal deposits, to manage risk by diversifying credit risk and positioning the balance sheet for interest rate sensitivity, to support local communities, and to meet tax planning strategies. The total securities portfolio increased $5,429,000, or 3.6% from December 31, 1997 to December 31, 1998 and increased $47,247,000, or 46.4%, from December 31, 1996 to December 31, 1997. The available-for-sale portfolio includes short-term Treasuries, U.S. Government Agency Notes and mortgage-backed securities not classified as held-to-maturity. During 1998, the Bank continued to classify most of its purchases of securities as available-for-sale. Unrealized gains on available-for-sale securities included in accumulated other comprehensive income as a component of equity at December 31, 1998 amounted to $627,000, net of taxes, as compared to unrealized gains of $896,000, net of taxes, at December 31, 1997. At December 31, 1998, 28.2% of the Bank's securities had maturities of five years or less, while 38.7% had maturities of five years or less at the end of 1997, and 50.6% had maturities of five years or less at the end of 1996. The decline in maturities of five years or less was caused by the Bank increasing its mortgage backed securities and SBA pools by approximately $29.3 million from 1996 to 1997 and by an additional $5.7 million from 1997 to 1998. At December 31, 1998 the average life of the Bank's amortizing securities such as mortgage pools and SBA pools was less than three years. The majority of the securities portfolio consists of U.S. Treasury Notes, U.S. Government Agency Notes, SBA pools and sequential pay mortgage-backed securities issued by U.S. government agencies. Since 1994 the Company has been decreasing its available-for-sale holdings of short-term treasuries and replacing them with medium term U.S. government agencies and longer-term variable and fixed rate mortgage-backed securities. Management believes that while this shift has helped the Bank to maintain its interest rate margins, a comparison of the interest rate sensitivity of all of its assets and liabilities suggests that the Bank's interest rate risks continue to be at appropriate levels. See "Management of Interest Rate Risk," below. The following tables summarize the Company's carrying value of securities available-for-sale and the carrying value of securities held-to-maturity, and their maturities and weighted average yields at December 31, 1998, 1997, and 1996. Carrying Value of Securities Available-for-Sale December 31, ____________ 1998 1997 1996 ____ ____ ____ (in thousands) Treasury $ 16,265 $ 25,403 $ 23,576 U.S. Government agency 43,863 34,346 9,967 Mortgage-backed securities 69,653 61,070 38,775 Other 2,883 - - _____ _ _ Total $ 132,664 $ 120,819 $ 72,318 ======= ======= ====== Notes: (1) The above figures are stated at fair value. The available-for-sale portfolio had net unrealized gains of $1,045,000, $1,491,000, and $447,000 at December 31, 1998, 1997 and 1996, respectively. Totals exclude Federal Reserve Bank stock and Federal Home Loan Bank stock of $2,188,000, $1,655,000 and $1,516,000 at December 31, 1998, 1997 and 1996, respectively. Carrying Value of Securities Held-to-Maturity December 31, 1998 1997 1996 ____ ____ ____ (in thousands) U.S. Treasury $ 8,047 $ 8,079 $ 8,108 U.S. Government agency 127 5,252 5,293 Mortgage-backed securities 6,929 10,721 12,909 Obligations of state and municipal subdivisions 6,409 3,876 2,872 Other 350 350 350 ___ ___ ___ Total $ 21,862 $ 28,278 $ 29,532 ====== ====== ======
Maturities and Weighted Yield of Securities Available-for-Sale (in thousands) After One Year After Five Years Within But Within But Within After One Year Five Years Ten Years Ten Years ________ __________ _________ _________ Amount Yield Amount Yield Amount Yield Amount Yield Total ______ _____ ______ _____ ______ _____ ______ _____ _____ U.S. Treasury $ 10,122 6.50% $ 6,143 6.27% $ - -% $ - -% $ 16,265 U.S. Government agency - - 5,045 6.73 25,900 6.42 12,918 6.09 43,863 Mortgage-backed securities (1) - - 6,888 6.67 3,370 5.94 59,395 6.58 69,653 Other - - - - - - 2,883 6.49 2,883 _ _ _ _ _ _ _____ ____ _____ Total $ 10,122 6.50% $ 18,076 6.55% $ 29,270 6.38% $ 75,196 6.23% $ 132,664 ====== ===== ====== ==== ====== ===== ====== ===== =======
Notes: (1) Mortgage-backed securities and SBA pools are reported at final maturity notwithstanding the fact that amortization is received regularly on some securities substantially reducing the effective maturities.
Maturities and Weighted Yield of Securities Held-to-Maturity (in thousands) After One Year After Five Years Within But Within But Within After One Year Five Years Ten Years Ten Years ________ __________ _________ _________ Amount Yield Amount Yield Amount Yield Amount Yield Total ______ _____ ______ _____ ______ _____ ______ ______ _____ U.S. Treasury $ - -% $ 8,047 5.80% $ - -% $ - -% $8,047 127. Government agency - - - - - - 6.137 Mortgage-backed securities (1) 787 7.00 4,410 6.10 1,023 7.89 709 7.37 6,929 Obligations of state and municipal subdivisions 657 3.92 1,138 4.36 1,102 4.20 3,512 5.07 6,409 Other 50 7.13 275 6.34 25 7.60 - - 350 __ ____ ___ ____ __ ____ _ __ ___ Total $ 1,494 5.65% $ 13,870 5.79% $ 2,150 6.01% $ 4,348 5.48% $21,862 ===== ==== ====== ==== ===== ==== ===== ===== ======
Notes: (1) See note (1) above. Loan Portfolio The loan portfolio increased $63,146,000, or 19.1%, from 1997 to 1998. This compares to an increase from 1996 to 1997 of $27,860,000, or 9.2%. The growth of the loan portfolio in both 1998 and 1997 was the result of a planned business development program soliciting small businesses and professionals and increases in residential mortgages with terms of 15 years or less. Of the total 1998 year-end loan portfolio, $291,903,000, or 74%, is secured by either commercial or residential real estate. The majority of the Company's loans continue to be commercial. Commercial loans increased $29,994,000, or 14.9%, from 1997, as compared to an increase of $14,001,000, or 7.5%, from 1996 to 1997. At year-end 1998, 57.1% of commercial loans were secured by commercial real estate. Of the commercial real estate securing those loans, 55.8% was owner occupied. Through expanded sales efforts, the Bank expects to continue to grow commercial loans, although at a somewhat slower rate. Competition for high quality loans is intense. The Bank is establishing itself in the small to medium-size business and professional markets. While its primary market is the Rochester area, the Business and Professional Banking Division has established a presence in the Syracuse and Buffalo markets with offices in Downtown Syracuse and in metropolitan Buffalo. Furthermore, the Bank has access to the Elmira area through its two community banking offices. Residential mortgage loans increased $26,635,000, or 32%, from 1997 to 1998, as compared to an increase of $11,850,000, or 16.6%, from 1996 to 1997. With lower interest rates in 1998, the Bank experienced increased refinancing activity, and much of that was directed into 15-year or less fixed rate mortgages. It is expected that the Bank may continue to hold a major portion of its 15-year originations in portfolio rather than selling them. When commercial and consumer loan demand is not sufficient to offset deposit increases management looks to the shorter term maturity and variable rate residential mortgages to fill that need. As a result of marketing promotions, home equity loans increased by $7,540,000, or 32.1%, from 1997 to 1998 and $2,219,000, or 10.4%, from 1996 to 1997. While home equity loans are attractive to borrowers who have equity in their homes, demand for this product is influenced by the residential mortgage refinance market. In the lower rate environment, many homeowners are choosing to refinance their mortgages resulting in the early repayment of home equity loans. Many of these homeowners take out new home equity loans and with increased marketing the Bank has been able to take advantage of the new home equity business this refinancing has created. Consumer loans declined in 1998 and 1997 by $863,000 and $267,000 respectively. Annual "Money Sale" promotions and other initiatives for new consumer loans have failed to generate enough business to offset the increased payoffs of existing loans. More and more borrowers now seem to use home equity financing for their consumer needs.
Types of Loans December 31, 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ (in thousands) Commercial $ 231,716 $ 201,722 $ 187,721 $ 165,645 $ 134,529 Residential mortgage 109,748 83,113 71,263 49,889 31,080 Home equity 31,056 23,516 21,297 18,773 20,586 Other consumer 22,023 22,886 23,153 19,711 16,443 ______ ______ ______ ______ ______ 254,018otal 394,543 331,237 202,638 Net deferred loan costs (fees) 123 283 226 (15) (201) Allowance for loan losses (5,258) (5,580) (5,696) (5,776) (6,452) _____ _____ _____ _____ _____ Loans, net $ 389,408 $ 325,940 $ 297,964 $ 248,227 $ 195,985 ======= ======= ======= ======= =======
Maturity Distribution of Loans at December 31, 1998 Maturity One Year One to Five Years or Less Five Years or more Total _______ __________ _______ _____ (in thousands) Commercial $ 22,116 $ 73,477 $ 135,646 $ 231,239 Residential mortgage 1,683 10,200 97,830 109,713 Home equity 1,552 1,462 28,602 31,616 Other consumer, net 1,174 16,657 4,267 22,098 _____ ______ _____ ______ Total loans $ 26,525 $ 101,796 $ 266,345 $ 394,666 ====== ======= ======= ======= Floating/adjustable Interest rate 46,705 126,019 Fixed or predetermined Interest rates 55,091 140,326 ______ _______ $ 101,796 $ 266,345 ======= =======
It is the policy of the Bank to place loans, except consumer and residential mortgage loans, on non-accrual status when payment of principal or interest becomes 90 days delinquent or when, in management's judgment, the collection of principal or interest appears uncertain. Any interest income accrued during the reporting period, but not received at the time the loan is placed on non-accrual status, is reversed in the reporting period to the extent considered uncollectible. Interest accrued in prior years, the collection of which appears uncertain, is charged off. Interest on loans categorized as non-accrual may be recognized as income when the payments are received or applied as a reduction to principal. Installment loans are not ordinarily placed on non-accrual status. Installment loans past due 120 days are generally charged off. At that time, all previously accrued or uncollected interest is reversed and charged against current earnings. Residential mortgage and home equity loans are placed on non-accrual status when they become 180 days past-due. The following table summarizes the Company's non-performing assets at the dates indicated:
Non-Performing Assets December 31, 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ (in thousands) Loans in non-accrual status $ 2,831 $ 2,100 $ 1,419 $ 1,665 $ 3,290 Loans past due 90 days or more and still accruing 1,564 540 645 45 196 _____ ___ ___ __ ___ Total non-performing loans 4,395 2,640 2,064 1,710 3,486 Real estate acquired by foreclosure 85 38 45 - 100 __ __ __ _ ___ Total non-performing assets $ 4,480 $ 2,678 $ 2,109 $ 1,710 $ 3,586 ===== ===== ===== ===== ===== Non-performing assets as a % of total loans and real estate acquired by foreclosure 1.13% 0.81% 0.69% 0.67% 1.77% ==== ==== ==== ==== ====
Total non-performing assets increased $1,802,000, or 67.3%, in 1998 from 1997 and total non-performing assets increased $569,000, or 27% in 1997 from 1996. The primary reason for the increase in loans past due 90 days or more is an increased delinquency rate in a pool of mortgage loans. These mortgages, totaling $8.2 million, were originated from 1995 to 1997 under special underwriting guidelines which targeted certain City of Rochester neighborhoods. The Bank has assigned an allocation of its reserve for loan losses to these loans and the allocation will be periodically evaluated and adjusted based on future delinquency rates and loss experience. The loans comprise $740,000 of the 90 days or more past due total and $203,000 of the non-accrual total. Loans in non-accrual status increased $731,000 from 1997 to 1998 and increased $681,000 from 1996 to 1997. Of the $2,831,000 in non-accrual loans, $1,250,000 is secured by real estate and $623,000 is guaranteed by the U.S. government. Non-performing assets represent 1.13% of total loans and real estate acquired by foreclosure at the end of 1998 compared to 0.81% in 1997 and 0.69% in 1996. Provision and Allowance for Loan Losses The allowance for loan loss is available to absorb charge-offs from any loan category and is restored by charges to income or recoveries of loans previously charged off. Management undertakes a quarterly analysis to assess the adequacy of the allowance 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 December 31, 1998 to absorb anticipated losses inherent in the portfolio. The following table summarizes the changes in the allowance for loan losses for 1994 through 1998:
Summary of Loan Loss Allowance December 31 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ (in thousands) Total Loans outstanding at year-end, net of costs (fees) and unearned discounts $ 394,666 $ 331,520 $ 303,660 $ 254,003 $ 202,437 ======= ======= ====== ======= ======= Daily average amount of net loans outstanding 363,156 318,254 283,958 229,331 186,229 ======= ======= ======= ======= ======= Balance at beginning of year 5,580 5,696 5,776 6,452 6,823 Provisions charged to operating expense (recovery) 150 55 - - (43) Reclassification of impairment reserves - - - - 210 Allowance of subsidiary sold - - - - (177) 5,730 5,751 5,776 6,452 6,813 _____ _____ _____ _____ _____ Loans charged off: Commercial, financial and agricultural (515) (179) (407) (840) (990) Real estate mortgage (73) (72) (14) (46) (124) Consumer (154) (158) (137) (147) (244) ___ ___ ___ ___ ___ Total charge-offs (742) (409) (558) (1,033) (1,358) ___ ___ ___ _____ ____ Recoveries of loans previously charged off: Commercial, financial and agricultural 178 166 407 267 867 Real estate mortgage 21 12 - - - Consumer 71 60 71 90 130 __ __ __ __ ___ 270 238 478 357 997 ___ ___ ___ ___ ___ Net (charge-offs) (472) (171) (80) (676) (361) ___ ___ __ ___ ___ Balance at end of year $ 5,258 $ 5,580 $ 5,696 $ 5,776 $ 6,452 ===== ===== ===== ===== ===== Net charge-offs as a percent of average loans outstanding during the year 0.13% 0.05% 0.03% 0.29% 0.19% Allowance for loan losses as a percent of year-end loans 1.33% 1.68% 1.88% 2.27% 3.19%
The increases in the loan portfolios and nonperforming loans required that some provision be made in 1998 and 1997. The lack of provision in 1996 and 1995 as well as the decrease in provision in 1994 was the result of reductions in the level of criticized and non-performing loans, and increased collection efforts resulting in significant recoveries. The recovery of provision recorded in 1994 was the result of reversing an excess allowance at Atlanta National Bank just prior to the time of its sale. At December 31, 1998, the Bank's internally criticized loans were $18,694,000 as compared to $15,194,000 at December 31, 1997 and $14,084,000 at December 31, 1996. Internally criticized loans increased $3,500,000, or 23%, from 1997 to 1998 and increased $1,110,000, or 7.9% from 1996 to 1997. As a percent of total loans, internally criticized loans remained almost unchanged. Internally criticized loans as a percent of total loans were 4.7%, 4.6%, and 4.6% for the years ended 1998, 1997 and 1996, respectively. Below is an allocation of the allowance for loan losses and the percentage of loans in each category to total loans. In addition to an allocation for specific problem loans, each category includes a portion of the unallocated allowance for loan losses based on loans outstanding, credit risks, and historical charge-offs. Notwithstanding the following allocation, the entire allowance for loan losses is available to absorb charge-offs in any category of loans.
Allocation of the Allowance for Loan Losses December 31, ____________ 1998 1997 1996 ____ ____ ____ Allowance % (1) Allowance %(1) Allowance % (1) _________ _____ _________ ____ _________ _____ (in thousands) Commercial, financial, & agricultural $ 3,710 58.7% $ 3,650 60.9% $ 3,925 61.9% Real estate, residential mortgage 1,102 27.8 1,418 25.1 998 23.5 Home equity 82 7.9 88 7.1 79 7.0 Other consumer, net 364 5.6 424 6.9 694 7.6 ___ ___ ___ ___ ___ ___ Total $ 5,258 100.0% $ 5,580 100.0% $ 5,696 100.0% ===== ===== ===== ===== ===== =====
1995 1994 ____ ____ Allowance % (1) Allowance % (1) _________ _____ _________ _____ (in thousands) Commercial, financial & agricultural $ 4,275 65.2% $ 5,384 66.4% Real estate, residential mortgage 706 19.6 294 15.3 Home equity 208 7.4 220 10.2 Installment, net 587 7.8 554 8.1 ___ ___ ___ ___ Total $ 5,776 100.0% $ 6,452 100.0% ===== ====== ===== ====== Notes: (1) Percentage of loans in each category to total loans Deposits The fundamental source of funds to support lending activities continues to be the Bank's deposit base, which consists of demand deposits, certificates of deposit, savings, and money market accounts. The ability of management to attract and retain depositors is key to sustaining the Company's growth. The emphasis continues to be on a high level of customer service and cross-selling of products and services. Total deposits in 1998 increased $31,540,000, or 6.7%, from 1997, while average deposits per banking office have increased from $26,574,000 for the month of December 1996 to $30,033,000 for December 1997 and declined to $27,992,000 for December 1998. The December 1996 and 1997 monthly averages include the four new banking offices that were opened in 1995 and 1996 and the 1998 average includes the three new banking offices opened in 1998. Average December 1998 deposits per branch, without the three new offices opened in 1998, were $32,189,000. In the years 1996 through 1998 the Bank has experienced increases in non-interest bearing demand deposits due in large part to accounts established with new loan relationships, accounts associated with the new banking offices, and increased public fund relationships. 1998 non-interest demand deposits grew 21.5% to $86,057,000 from $70,831,000 in 1997. 1997 non-interest bearing accounts increased $14.7 million, or 26.2%, over 1996 and for the period ended December 31, 1996, the increase was $10.1 million, or 21.8%, over 1995. Interest bearing demand deposits increased $13,879,000, or 20.5%, from December 31,1997 to December 31, 1998 and savings and money market deposits increased $14,325,000, or 16.1%, for the same period. In 1998, to help control interest costs, management has funded the Bank's growth with less expensive long-term debt and savings, interest checking and money market accounts rather than certificates of deposit. As a result, certificate of deposit volumes declined in the second half of 1998. As compared to December 31, 1997, certificates of deposit declined $11,890,000, or 4.9%. $4,831,000 of the decline was in certificates of deposit of $100,000 or more. From 1996 to 1997, certificates of deposit over $100,000 increased $30,041,000, or 48.1%. In 1997 management sought to increase certificates of deposit over $100,000 as a short-term leverage strategy to increase interest income. $14.0 million of the increase in certificates over $100,000 was the result of an increase in one municipal relationship. The Company has been taking a number of steps to better position itself to compete in a market which is experiencing disintermediation and movement from low-interest bearing accounts into certificates of deposit. The addition of the three new community banking offices in 1995, a fourth in 1996 and an additional three in 1998 as well as the replacement of two existing offices has significantly improved the Company's retail outlets and has extended services to areas that it previously could not service effectively. The following tables summarize the daily average deposits of the Company for the years 1998, 1997, and 1996, categories in which those deposits were held in 1998 and 1997, and the maturity distribution of certificates of deposit and public funds of $100,000 or more for the year-end December 31, 1998.
Daily Average Deposits For Years 1998 1997 1996 ____ ____ ____ Amount Rate Amount Rate Amount Rate ______ ____ ______ ____ ______ ____ (in thousands) Non-interest bearing demand $ 77,065 - % $ 61,411 - % $ 50,114 - % Interest-bearing demand 69,634 1.09 62,894 1.08 62,820 1.14 Savings, and money market 99,701 3.08 83,766 3.05 81,070 2.93 Certificates of deposit 247,087 5.50 234,782 5.61 187,426 5.52 _______ ____ _______ ____ _______ ____ Total deposits $ 493,487 3.53% $ 442,853 3.70% $ 381,430 3.52% ======= ==== ======= ==== ======= =====
Period End Deposits For Years _________ 1998 1997 ____ ____ (in thousands) Deposit category: Non-interest-bearing demand $ 86,057 $ 70,831 Interest-bearing demand 81,731 67,852 Savings 46,601 42,266 Money market 56,948 46,958 CDS less than $100,000 141,813 148,613 CDS greater than $100,000 41,186 40,836 Public funds less than $100,000 565 824 Public funds greater than $100,000 46,460 51,641 ______ ______ Total $ 501,361 $ 469,821 ======= ======= Maturity Distribution of Certificates of Deposits and Public Funds Greater Than $100,000 December 31, 1998 _________________ Maturity range (in thousands) less than 3 months $ 38,790 3 to 6 months 15,772 6 to 12 months 23,196 12 months or more 9,888 _____ Total $ 87,646 ====== Securities with an amortized cost of $132,862,000 at December 31, 1998 were pledged as collateral for municipal deposits and short-term borrowing. Short-Term Borrowings The following table describes the Company's short-term borrowings at the dates indicated: December 31, ____________ 1998 1997 1996 ____ ____ ____ (In thousands) Securities sold under agreements to repurchase $ 23,566 $ 13,436 - Other short-term borrowing 274 800 786 ___ ___ ___ Total $ 23,840 $ 14,236 $ 786 ====== ====== === The Bank had no securities sold under agreements to repurchase at December 31, 1996. The maximum amount outstanding at any one month-end and average amount for securities sold under agreements to repurchase were $23,566,000 and $22,333,000, respectively for 1998 and $13,436,000 and $5,173,000, respectively for 1997 and $4,348,000 and $704,000, respectively for 1996. The increase in 1997 and 1998 was the result of the introduction of a sweep account for business customers. Interest expense on securities sold under agreements to repurchase averaged 4.90% for 1998, 5.08% for 1997, and 5.82% for 1996. The other short-term borrowing represents the Bank's Note Option as a Treasury, Tax, and Loan Depository for Federal Tax Deposits. Securities with a carrying value of $2,970,000 at December 31, 1998 are held under the control of the Federal Reserve Bank of New York to secure Federal Tax Deposits in amounts in excess of FDIC insurance limits. Capital Resources Total shareholders' equity increased $4,132,000 from 1997. This increase is due to net income for 1998 of $5,036,000 and $522,000 for option and employee purchase common shares issued offset by a decrease in the fair value of securities available-for-sale of $269,000 and dividends paid on common stock of $1,157,000. Under SFAS 115, the net unrealized gain or loss on securities held in the available-for-sale portfolio is recorded in equity, net of taxes. In 1997, this resulted in an increase in shareholder's equity of $628,000 from the period ended December 31, 1996. The SFAS 115 adjustment is not considered in computing regulatory capital. Both the Federal Reserve Board and the Office of the Comptroller of the Currency have issued risk-based capital guidelines which went into full effect December 31, 1992. The Company presently is deemed well-capitalized under these guidelines. The numerator of risk-based capital ratios for bank holding companies includes Tier I capital, consisting of common shareholders' equity and qualifying cumulative and noncumulative preferred stock; and Tier II capital, consisting of a menu of internationally accepted items, including preferred stock, reserve for loan losses, and certain subordinated and term-debt capital. The denominator, or asset portion, of the risk-based ratio aggregates generic classes of balance sheet and off-balance sheet exposures, each weighted by one of four factors ranging from 0% to 100%, based on relative risk of the exposure class. This ratio assesses both the capital adequacy of the Company and the risk profiles of the Bank. The prompt corrective action regulations of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established specific capital categories based on an institution's capital ratios. To be considered "adequately capitalized" a bank must generally have a Leverage Ratio of at least 4%, a Tier I Risk-Based Capital Ratio of at least 4%, and a total Risk-Based Capital Ratio of 8%. At December 31, 1998, the Leverage, Tier-I Risk-Based Capital, and Total Risk-Based Capital Ratios of the Company and the Bank were as follows: Capital Ratios Tier-I Total Leverage Risk-Based Risk-Based Capital Ratio Capital Ratio Capital Ratio FNB Rochester Corp. 6.4% 9.9% 11.2% First National Bank of Rochester 6.0% 9.3% 10.6% Regulatory guidelines: Well capitalized 5.0% 6.0% 10.0% Adequately capitalized 4.0% 4.0% 8.0% Maintaining adequate capital ratios is a clearly defined objective of management. A number of steps have been taken by management to monitor capital adequacy. This effort becomes particularly important in light of the growth expectations for the Bank. An early warning system is part of the Company's business planning process. In addition to carefully monitoring performance and its impact on capital ratios, management re-forecasts the Company's balance sheet, income statement, and measures of capital adequacy at least quarterly. Furthermore, each year the entire business plan is revised to reflect actual results and project another year into the future. These measures serve to alert management to potential capital adequacy problems so that appropriate action could be formulated and addressed in advance. After a four year suspension, the Company declared a common stock cash dividend in December 1996. The suspension was based on the belief of the Company's Board of Directors that until capital was sufficient to sustain the anticipated growth, earnings should be retained in the Company to support that growth. The Board declared cash dividends on the Company's common stock in June and December of 1997 and quarterly cash dividends in 1998. 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. All internal liquidity measures exceed minimum levels established by the Bank. The fundamental source of liquidity will continue to be core deposits. Available sources of asset liquidity include short-term investments, loan repayments, and securities held in the available-for-sale portfolio. Additionally, the Company has the ability to pledge securities to secure short-term borrowing. The Bank is a member of the Federal Home Loan Bank which provides additional source of funding if needed. At December 31, 1998, the Bank had available $30.8 million out of a total line of $50.8 million. The Federal Home Loan Bank line is secured by residential mortgages. The Bank has agreements under which it may obtain funds for short-term liquidity needs by selling securities under agreements to repurchase. Additionally the Bank began selling securities under agreements to repurchase to business customers in 1997 under a cash management sweep account arrangement. The majority of the Company's assets are held by the Bank. Dividends and cash advances to the Company from the Bank are subject to standard regulatory constraints. Based on an analysis of projected expenses and cash flows, management believes that the Company has sufficient cash to meet its anticipated cash obligations. Management of Interest Rate Risk An objective of the Company's asset/liability management policy is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. The Asset/Liability Management Committee is responsible for managing interest rate risks. The Company uses a variety of methods to manage its interest rate risk and does not rely solely on one method. One such method used to manage interest rate risk involves the measurement of interest rate gap. Interest rate gap is the amount by which a bank's rate sensitive assets differ from its rate sensitive liabilities. A positive gap exists when rate sensitive assets exceed rate sensitive liabilities, indicating that a greater volume of assets than liabilities will reprice during a given period. Theoretically, this mismatch will enhance earnings in a rising rate environment and inhibit earnings when rates decline. Conversely, when rate sensitive liabilities exceed rate sensitive assets, the gap is negative, indicating that a greater volume of liabilities than assets will reprice during the period. Theoretically, in this case, a rising rate environment will inhibit earnings and declining rates will enhance earnings. The Rate Sensitivity Schedule that follows illustrates the measurement of interest rate gap at December 31, 1998.
Rate Sensitivity Schedule One Day Over Three Over Six Over One Over to Three Months to Months to Year to Five Months Six Months One Year Five Years Total ______ __________ ________ _______ _______ _____ (in thousands) Interest earning assets: Loans: Commercial $ 90,308 $ 8,639 $ 5,661 $ 84,564 $ 42,126 $ 231,298 Residential mortgage (1) 339 3,335 7,398 30,427 73,922 115,421 Home equity (1) 31,385 - - 233 31,618 Consumer 596 2,860 2,878 9,914 81 16,329 ___ _____ _____ _____ __ ______ Total loans 122,628 14,834 15,937 124,905 116,362 394,666 _______ ______ ______ _______ _______ _______ Investment securities 36,130 13,638 29,387 55,394 22,165 156,714 Interest bearing deposits in banks and federal funds sold 2,582 - - 50 - 2,632 _____ _ _ __ _ _____ Total interest-earning assets $ 161,340 $ 28,472 $ 45,324 $ 180,349 $ 138,527 $ 554,012 ======= ====== ===== ======= ======= ======= Interest-bearing liabilities: Savings deposits $ 185,280 - - - - $ 185,280 Time deposits $100M & over 38,790 15,772 23,196 9,888 - 87,646 Other time deposits 25,304 33,033 64,896 19,035 110 142,378 Short-term borrowing 23,840 - - - - 23,840 Long-term debt - - - 20,210 - 20,210 _ _ _ ______ _ ______ Total interest-bearing liabilities $ 273,214 $ 48,805 $ 88,092 $ 49,133 $ 110 $ 459,354 ======= ====== ====== ====== === ======= Net interest rate sensitivity gap $ (111,874) $ (20,333) $ (42,768) $ 131,216 $ 138,417 $ 94,658 ======= ====== ====== ======= ======= ====== Cumulative gap $ (111,874) $ (132,207) $ (174,975) $ (43,759) $ 94,658 ======= ======= ======= ====== ====== Cumulative gap ratio (2) 0.59 0.59 0.57 0.90 1.21 ==== ==== ==== ==== ==== Cumulative gap as a % of Total assets (19.03)% (22.49)% (29.76)% (7.44)% 16.10% ===== ===== ===== ==== =====
Notes: (1) Fixed rate home equity loans are included with residential mortgage loans for rate sensitivity and with other consumer loans for financial statement purposes. The home equity category above includes only lines of credit. (2) Cumulative total interest-earning assets divided by cumulative total interest-bearing liabilities. As measured by the cumulative sensitivity gap at December 31, 1998, the maturity and repricing of the Company's interest earning assets and interest bearing liabilities showed a negative gap in the one year period. Interest checking, savings and money market deposits are assigned one day to three months repricing and while these deposits can be repriced in that time period they may react very differently to various interest rate scenarios. Management does not believe this rate sensitivity schedule accurately reflects the true interest rate risk of the Company because changes in interest rates do not affect all categories of assets and liabilities equally as implied by this schedule. 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 its negative gap position will not have a material adverse effect on its operating results or liquidity in the event of reasonably foreseeable changes in interest rates during 1999. These simulations are based on numerous assumptions regarding the timing and extent of repricing characteristics. Assumptions include prepayments of mortgage assets, cash flows from other financial instruments and loan and deposit pricing maturities. Actual results may differ significantly. The following table shows the Company's estimated earnings sensitivity profile as of December 31, 1998. Changes in Interest Rates Percentage Change in Net Interest Income (basis points) 12 Months 24 Months ____________ _________ __________ + 200 over one year -0.8 -2.8 +100 over one year 0.0 -0.6 - - 100 over one year -0.3 0.9 - - 200 over one year 0.0 3.0 Impact of Inflation The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles, consistently applied. These principles require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. Management believes that it needs to manage the rates, liquidity, and interest sensitivity of the assets and liabilities to help generate an acceptable return. 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 Bank of Rochester into M & T Bank was announced. The Merger is subject to regulatory and shareholder approvals and is expected to be completed by 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, 14 totaling $13.1 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, validation of several mission critical systems has been rescheduled. In the event that the proposed Merger is not completed by June 1, 1999, the validation of all mission critical systems will be scheduled so that the validation can be completed by June 30, 1999. As a result of the proposed Merger, First National postponed the conversion of its core processing systems and has extended its contract for use of the Jack Henry Associates Liberty System. Jack Henry Associates advises that the Liberty System is Year 2000 ready with the installation of the latest update release which was installed in December, 1998. In the first quarter of 1999, First National will review the results of proxy testing completed by various Liberty system users and will purchase a copy of the third party review of the proxy testing process by McGladdery and Pullen, a national accounting and consulting firm. Implementation Phase - By 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 expenses 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 before the ultimate deadline of January 1, 2000. Recently Issued 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, did not have a material impact on the Company. The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information in 1998. SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain specific revenue and expense items, and total assets. The Company did not identify any separate operating segments requiring disclosure, therefore SFAS No. 131 did not have an impact on the Company's statement of financial condition or statement of operations. The Company adopted SFAS No. 132, Employers Disclosure about Pensions and Other Postretirement Benefits in 1998. This statement revises employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 does not change the expense measurement or recognition of these plans. SFAS No. 132 did not have an impact on the Company's statement of financial condition or statement of operations. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires the Company to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for gains and losses results from changes in fair value of the derivative instrument depends on the intended use of the derivative and the type of risk being hedged. The statement is effective for fiscal years beginning after June 15, 1999 although earlier adoption is permitted. Based upon current activities, the adoption of the statement will not have an effect on the Company's financial position or results of operation. 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 is effective for the first quarter beginning January 1, 1999 and this statement will not have any impact on the Company's financial position or results of operation as the Company does not currently securitize mortgage loans. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See the information provided above under the caption "Quantitative and Qualitative Disclosures About Market Risk" in Item 7 of this report. Item 8. Consolidated Financial Statements and Supplementary Data Consolidated Financial Statements Independent Auditors' Report The Board of Directors and Shareholders FNB Rochester Corp.: We have audited the consolidated statements of financial condition of FNB Rochester Corp. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Rochester Corp. and subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ KPMG LLP January 25, 1999 Rochester, New York
FNB ROCHESTER CORP. AND SUBSIDIARY Consolidated Statements of Financial Condition December 31, 1998 and 1997 (in thousands, except share data) 1998 1997 ____ ____ Assets: Cash and due from banks $ 20,031 $ 17,968 Interest bearing deposits with other banks 1,132 1,134 Federal funds sold 1,500 12,200 Securities available-for-sale, at fair value 132,664 120,819 Securities held-to-maturity (fair value of $22,106 in 1998 and $28,323 in 1997) 21,862 28,278 Loans, net of allowance of $5,258 in 1998 and $5,580 in 1997 389,408 325,940 Premises and equipment 11,673 8,813 Accrued interest receivable 4,069 3,761 FHLB and FRB stock 2,188 1,655 Other assets 3,373 1,785 _____ _____ Total assets $ 587,900 $ 522,353 ======= ======= Liabilities and shareholders' equity Deposits: Demand: Non interest bearing $ 86,057 $ 70,831 Interest bearing 81,731 67,852 Savings and money market 103,549 89,224 Certificates of deposit 230,024 241,914 _______ _______ Total deposits 501,361 469,821 Securities sold under agreement to repurchase 23,566 13,436 Other short-term borrowing 274 800 Accrued interest payable and other liabilities 4,337 4,066 Long-term debt 20,210 210 Total liabilities 549,748 488,333 _______ _______ Shareholders' equity: Common Stock, $1 par value; authorized 5,000,000 shares; issued and outstanding 3,628,618 in 1998 and 3,589,253 in 1997. 3,629 3,589 Additional paid in capital 13,751 13,269 Undivided profits 20,145 16,266 Accumulated other comprehensive income 627 896 ___ ___ 38,152 34,020 ______ ______ Total liabilities and shareholders' equity $ 587,900 $ 522,353 ======= =======
See accompanying notes to consolidated financial statements.
FNB ROCHESTER CORP. AND SUBSIDIARY Consolidated Statements of Operations Years Ended December 31, 1998, 1997, 1996 (in thousands, except per share data) 1998 1997 1996 ____ ____ ____ Interest income: Interest and fees on loans $ 30,957 $ 28,219 $ 25,390 Securities: Taxable 9,682 8,678 6,420 Tax-exempt 219 104 122 ___ ___ ___ 9,901 8,782 6,542 Interest on federal funds sold and deposits with banks 504 505 313 ___ ___ ___ Total interest income 41,362 37,506 32,245 ______ ______ ______ Interest expense: Savings, interest checking and money market accounts 3,822 3,231 3,093 Certificates of deposit 13,583 13,169 10,348 Short-term borrowings 896 301 99 Long-term debt 339 20 19 ___ __ __ Total interest expense 18,640 16,721 13,559 ______ ______ ______ Net interest income 22,722 20,785 18,686 ______ ______ ______ Provision for loan losses 150 55 - ___ __ _ Net interest income after provision for loan losses 22,572 20,730 18,686 ______ ______ ______ Non-interest income: Service charges on deposit accounts 2,110 1,720 1,547 Credit card fees 690 715 740 Gain on sale of mortgages 159 73 65 Gain (loss) on sale of securities available-for-sale 24 (8) (45) Loan servicing fees 266 262 263 Gain on sale of banking office - - 621 Other operating income 1,081 647 616 _____ ___ ___ Total non-interest income $ 4,330 $ 3,409 $ 3,807 _____ _____ _____ Non-interest expense: Salaries and employee benefits $ 10,915 $ 9,618 $ 9,227 Occupancy 4,008 3,561 3,448 Marketing and public relations 721 610 489 Office supplies, printing and postage 771 624 637 Processing fees 1,184 1,075 1,018 F.D.I.C. assessments 57 52 2 Net cost of operation of other real estate 26 16 2 Legal 240 192 190 Other 2,216 1,746 1,637 _____ _____ _____ Total non-interest expense 20,138 17,494 16,650 ______ ______ ______ Income before income taxes 6,764 6,645 5,843 Income tax expense 1,728 2,126 1,710 Net income $ 5,036 $ 4,519 $ 4,133 ===== ===== ===== Net income per common share - basic $ 1.39 $ 1.26 $ 1.16 ==== ==== ==== Net income per common share - diluted $ 1.32 $ 1.21 $ 1.13 ==== ==== ====
See accompanying notes to consolidated financial statements.
FNB ROCHESTER CORP. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity and Comprehensive Income Years Ended December 31, 1998, 1997 and 1996 (in thousands except per share data) Accumulated Additional Other Common Paid in Undivided Comprehensive Stock Capital Profits Income Total _____ _______ _______ ______ _____ Balance at December 31, 1995 $ 3,569 $ 13,024 $ 8,403 $ 850 $ 25,846 Comprehensive income: Net income - - 4,133 - 4,133 Change in unrealized gain on securities available-for-sale, net of taxes of $397 (582) (582) ___ Total comprehensive income 3,551 _____ Common stock cash dividend - $.05 per share - - (179) - (179) Option and employee purchase shares issued 2 11 - - 13 _ __ _ _ __ Balance at December 31, 1996 $ 3,571 $ 13,035 $ 12,357 $ 268 $ 29,231 Comprehensive income: Net income - - 4,519 - 4,519 Change in unrealized gain on securities available-for-sale, net of taxes of $417 - - - 628 628 ___ Total comprehensive income - - - - $ 5,147 _____ Common stock cash dividend - $.17 per share - - (610) - (610) Option and employee purchase shares issued 18 234 - - 252 __ ___ _ _ ___ Balance at December 31, 1997 $ 3,589 $ 13,269 $ 16,266 $ 896 $ 34,020 Comprehensive income: Net income - - 5,036.00 - 5,036 Change in unrealized gain on securities available-for-sale, net of taxes of $179 - - - (269) (269) ____ Total comprehensive income 4,767 _____ Common stock cash dividend - $.32 per share - - (1,157) - (1,157) Option and employee purchase shares issued 40 482 - - 522 ___ Balance at December 31, 1998 $ 3,629 $ 13,751 $ 20,145 $ 627 $ 38,152 ===== ====== ====== === ====== Disclosure of reclassification amount: 1998 1997 1996 ____ ____ ____ Unrealized holding gains (losses) arising during period $(283) $ 633 $(555) Less: reclassification adjustment for gains (losses) Included in net income 14 (5) (27) __ _ __ Change in unrealized gain on securities available-for- sale, net of taxes $ (269) $ 628 $ (582) === === ===
See accompanying notes to consolidated financial statements.
FNB ROCHESTER CORP AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ____ ____ ____ Cash flows from operating activities: Net income $ 5,036 $ 4,519 $ 4,133 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 150 55 - Depreciation and amortization 1,681 1,464 1,449 Amortization of goodwill - - 79 Deferred income taxes (623) (548) (78) (Gain) loss on sales of securities available-for-sale (24) 8 45 Gain on sale of subsidiary and banking offices - - (621) (Increase) decrease in mortgage loans held for sale, net (2,210) (2,700) 550 (Increase) decrease in accrued interest receivable (308) (519) 331 Increase in other assets (872) (199) (465) Increase in accrued interest payable and other liabilities 340 986 175 ___ ___ ___ Net cash provided by operating activities 3,170 3,066 5,598 _____ _____ _____ Cash flow from investing activities: Securities available-for-sale: Purchase of securities (70,154) (71,502) (29,987) Proceeds from maturities 53,460 23,275 19,857 Proceeds from sales 4,427 762 10,097 Securities held-to-maturity: Purchase of securities (5,370) (3,249) (2,891) Proceeds from maturities 11,786 4,503 5,139 Loan origination and principal collection, net (61,323) (25,293) (51,375) Payment made for sale of banking office - - (7,855) Purchases of premises and equipment, net (4,541) (1,125) (3,377) _____ _____ _____ Increase in FHLB and FRB stock (533) (139) - ___ ___ _ Net cash used by investing activities $ (72,248) $ (72,768) $ (60,392) ______ ______ ______ Cash flows from financing activities: Net increase in demand, savings, interest checking, and money market accounts $ 43,430 $ 27,076 $ 16,125 Certificates of deposit accepted and repaid, net (11,890) 37,974 40,404 Increase (decrease) in short-term borrowings 9,604 13,450 (4,200) Increase in long-term debt 20,000 - 210 Employee common stock purchase and exercise of options to purchase common stock 522 252 13 Dividends paid - common stock (1,227) (429) - _____ ___ _ Net cash provided by financing activities 60,439 78,323 52,552 ______ ______ ______ Increase (decrease) in cash and cash equivalents (8,639) 8,621 (2,242) Cash and cash equivalents at beginning of year 30,302 21,681 23,923 ______ ______ ______ Cash and cash equivalents at end of year $ 21,663 $ 30,302 $ 21,681 ====== ====== ====== Supplemental disclosure of non-cash investing and financing activities: Additions to other real estate acquired through foreclosure, or deed in lieu of foreclosure, net of loans to facilitate sale and write downs $ 85 $ 38 $ 45 The Company paid cash during 1998, 1997, and 1996 for income taxes and interest as follows (in thousands): 1998 1997 1996 ____ ____ ____ Interest $ 18,876 $ 16,399 $ 13,553 Income taxes 872 2,637 1,335
See accompanying notes to consolidated financial statements FNB ROCHESTER CORP. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 (1) Summary of Significant Accounting Policies Business FNB Rochester Corp. (the Company) provides a full range of banking and trust services to individual and corporate customers. The Company generates interest income by accepting deposits and investing those deposits, together with funds from borrowings and ongoing operations in a variety of loans and investment securities. The most significant source of revenue for the Company is net interest income - the difference between interest income earned on loans and investments and interest expense incurred on deposits and borrowings. The Company, operating primarily in western New York, is headquartered in Rochester, New York, the third largest city in the state. The Company is subject to competition from other financial institutions. The Company is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. On December 9, 1998 a definitive agreement was entered into for a merger between the Company and M&T Bank Corporation, Buffalo, New York. The merger is subject to both shareholder and regulatory approval and it is expected to take place in the second quarter of 1999. Basis of Presentation The Company operates as a bank holding company. In 1998 its only subsidiary was First National Bank of Rochester (First National). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, First National. All material intercompany accounts and transactions have been eliminated. The financial statements have been prepared in conformity with generally accepted accounting principles and conform with predominate practices within the banking industry. In preparing these financial statements, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Securities The Company classifies its debt securities as either available-for-sale or held-to-maturity, as the Company does not hold any securities considered to be trading. Held-to-maturity securities are those that the Company has the ability and intent to hold until maturity. Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost. Unrealized holding gains and losses, net of related taxes, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income in shareholders' equity until realized. A decline in the fair value of any security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new basis for the security. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses from securities sold are determined using the specific identification method. The Company's investments in the Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) are required by law and are carried at cost in the consolidated statement of condition. The Company's disposition of these securities is restricted by agreements with the FHLB and FRB. Loans Loans are stated at the principal amount outstanding, net of deferred loan origination fees and costs which are accrued to income based on the interest method. The Company originates some residential mortgage loans with the intent to sell. These loans are carried at the lower of aggregate cost or fair value as determined by outstanding commitments from investors or, in the absence of such commitments, the current investor yield requirements calculated on an aggregate basis. The accrual of interest on commercial loans is discontinued and previously accrued interest is reversed when the loans become 90 days delinquent or earlier if, in management's judgment, the collection of principal and interest is uncertain. Recognition of interest income on non-accrual loans does not resume until management considers principal and interest collectible. Installment loans are generally charged-off upon becoming 120 days past due. Residential mortgage loans are reduced to the fair value of the underlying collateral, as applicable, upon becoming 180 days past due. Fair value is the amount that would reasonably be anticipated in a current sale in which the buyer and seller are each acting prudently, knowledgeably, and under no necessity to buy or sell. The Company services residential mortgage loans for the Federal Home Loan Mortgage Corporation (Freddie Mac), and earns servicing fees, which are recognized when payments are received, based upon the outstanding principal balance of the loans. The cost of originating these loans is attributed to the loans and is considered in the calculation of the gain or loss on sale of the loans. Due to their immateriality, the right to service the loans is assigned no financial statement value. Allowance for Loan Losses The Company provides for loan losses by a charge to current operations to bring the allowance to an appropriate level considering the character of the loan portfolio, economic conditions, analysis of specific loans, and historical loss experience. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Management considers a loan to be impaired if, based on current information, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price of the fair value of collateral if the loan is collateral dependent. Management excludes large groups of smaller balance homogeneous loans such as residential mortgages and consumer loans which are collectively evaluated. When a loan is impaired and the future repayment of the recorded balance is doubtful, interest payments received are applied to principal and no interest income is recognized. If the recorded loan balance is expected to be paid, interest income is recognized on a cash basis. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is provided over the lesser of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of the Company's premises and equipment are as follows: Buildings and improvements 5 - 40 years Furniture, fixtures, and equipment 3 - 7 years Leasehold improvements 3 - 20 years Vehicles 2 - 5 years Other Real Estate Owned Real estate acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of the investment in the loan or fair value less estimated costs to dispose. Fair value is determined on an asset by asset basis, primarily through independent third party appraisals. Adjustments to the carrying values of such properties resulting from subsequent declines in fair value are charged to operations in the period in which the declines occur. These adjustments, the net expense of operating other real estate owned and gains and losses on disposition of other real estate owned are included in net cost of operation of other real estate expense. Other real estate owned is included in other assets on the accompanying consolidated statements of financial condition. Income Taxes 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 temporary 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 in the period that includes the enactment date. Stock Option Plan The Company continues to account for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of an option's grant only if the current market price of the underlying stock exceeded the exercise price. In accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, the Company has elected to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. Pension Plan First National sponsors a non-contributory defined benefit pension plan covering substantially all of its employees. Benefits are based upon years of service and the employee's average compensation. Average compensation is determined by the average of the highest five consecutive years of service. The cost of this plan is being funded currently. First National's policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts, subject to IRS limitations, as the Bank may determine to be appropriate from time to time. Trust Department Income Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated statements of financial condition, since such assets are not assets of the Company. Fee income is recognized on the cash method. At December 31, 1998 the market value of the assets under management was $113,842,000. Comprehensive Income On January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. This Statement establishes standards for reporting and display of comprehensive income and its components. Accumulated other comprehensive income consists of net income and the net unrealized holding gains and losses on securities available-for-sale, net of the related tax effect. Prior year financial statements have been reclassified to conform to the requirements of the Statement. Per Share Data Basic earnings per share data is based upon the weighted average number of common shares outstanding during each year. Diluted earnings per share data is based upon the weighted average number of common shares outstanding and effect of stock issued upon conversion of equivalents stock options during each year. Cash Equivalents For the purpose of reporting cash flows, cash equivalents include due from banks, unrestricted interest bearing deposits with banks, and federal funds sold. Financial Instruments With Off-Balance Sheet Risk The Company does not engage in the use of derivative financial instruments and the Company's only financial instruments with off-balance risk are commercial letters of credit and mortgage and commercial loan commitments. These off-balance sheet items are shown in the Company's consolidated statement of financial condition upon funding. (2) Securities The aggregate amortized cost and fair value of securities available-for-sale and securities held-to-maturity at December 31, 1998 and 1997 follows (in thousands):
1998 1997 ____ ____ Amortized Fair Amortized Fair Cost Value Cost Value ____ _____ ____ ______ Securities available-for-sale: U.S. Treasury $ 16,045 $ 16,265 $ 25,152 $ 25,403 U.S. Government agency 43,675 43,863 34,213 34,346 Mortgage-backed securities 68,968 69,653 59,963 61,070 Other securities 2,931 2,883 - - _____ _____ _ _ Total 131,619 132,664 119,328 120,819 ======= ======= ======= ======= Securities held-to-maturity: U.S. Treasury 8,047 8,167 8,079 8,091 U.S. Government agency 127 128 5,252 5,229 Mortgage-backed securities 6,929 6,967 10,721 10,769 Obligations of state and municipal subdivisions 6,409 6,494 3,876 3,884 Other securities 350 350 350 350 ___ ___ ___ ___ Total $ 21,862 $ 22,106 $ 28,278 $ 28,323 ====== ====== ====== ======
Securities with an amortized cost of $132,862,000 and $105,341,000 at December 31, 1998 and 1997, respectively were pledged as collateral for municipal deposits and to secure short term borrowings. Gross unrealized gains and losses on securities available-for-sale and securities held-to-maturity at December 31, 1998 and 1997 follows (in thousands):
1998 1997 ____ ____ Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses _____ ______ _____ ______ Securities available-for-sale: U.S. Treasury $ 220 $ - $ 251 $ - U.S. Government agency 328 140 172 39 Mortgage-backed securities 740 55 1,157 50 Other securities 26 74 - - __ __ __ _ Total $ 1,314 $ 269 $ 1,580 $ 89 ===== === ===== == Securities held-to-maturity: U.S. Treasury $ 120 $ - $ 39 $ 27 U.S. Government agency 1 - - 23 Mortgage-backed securities 42 4 77 29 Obligations of state and municipal subdivisions 87 2 18 10 __ _ __ __ Total $ 250 $ 6 $ 134 $ 89 === = === ==
The amortized cost of securities by contractual years to maturity as of December 31, 1998 are as follows (in thousands):
Under 1 1 to 5 Years 5 to 10 10 Years Total _______ ____________ _______ ________ _____ Year Years and ____ _____ ___ Over ____ Securities available-for-sale: U.S. Treasury $ 10,035 $ 6,010 $ - $ - $ 16,045 U.S. Government agency - 5,000 25,773 12,902 43,675 Mortgage-backed securities - 6,899 3,357 58,712 68,968 Other securities - - - 2,931 2,931 _ _ _ _____ _____ Total $ 10,035 $ 17,909 $ 29,130 $ 74,545 $ 131,619 ====== ====== ====== ====== ======= Securities held-to-maturity: U.S. Treasury $ - $ 8,047 $ - $ - $ 8,047 U.S. Government agency - - - 127 127 Mortgage backed securities 787 4,410 1,023 709 6,929 Obligations of state and municipal subdivisions 657 1,138 1,102 3,512 6,409 Other securities 50 275 25 - 350 __ ___ __ _ ___ Total $ 1,494 $ 13,870 $ 2,150 $ 4,348 $ 21,862 ===== ====== ===== ===== ======
The fair value of securities by contractual years to maturity as of December 31, 1998 are as follows (in thousands):
Under 1 1 to 5 Years 5 to 10 10 Years and Total Year _____________ Years Over _____ ____ ____ ___ Securities available-for-sale U.S. Treasury $ 10,122 $ 6,143 $ - $ - $ 16,265 U.S. Government agency - 5,045 25,900 12,918 43,863 Mortgage-backed securities 6,888 3,370 59,395 69,653 Other securities - - - 2,883 2,883 _ _ _ _____ _____ Total $ 10,122 $ 18,076 $ 29,270 $ 75,196 $ 132,664 ====== ====== ====== ====== ======= Securities held-to-maturity U.S. Treasury $ - $ 8,167 $ - $ - $ 8,167 U.S. Government agency - - - 128 128 Mortgage backed securities 787 4,412 1,042 726 6,967 Obligations of state and municipal subdivisions 657 1,159 1,115 3,563 6,494 Other securities 50 275 25 - 350 __ ___ __ _ ___ Total $ 1,494 $ 14,013 $ 2,182 $ 4,417 $ 22,106 ===== ====== ===== ===== ======
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations without prepayment penalties. The following table presents the total proceeds from sales of securities available-for-sale for 1998, 1997 and 1996 and the gross realized gains and losses (in thousands): 1998 1997 1996 ____ ____ ____ Proceeds from sales $ 4,427 $ 762 $ 10,097 _____ ___ ______ Gains 24 - 2 Losses - (8) (47) _ _ __ Net $ 24 $ (8) $ (45) == = == (3) Loans The major classifications of loans at December 31, 1998 and 1997 follow (in thousands): 1998 1997 ____ ____ Commercial $ 231,716 $ 201,722 Residential mortgage 104,508 80,083 Residential mortgage loans held for sale 5,240 3,030 Home equity 31,056 23,516 Other consumer 22,023 22,886 ______ ______ Total 394,543 331,237 Net deferred loan costs 123 283 Allowance for loan losses (5,258) (5,580) _____ _____ Loans, net $ 389,408 $ 325,940 ======= ======= The Company considers its primary service and marketing area to be the city of Rochester and its surrounding towns in New York State. The Company also has two full service banking offices in the Elmira area and offices, in both Syracuse and Buffalo, which provide services primarily to professional and business customers. Substantially all of the Company's outstanding loans are with borrowers living or doing business within these areas. The Company's concentrations of credit risk are disclosed in the above loan classifications. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. Loans serviced for others amounting to $92,931,000 and $102,757,000 at December 31, 1998 and 1997, respectively are not included in the consolidated financial statements. Custodial accounts held by First National for these loans amounted to $2,639,000 and $2,193,000 at December 31, 1998 and 1997, respectively. The Company has an available line of credit with the FHLB of New York, which at December 31, 1998 amounted to approximately $30,750,000. The amount available under the line varies according to a formula which considers the amount of FHLB stock held by the Company, the Company's FHLB borrowings outstanding and the Company's total assets. At December 31, 1998, the Company pledged residential mortgages with a carrying value of $84,016,000 as collateral for this line of credit. (4) Allowance for Loan Losses A summary of the changes in the allowance for loan losses follows (in thousands):
Years Ended December 31, ________________________ 1998 1997 1996 ____ ____ _____ Balance at beginning of year $ 5,580 $ 5,696 $ 5,776 Provision charged to operating expense 150 55 - 5,730 5,751 5,776 _____ _____ _____ Loans charged off Commercial (515) (179) (407) Residential mortgage (73) (72) (14) Home equity - (13) (5) Other consumer (154) (145) (132) ___ ___ ___ Total loans charged off (742) (409) (558) ___ ___ ___ Recoveries of loans charged off Commercial 178 166 407 Residential mortgage 21 12 - Home equity 16 - 3 Other consumer 55 60 68 __ __ __ Total recoveries of loans charged off 270 238 478 ___ ___ ___ Balance at end of year $ 5,258 $ 5,580 $ 5,696 ===== ===== =====
The principal balance of loans not accruing interest totaled $2,831,000 and $2,100,000 at December 31, 1998 and 1997 respectively. The effect of non-accrual loans on interest income for the years ended December 31, 1998, 1997, and 1996 was $82,000, $22,000 and $48,000 respectively. Other real estate owned amounted to $85,000, $38,000 and $45,000 at December 31, 1998, 1997 and 1996 respectively. At December 31, 1998, 1997, and 1996, the recorded investment in loans that are considered to be impaired totaled $1,884,000, $1,160,000, and $2,337,000, respectively, and the impairment allowance associated with these loans is $656,000 for 1998, $125,000 for 1997 and $38,000 for 1996. The average recorded investments in impaired loans during the twelve months ended December 31, 1998, 1997 and 1996 was approximately $1,058,000, $2,882,000 and $913,000, respectively. For the twelve months ended December 31, 1998, 1997 and 1996 the Company recognized interest income on impaired loans of $58,000, $234,000 and $77,000, respectively. (5) Premises and Equipment A summary of premises and equipment follows (in thousands): December 31, ____________ 1998 1997 ____ ____ Land $ 710 $ 710 Building and improvements 2,144 2,091 Furniture, fixtures, equipment and vehicles 11,991 9,472 Leasehold 7,336 5,444 _____ _____ 22,181 17,717 Less accumulated depreciation and amortization 10,508 8,904 ______ _____ Premises and equipment, net $ 11,673 $ 8,813 ====== ===== (6) Certificates of Deposit Certificates of deposit of $100,000 or more amounted to $87,646,000 at December 31, 1998 and $92,477,000 at December 31, 1997. Interest expense on certificates of deposit of $100,000 or more was $4,877,000 in 1998, $4,269,000 in 1997 and $3,225,000 in 1996. At December 31, 1998, the scheduled maturities of all certificates of deposits are as follows (in thousands): Year Amount ____ ______ 1999 $ 200,991 2000 18,123 2001 5,175 2002 2,005 2003 and thereafter 3,730 _____ Total $ 230,024 ======= (7) Borrowings The Company had short term borrowings of $23,840,000 and $14,236,000 at December 31, 1998 and 1997 respectively. The December 31, 1998 balance included $23,566,000 of securities sold under agreement to repurchase, with a maturity date of January 4, 1999 and an average rate of 4.33%. The December 31, 1997 balance included $13,436,000 of securities sold under agreement to repurchase, with a maturity date of January 2, 1998 and an average rate of 4.92%. The maximum amount outstanding at any one month-end and average amount for securities sold under agreements to repurchase were $23,566,000 and $22,333,000 respectively for 1998 and $13,436,000 and $5,173,000 respectively for 1997. Interest expense averaged 4.90% for 1998, 5.08% for 1997 and 5.82% for 1996. Long-term borrowings consist of two Federal Home Loan Bank advances of $10 million each and a $210,000 note to an individual to purchase land for the Bank's Greece Office. The $10 million advances mature on August 28, 2001 and October 2, 2002 and are at interest rates of 5.57% and 4.91% respectively. The $210,000 note matures on February 1, 2001 and has an interest rate of 9.50%. (8) Income Taxes Total income taxes for the years ended December 31, 1998, 1997 and 1996 were allocated as follows (in thousands):
1998 1997 1996 ____ ____ ____ Income from operations $ 1,728 $ 2,126 $ 1,710 Shareholders' equity, change in unrealized gain (loss) on securities available-for-sale (179) 417 (397) ___ ___ ___ $ 1,549 $ 2,543 $ 1,313 ===== ===== =====
For the years ended December 31, 1998, 1997 and 1996, income tax expense (benefit) attributable to income from operations consists of (in thousands): 1998 1997 1996 Current: Federal $ 2,148 $ 2,113 $ 1,648 State 203 561 140 ___ ___ ___ 2,351 2,674 1,788 _____ _____ _____ Deferred: Federal (530) (466) (335) State (93) (82) 257 __ __ ___ (623) (548) (78) ___ ___ __ $ 1,728 $ 2,126 $ 1,710 ===== ===== ====== The reconciliation of the statutory federal income tax rate with the actual effective tax rate follows: 1998 1997 1996 ____ ____ ____ Statutory rate 34.0% 34.0% 34.0% Increases (decreases) attributable to: Change in the beginning of the year valuation allowance for deferred tax assets allocated to income tax expense (10.7)% (7.0)%% (11.0) State taxes, net of federal benefit 1.1% 4.7% 5.0 Other items, net 1.1% 0.3% 1.0 ___ ___ ___ 25.5% 32.0% 29.0% ==== ==== ==== The significant components of deferred tax expense (benefit) attributable to income from continuing operations at December 31, 1998, 1997 and 1996 are as follows: 1998 1997 1996 ____ ____ ____ Deferred tax expense (benefit) $ 99 $ (79) $ 582 Decrease in valuation allowance for deferred tax assets (722) (469) (660) ___ ___ ___ Net deferred tax benefit $ (623) $ (548) $ (78) === === == The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998, and 1997 are presented below (in thousands):
1998 1997 ____ ____ Deferred tax assets: Allowance for loan losses - financial statements $ 2,100 $ 2,229 Interest on non accrual loans 59 140 Premises and equipment - principally due to depreciation 187 163 Reserve for abandoned lease 62 91 Accrued salaries and benefits 112 121 Other 90 97 __ __ Gross deferred assets 2,610 2,841 Less valuation allowance (54) (776) __ ___ Net deferred tax assets 2,556 2,065 ===== ===== Deferred tax liabilities: Allowance for loan losses - tax (585) (650) Net unrealized gain on securities available-for-sale (417) (596) Bond discount (149) (152) Net deferred loan origination costs (49) (113) __ ___ Total gross deferred liabilities (1,200) (1,511) _____ _____ Net deferred tax asset $ 1,356 $ 554 ===== ===
The net change in the total valuation allowance for the years ended December 31, 1998, 1997 and 1996 were decreases of $722,000, $469,000 and $660,000 respectively. Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry back period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. (9) Shareholders' Equity Payment of dividends by First National to the Company is limited or restricted in certain circumstances. According to federal banking law, the approval of the Office of the Comptroller of the Currency (OCC) is required for the declaration of dividends by a bank in any year in which the dividend declared will exceed the total of net income for that year plus any retained income for the preceding two years. Dividends approximating $10,750,000 are available from First National at December 31, 1998 without the approval of the OCC. (10) Stock Option Plans The Company has two stock option plans. A plan adopted in 1992 (amended May 19, 1998) for employees, authorizes grants of options to purchase up to 525,000 shares of its authorized but unissued common stock. The second plan is the 1995 Non-employee Director Stock Option Plan which was approved by shareholders on May 28, 1996 and authorizes grants of options to purchase up to 25,000 shares of its authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of the grant. All stock options are exercisable over terms not exceeding ten years and at prices equal to the fair market value of the common stock on the date of grant. The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions used for grants in 1998: dividend yield of 1.48 percent, risk-free interest rate of 5.65 percent, expected volatility of 35.4 percent, and expected lives of 6.5 years. For grants in 1997: dividend yield of .87 percent, risk-free interest rate of 6.06 percent, expected volatility of 35.6 percent, and expected lives of 10 years. For grants in 1996: dividend yield of .14 percent, risk-free interest rate of 6.1 percent, expected volatility of 40 percent, and expected lives of 8.8 years. Had the Company determined compensation cost based on the fair value at the grant date for its options under SFAS No. 123, the Company's net income and basic earnings per share would have been reduced to the pro forma amounts indicated below: Year ended December 31 (net income in thousands) 1998 1997 1996 ____ ____ ____ Net income As reported $ 5,036 $ 4,519 $ 4,133 Pro forma 4,775 4,385 4,003 Basic earnings Per share As reported 1.39 1.26 1.16 Pro forma $ 1.32 $ 1.22 $ 1.12 Pro forma net income and earnings per share reflect only options granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1996 is not considered. A summary of the status of the Company's two fixed stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 ____ ____ ____ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ______ _____ ______ ______ ______ _____ Outstanding at beginning of year 321,850 $ 7.49 318,850 $ 7.28 223,100 $ 6.59 Granted 211,050 20.28 7,500 16.13 98,750 8.88 Exercised 20,487 7.05 3,000 7.64 2,100 6.01 Forfeited 7,288 18.67 1,500 11.27 900 7.15 _____ _____ _____ _____ ___ ____ Outstanding at end of year 505,125 $ 13.13 321,850 $ 7.48 318,850 $ 7.30 ======= ===== ======= ==== ======= ==== Options exercisable at year end 405,577 304,475 244,350 ======= ======= ======= Weighted-average fair value of options granted during the year $ 8.11 $ 8.44 $ 5.11 ==== ==== ====
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ___________________ ____________________ Number Weighted-Avg Number Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg Exercise Prices at 12/31/98 Contractual Life Exercise at 12/31/98 Exercise Price _______________ ___________ ________________ ___________ ____________ ______________ $ 5.63 - 9.75 277,350 4.8 $ 6.99 277,350 $ 6.99 12.75 - 17.38 23,200 8.3 13.98 18,750 13.43 18.00 - 21.50 204,575 9.4 21.34 109,477 21.50 _____________ _______ ___ _____ _______ _____ $ 5.63 - 21.50 505,125 6.8 $ 13.13 405,577 $ 11.21 ============ ======= === ===== ======= =====
(11) Leases The Company leases certain buildings and office space under operating lease arrangements. Rent expense under these arrangements amounted to $1,247,000 in 1998, $1,123,000 in 1997 and $1,110,000 in 1996. Real estate taxes, insurance, maintenance, and other operating expenses associated with the buildings and office space are generally paid by the Company. A summary of non-cancelable long-term operating lease commitments as of December 31, 1998 follows (in thousands): Year Ending December 31, ________________________ Year Amount ____ ______ 1999 $ 1,224 2000 1,249 2001 1,283 2002 1,288 2003 1,239 After 2003 10,130 ______ Total $ 16,413 ====== Several new leases have been signed for additional banking offices and office space. Two 20-year ground leases were signed for new banking offices in the Village of Brockport and the Town of Victor. A 5-year lease has been signed for space in a supermarket located in the City of Rochester and the Bank's Powers Building lease has been amended to include 7,652 square feet of additional space to be used for operations. The new lease amounts are included in the table above. (12) Commitments and Contingencies In the normal course of business there are various outstanding commitments to extend credit which are not reflected in the accompanying consolidated financial statements. Because many commitments and almost all letters of credit expire without being funded in whole or in part, the contract amounts are not estimates of actual future cash flows. Loan commitments have off-balance sheet credit risk, because only origination fees are recognized in the balance sheet, until the commitments are fulfilled or expire. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and collateral or other security is of no value. The Company's policy generally requires customers to provide collateral, usually in the form of customers' operating assets or property, prior to the disbursement of approved loans. The contract amounts of these commitments at December 31, 1998 and 1997 are set forth in the table below (in thousands): 1998 1997 ____ ____ Fixed Rate Variable Rate Fixed Rate Variable Rate __________ _____________ __________ _____________ Commercial letters of credit - 4,817 - 2,749 Commercial lines of credit 1,122 55,604 2,362 59,040 Other loan commitments 14,120 26,449 17,184 18,917 For substantially all commercial lines of credit, First National evaluates each customer's creditworthiness annually. Since many of the line of credit commitments are never drawn upon, the total commitment amounts do not necessarily represent future cash flows. Other loan commitments include lines of credit for home equity loans, overdraft protection, and credit cards as well as commitments to extend new loans. In 1997 the Company committed $1 million to fund a 10% limited partnership investment interest in Cephas Capital Partnership, L.P. This small business investment company was established for the purpose of providing financing to small businesses in conjunction with programs established by the U.S. Small Business Administration. At December 31, 1998, the Company had funded $703,000 of this commitment and carries the investment under the equity method in other assets. First National is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of such reserve balances for the year ended December 31, 1998 and 1997 was approximately $138,000 and $365,000. Interest bearing deposits with other banks are substantially restricted by balance agreements. Because the Bank's business involves the deposit, collection, and transfer of checks and similar negotiable instruments and the collection of loans and enforcement of security interests, mortgages, and other liens, the Bank is plaintiff or defendant in various legal proceedings which may be considered as arising in the ordinary course of business. In the opinion of management, after consultation with counsel handling all such litigation, there are no legal proceedings now pending by or against the Bank or the Company, the outcome of which are expected to have a material effect on their businesses, business properties, or financial condition. (13) Employee Benefit Plans The Company has a defined benefit pension plan covering substantially all employees. The benefits are based on years of service and the employee's highest average compensation during five consecutive years of employment. The Company's funding policy is to contribute annually an actuarially determined amount to cover current service cost plus amortization of prior service costs. The following table sets forth (in thousands) the defined benefit pension plan's change in benefit obligation and change in plan assets for the years ended December 1998, 1997 and 1996 using the most recent actuarial data measured at September 30, 1998, 1997 and 1996 as follows:
December 31 ____________ 1998 1997 1996 ____ ____ ____ Change in benefit obligation: Benefit obligation at beginning of year $1,691 $1,022 $726 Service cost 508 385 368 Interest cost 127 82 54 Benefits paid (8) (12) (9) Assumption changes and other 502 214 (117) ___ ___ ___ Projected benefit obligation at end of year 2,820 1,691 1,022 _____ _____ Change in plans assets: Fair value of plan assets at beginning of year 1,307 757 475 Actual return on plan assets 51 218 70 Employer contribution 598 388 270 Benefits paid (8) (12) (9) Plan expenses (49) (44) (49) __ __ __ Fair value of plan assets at end of year 1,899 1,307 757 _____ _____ ___ Funded status (deficit) (921) (384) (265) Unrecognized net actuarial loss (gain) 778 142 19 Unrecognized prior service cost (4) (4) (5) _ _ _ Prepaid (accrued) benefit cost $(147) $ (246) $ (251) === === === Pension costs consists of the following components (in thousands): Years ended December 31, ________________________ 1998 1997 1996 ____ ____ ____ Service cost $ 508 $ 385 $ 368 Interest cost 127 82 54 Expected return on plan assets (137) (83) (40) Amortization of net (gain) loss - - 3 Net periodic benefit cost $ 498 $ 384 $ 385 === === === Weighted average discount rate 6.50% 7.50% 8.00% Expected long term rate of return 8.50% 8.50% 8.50%
The projected benefit obligation assumed a long-term rate of increase in future compensation levels was 4.00% for 1998, 5.00% for 1997 and 1996. First National sponsors a 401(k) plan covering substantially all employees. First National matched eligible employee contributions to the 401(k) plan up to a maximum 1.5 percent of eligible compensation. Expense for the 401(k) amounted to $84,000 in 1998, $77,000 in 1997, and $66,000 in 1996. (14) Loans to Directors, Officers and Shareholders owning more than 5% of Voting Stock A summary of the changes in outstanding loans to members of the Board of Directors, officers of the Company and shareholders owning more than 5% of voting stock, or their interests, follows (in thousands): Years ended December 31, ________________________ 1998 1997 ____ ____ Balance of loans outstanding at beginning of year $ 5,941 $ 4,827 New loans and increases in existing loans 2,169 1,496 Loan principal repayments (1,120) (382) _____ ___ Balance at end of year $ 6,990 $ 5,941 Loans to directors, officers and shareholders owning more than 5% of voting stock are believed to have been made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties. (15) Earnings Per Share Calculation of Basic Earnings Per Share (Basic EPS) and Diluted Earnings Per Share (Diluted EPS) is as follows (income in thousands):
Income Average Per Share ______ _______ _________ For year ended December 31, 1998 Basic EPS Net income applicable to common shareholders $ 5,036 3,611,947 $ 1.39 Effect of assumed exercise of stock options - 192,085 _______ Diluted EPS Income available to common shareholders and assumed exercise of stock options $ 5,036 3,804,032 $ 1.32 Net income applicable to common shareholders $ 5,036 3,611,947 $ 1.39 ===== ========= ==== For year ended December 31, 1997 Basic EPS Net income applicable to common shareholders $ 4,519 3,580,713 $ 1.26 ==== Effect of assumed exercise of stock options - 164,829 _______ Diluted EPS Income available to common shareholders and assumed exercise of stock options $ 4,519 3,745,542 $ 1.21 ===== ========= ==== For year ended December 31, 1996 Basic EPS Net income applicable to common shareholders $ 4,133 3,570,159 $ 1.16 ==== Effect of assumed exercise of stock options - 93,117 ______ Diluted EPS Income available to common shareholders and assumed exercise of stock options $ 4,133 3,663,276 $ 1.13 ===== ========= ====
(16) Condensed Financial Information - Parent Company Only The following presents the financial condition of the Parent Company (FNB Rochester Corp.) as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the years ended December 31, 1998, 1997, and 1996: Condensed Statements of Financial Condition (in thousands) Assets 1998 1997 ____ ____ Cash and cash equivalents $ 2,293 $ 996 Investment (at equity) in subsidiary 35,915 33,411 Other assets 306 3 Total assets $ 38,514 $ 34,410 Liabilities and shareholders' equity Accrued interest payable and other liabilities $ 362 $ 390 Total liabilities 362 390 ___ ___ Shareholders' equity 38,152 34,020 ______ ______ Total liabilities and shareholders' equity $ 38,514 $ 34,410 ====== ====== Statement of Income (in thousands) Years ended December 31, ________________________ 1998 1997 1996 ____ ____ ____ Income: Dividends from subsidiary $ 2,352 $ 600 $ 200 Interest and other 67 27 19 __ __ __ Total income 2,419 627 219 _____ ___ ___ Expense: Other 191 118 109 ___ ___ ___ Total expense 191 118 109 ___ ___ ___ Income before taxes and equity in undistributed income of subsidiary 2,228 509 110 Income tax benefit (36) (29) (26) __ __ __ Income before undistributed income of subsidiary 2,264 538 136 Equity in undistributed income of subsidiary 2,772 3,981 3,997 _____ _____ _____ Net income $ 5,036 $ 4,519 $ 4,133 ===== ===== =====
Statement of Cash Flows (in thousands) Years ended December 31, ________________________ 1998 1997 1996 ____ ____ ____ Cash flows from operating activities: Net income $ 5,036 $ 4,519 $ 4,133 Adjustment to reconcile net income to cash (used) provided by operating activities: Equity in undistributed income of subsidiary (2,772) (3,981) (3,997) (Increase) decrease in other assets (303) (2) 3 Increase (decrease) in accrued interest payable and other liabilities 41 (7) (2) __ _ _ Net cash provided by operating activities 2,002 529 137 _____ ___ ___ Cash flows from investing activities: Net cash provided by investing activities - - - Cash flows from financing activities: Employee common stock purchase and exercise of options to purchase common stock 522 252 13 Dividends paid - common stock (1,227) (429) - Net cash provided by financing activities (705) (177) 13 ___ ___ __ Increase in cash and cash equivalents 1,297 352 150 Cash and cash equivalents at beginning of year 996 644 494 ___ ___ ___ Cash and cash equivalents at end of year $ 2,293 $ 996 $ 644 ===== === ====
(17) Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) First National is subject to capital adequacy requirements of the Federal Deposit Insurance Corporation. The FDICIA established capital levels for which insured institutions are categorized as (in declining order) well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. Under the FDICIA, a well capitalized institution must generally have a risk-based capital ratio of at least 10 percent, a Tier 1 risk- based ratio of at least 6 percent and a Tier 1 leverage ratio of at least 5 percent. As of December 31, 1998, First National is a well capitalized institution under the definitions. First National is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could cause regulators to initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on First National's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First National must meet specific capital guidelines that involve quantitative measures of First National's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. First National's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require First National to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 1998, that First National meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized First National as (well capitalized) under the regulatory framework for prompt corrective action. To be categorized as (well capitalized) First National must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios set forth in the table. There are no conditions or events since that notification that management believes have changed First National's category. First National's actual capital amounts and ratios are presented in the following table (in thousands). There was no deduction from capital for interest-rate risk.
For Capital To Be Well Actual Adequacy Purposes Capitalized Amount Ratio Amount Ratio Amount Ratio ______ _____ ______ _____ ______ _____ As of December 31, 1998 Total Capital (to Risk Weighted Assets) $ 40,131 10.6% $ 30,338 8.0% $ 37,922 10.0% Tier I Capital (to Risk Weighted Assets) $ 35,385 9.3% $ 15,169 4.0% $ 22,753 6.0% Tier I Capital (to Average Assets) $ 35,385 6.0% $ 23,447 4.0% $ 29,308 5.0% As of December 31, 1997 Total Capital (to Risk Weighted Assets) $ 36,557 11.4% $ 25,745 8.0% $ 32,181 10.0% Tier I Capital (to Risk Weighted Assets) $ 32,515 10.1% $ 12,873 4.0% $ 19,309 6.0% Tier I Capital (to average assets) $ 32,515 6.3% $ 20,491 4.0% $ 25,613 5.0%
The Company's capital amounts and ratios as of December 31, 1998 and 1997 were not materially different from those of First National. (18) Fair Value of Financial Instruments The following fair value estimates, methods, and assumptions of each class of the Company's financial instruments were used to estimate the fair value. Interest Bearing Deposits with Banks and Federal Funds Sold For these short-term instruments that generally mature in less than 90 days or reprice on a daily basis, the carrying value approximates fair value. Securities Fair values for securities are based on quoted market prices or dealer quotes, where available. Variable rate securities that reprice frequently and have no significant credit risk have fair values based on carrying values. Loans The fair values of loans are generally estimated using discounted cash flow analyses applying interest rates currently being offered for loans with similar terms and credit quality and employing prepayment assumptions based on available industry information sources. Delinquent and non-accrual loans are valued using the discounted cash flow methods described above. Credit risk is a component of the discount rate used to value the loans. Delinquent and non-accrual loans are presumed to possess additional risk. Therefore, the discount rates used to value these non-performing loans reflect this additional risk. Deposits The fair values disclosed for demand deposits, savings accounts, and money market accounts are equal to their carrying values since these are liabilities that are payable on demand. The fair value of fixed rate certificates of deposit is calculated using a discounted cash flow analysis applying rates currently being offered on certificates to a schedule of weighted average expected monthly maturities on time deposits. Short-Term Borrowings and Long-Term Debt Variable rate instruments reprice daily and therefore the carrying value approximates fair value. Fixed rate obligations are valued using a discounted cash flow approach employing a discount rate currently offered for similar instruments. Off-Balance Sheet The fair value of commitments to extend credit approximates the fees charged to make these commitments since rates and fees of the contracts approximate those currently charged to originate similar commitments. These commitments are included under loans and loan commitments.
1998 1997 ____ ____ (in thousands) Estimated Estimated Carrying Fair Carrying Fair Financial Assets: Amount Value (1) Amount Value (1) ________________ ______ _________ ______ _________ Cash $ 20,031 $ 20,031 $ 17,968 $ 17,968 Interest bearing deposits with banks 1,132 1,132 1,134 1,134 Federal funds sold 1,500 1,500 12,200 12,200 Securities, including FHLB and FRB 156,714 156,958 149,261 150,797 Net Loans and commitments 389,408 397,660 325,940 337,123 Financial Liabilities: _____________________ Total deposits 501,361 502,648 469,821 470,254 Short-term borrowings and long-term debt $ 44,050 $ 43,951 $ 14,446 $ 14,446
(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (19) Dispositions On November 30, 1998, First National announced an agreement for the sale of its Southport Office. At December 31, 1998 the Office had deposits of approximately $14 million. The closing is expected to take place before the end of the first quarter of 1999. On November 18, 1996, First National sold its Odessa Office. The Office had deposits of $9,633,000 and loans of $1,133,000, and a gain of $621,000 was recognized as a result of the sale. Supplementary Data
Quarterly Financial Information (Unaudited) (In thousands, except share data) Diluted Net Provision Income Earnings Per Interest Interest for Loan Before Net Common Income Income Losses Income Taxes Income Share ______ ______ ______ ____________ ______ _____ 1998 ____ First quarter $ 9,910 $ 5,397 $ 90 $ 1,634 $ 1,132 $ 0.30 Second quarter 10,341 5,600 60 1,608 1,200 0.31 Third quarter 10,552 5,805 - 1,768 1,292 0.34 Fourth quarter 10,559 5,920 - 1,754 1,412 0.37 1997 ____ First quarter $ 8,556 $ 4,801 $ - $ 1,326 $ 902 $ 0.24 Second quarter 9,279 5,114 - 1,590 1,075 0.29 Third quarter 9,730 5,381 - 1,814 1,225 0.33 Fourth quarter 9,941 5,489 55 1,915 1,317 0.35
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PART III ________ Item 10. Directors and Executive Officers of the Registrant Directors The following persons are currently directors of the Company. Directors are elected annually at the Annual Meeting of Shareholders of the Company. Director's Name (age) Director Since Principal Occupation _____________________ ______________ ____________________ R. Carlos Carballada (64) 1992 President, Chief Executive Officer, FNB Rochester Corp. Michael J. Falcone (63) 1978 Chairman, Pioneer Group and Pioneer Development Joseph M. Lobozzo II (55) 1993 President & CEO, JML Optical Industries, Inc. Francis T. Lombardi (67) 1978 Vice President, Syracuse Tank & Mfg. Co. Inc. Carl R. Reynolds (51) 1977 Attorney H. Bruce Russell (61) 1993 President, Rochester Downtown Development Corp. James D. Ryan (66) 1992 President and Owner, RYCO Management, Inc. Linda Cornell Weinstein (54) 1993 Executive Director, Cornell/Weinstein Family Foundation Other than Mr. Russell, each director of the Company has been engaged in his or her principal occupation or employment as specified above for five years or more. Each director of the Company is also a director of First National Bank of Rochester (the "Bank"). Mr. Carballada has been employed in the banking business since 1968. He was President and Chief Executive Officer of Citizens Central Bank in Arcade, New York from July 1976 until August 1981, and was President and Chief Executive Officer of Central Trust Company in Rochester, New York, from September, 1981 until May, 1992. Mr. Carballada became the President and Chief Executive Officer of the Company in June of 1992. Mr. Carballada also serves as President and Chief Executive Officer of the Bank. Mr. Falcone is the Chairman of the Pioneer Group and Pioneer Development Company, a real estate development and management companies headquartered in Syracuse, New York. He has held that position since 1987. Since 1992, Mr. Falcone has served as Chairman of the Board of Directors of the Company and the Bank. Mr. Lobozzo has been the President, Chief Executive Officer, and principal shareholder of JML Optical Industries, Inc., located in Rochester, New York, since 1972. JML Optical Industries, Inc. manufactures, designs, and imports precision optical systems. Mr. Lombardi is Vice President of Syracuse Tank & Manufacturing Company, Incorporated, a manufacturer of metal products in Syracuse, New York, and has been associated with the manufacturing company since 1957. Mr. Reynolds has been an attorney engaged in the general practice of law in Rochester, New York since 1975. Mr. Reynolds is also President and a director of New Sky Communications, Inc., a motion picture production company and Vice President of the Logan Consulting Group, Inc., a Rochester, New York financial and business consulting firm. Since 1992, Mr. Reynolds has served as Vice Chairman of the Board Directors of the Company and the Bank. Mr. Russell is President of Rochester Downtown Development Corp., in which he has held various leadership positions over a period of seven years. In 1997, he retired from the Eastman Kodak Company. He joined the Finance and Administration Division of the Eastman Kodak Company in Rochester in 1963, and thereafter he held a variety of positions at Kodak, each with increasing responsibility. In 1986, he became a divisional Vice President and Director, Corporate Real Estate Office, a position he held until his retirement. Mr. Ryan is a Rochester area real estate developer, and since 1969 has been the principal shareholder and president of RYCO Management, Inc., a real property development and management company. Ms. Weinstein has served as Executive Director of the Cornell/Weinstein Family Foundation, a private non-profit foundation located in Rochester, New York, since 1986. No family relationships exist among the above-named Directors or Officers of the Company. None of the Directors of the Company holds a directorship in any other publicly traded company, except for Carl R. Reynolds, who is a director of New Sky Communications, Inc., a company registered under Section 15(d) of the Securities and Exchange Act of 1934, as amended. Executive Officers The following current officers of the Company or the Bank ("Executive Officers") are deemed to be "executive officers" for purposes of the federal securities laws. R. Carlos Carballada (64), President and Chief Executive Officer of the Company and the Bank, commencing June 8, 1992. See the information provided under "Directors," above, for a description of employment history and business experience of Mr. Carballada. Donald R. Aldred (56), Senior Vice President, Business and Professional Banking Division of the Bank, commencing June 23, 1992. From 1987 to 1992, he was Senior Vice President and Manager of the Commercial Banking Division at Central Trust Company. Prior to his time with Central Trust Company, he spent 21 years with Manufacturers and Traders Trust Company progressing through numerous lending/credit functions to the position of Vice President and Manager of Commercial Finance. Robert B. Bantle (47), Senior Vice President, Community Banking Division of the Bank, commencing July 1, 1992. He was Senior Vice President, Human Resources, at Central Trust Company from 1989 until 1992. Prior to joining Central Trust Company, he spent 15 years with Security Trust/Fleet Bank in various areas, including Human Resources, Branch Administration, and Strategic Planning. Stacy C. Campbell (62), Senior Vice President and Chief Financial Officer of the Company and the Bank, commencing July 1, 1992. From 1976 to 1992, Mr. Campbell was Senior Vice President and Chief Financial Officer at Central Trust Company. Prior to joining Central Trust Company, he was employed by Marine Midland Bank N.A. in Commercial Lending, Treasury, and Financial positions. Robert E. Gilbert (51), Senior Vice President, Operations Division of the Bank, commencing June 29, 1992. From 1990 to 1992, he was a Managing Agent at the Resolution Trust Corporation. From 1975 to 1989, he worked in various capacities with Irving Bank Corporation including Executive Vice President and General Manager of Irving Services Corporation, Senior Vice President of Operations at Central Trust Company, and Vice President of Operations at Citizens Central Bank of Arcade, New York. Theresa B. Mazzullo (46), Senior Vice President, Trust & Investment Division of the Bank, commencing March 10, 1993. She was Vice President and Manager of the Personal Trust and Investment Division of The Chase Manhattan Bank, N.A. in Rochester from March 1992 until March 1993. From 1978 until 1992 she progressed through various trust positions at Central Trust Company to the level of Vice President and Manager of Trust Marketing Sales. Section 16(a) Beneficial Ownership Reporting Compliance Under Section 16 of the Securities and Exchange Act of 1934, as amended, Directors, Executive Officers, and certain other persons are required to report their ownership of equity securities of the Company, and any changes in that ownership, to the Securities and Exchange Commission and the Company. Based solely upon a review of reports furnished to the Company by such persons on Forms 3, 4, or 5 for the year ended December 31, 1998 (the "Section 16(a) Reports"), the only omission from or late filing of Section 16(a) Reports known to the Company was one omitted filing of Form 4 by Mr. Russell with respect to two transactions in the Company's stock. The transactions were subsequently reported on Form 5 for 1998. Item 11. Executive Compensation Shown below is information concerning annual and long-term compensation to certain Executive Officers for services to the Company for the years ended December 31, 1998, 1997, and 1996. The table includes information on the Company's Chief Executive Officer, Mr. Carballada, and its Chief Financial Officer, Mr. Campbell, and also on Mr. Aldred, Mr. Bantle, and Mr. Gilbert, three of the Bank's Senior Vice Presidents (the "Named Officers").
Summary Compensation Table Annual Compensation Long-Term Name and Compensation Principal Position Year Salary Bonus Securities Underlying All Other Options/SARs Compensation (1) ($) ($) (#) R. Carlos Carballada, President & 1998 $226,162` $10,886 11,000 $3,380 Chief Executive Officer 1997 $210,618 $10,531 0 $3,236 1996 $203,964 $ 8,159 0 $3,139 Donald R. Aldred, Senior Vice 1998 $122,128 $ 7,878 12,500 $1,349 President, Business & Professional 1997 $113,734 $ 7,687 0 $1,327 Banking 1996 $110,141 $ 6,406 1,000 $1,096 Robert B. Bantle, Senior Vice 1998 $109,906 $ 7,290 12,500 $2,004 President, Community Banking 1997 $102,352 $ 7,118 0 $1,964 1996 $ 99,119 $ 5,965 1,000 $1,899 Stacy C. Campbell, Senior Vice 1998 $109,902 $ 7,290 12,500 $2,104 President & Chief Financial Officer 1997 $102,349 $ 7,118 0 $1,964 1996 $ 99,116 $ 5,965 1,000 $1,899 Robert E. Gilbert, Senior Vice 1998 $110,248 $ 7,306 12,500 $1,929 President, Operations 1997 $102,671 $ 7,134 0 $1,729 1996 $ 99,428 $ 5,977 1,000 $1,714
(1) For 1998, the amount includes $2,519, $875, $1,575, $1,675 and $1,500 for Company contributions to the Company's 401(k) plan on behalf of Messrs. Carballada, Aldred, Bantle, Campbell, and Gilbert, respectively, and $861, $474, $429, $429, and $429 in group term life insurance premiums for Messrs. Carballada, Aldred, Bantle, Campbell, and Gilbert, respectively. Option Grants and Exercises Option Grants The following table details the number and terms of options granted during the last fiscal year to Named Officers. The Company's employee benefit plans do not provide for the grant of stock appreciation rights (SARs).
Option Grants in the Last Fiscal Year Potential Realizable Value at Individual Grants Assumed Annual Rates of Stock Price Appreciation for Option Term Name Number of Percent of Exercise or Expiration 5% 10% Securities Total Options Base Price Date Underlying Granted to Options Employees in Granted (1) Fiscal Year (#) ($/Share) ($) ($) R. Carlos Carballada 11,000 5.2% $21.50 5/19/08 $148,720 $376,970 Donald R. Aldred 1,000 0.5% $18.50 1/30/08 $ 11,630 $ 29,480 11,500 5.4% $21.50 5/19/08 $155,480 $394,105 Robert B. Bantle 1,000 0.5% $18.50 1/30/08 $ 11,630 $ 29,480 11,500 5.4% $21.50 5/19/08 $155,480 $394,105 Stacy C. Campbell 1,000 0.5% $18.50 1/30/08 $ 11,630 $ 29,480 11,500 5.4% $21.50 5/19/08 $155,480 $394,105 Robert E. Gilbert 1,000 0.5% $18.50 1/30/08 $ 11,630 $ 29,480 11,500 5.4% $21.50 5/19/08 $155,480 $394,105
(1) Grants with expiration dates of 1/30/08 were granted January 30, 1998 at fair market value with one-half exercisable per year commencing January 30, 1999. Assuming 5% and 10% compounded annual appreciation of the stock price over the term of the option, the price per share of common stock would be $30.13 and $47.98 respectively, on January 30, 2008. Grants with expiration dates of 5/19/08 granted May 19, 1998 at fair market value with 25% becoming exercisable when the average trading price of the stock over a 30-day period reaches $25.50, an additional 30% becoming exercisable when the average trading price of the stock over a 30-day period reaches $27.50 and the final 45% becoming exercisable when the average trading price of the stock reaches $33.50. All shares are exercisable no later than May 19, 2007 or upon a change of control of FNB Rochester Corp. Assuming 5% and 10% compounded annual appreciation of the stock price over the term of the option, the price per share of common stock would be $35.02 and $55.77 respectively, on January 30, 2008. Option Exercises The following table summarizes aggregate exercises of options by Named Officers, and the number of and the spread on unexercised options that they held at fiscal year end:
Option Exercises and Year-End Value Table Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values Number of Securities Value of Underlying Unexercised In- Name Shares Acquired Value Realized Unexercised Options the-Money Options on Exercise (#) ($) at FY-End (#) at FY-End ($) (1) Exercisable/ Exercisable/ Unexercisable Unexercisable _____________ _____________ R. Carlos Carballada 0 0 106,050/ $2,622,645/ 4,950 $56,925 Donald R. Aldred 0 0 28,325/ $651,918/ 6,175 $74,013 Robert B. Bantle 0 0 28,325/ $651,918/ 6,175 $74,013 Stacy C. Campbell 0 0 28,325/ $651,918/ 6,175 $74,013 Robert E. Gilbert 0 0 28,325/ $651,918/ 6,175 $74,013
(1) Based on the difference between the option exercise prices and $33.00, the closing price of the Company's common stock on 12/31/98 as quoted on the Nasdaq Stock Market. Retirement Plan The following table shows the estimated retirement benefits payable under the Bank's plan with the New York State Bankers Retirement System (the "Plan") to Named Officers based upon hypothetical compensation and years of service levels: Pension Plan Table Annual Benefits Per Number of Years of Service (1) Average Compensation 5 8 10 12 $100,000 $7,500 $12,000 $15,000 $18,000 $125,000 $9,375 $15,000 $18,750 $22,500 $150,000 $11,250 $18,000 $22,500 $27,000 $175,000 $13,125 $21,000 $26,250 $31,500 (1) Annual benefits equal 1.5% of Average Compensation at time of retirement multiplied by years of creditable service commencing on or after April 1, 1993. For the purposes of determining benefits under the Plan, Average Annual Compensation is the average annual compensation during the highest five consecutive years in all of the years of creditable service including salary, bonus, and other taxable compensation. Effective October 1, 1994, the maximum amount of annual compensation that is taken into account in determining benefits is $150,000. Because Mr. Carballada presently has 1.5 years of credited service at higher compensation levels, he may be entitled to benefits at retirement based on more than $150,000 of Average Compensation. The annual benefits are not subject to deduction for social security or other offsets. As of March 31, 1999, all of the Named Officers have six years of creditable service. Mr. Carballada reached his normal retirement age as defined in the Plan on April 1, 1997, when he had five years of vesting service and had reached age 62. Employment Agreement On June 8, 1992, the Company entered into a three-year employment agreement with Mr. Carballada, which was extended by the mutual consent of the parties on February 22, 1994 and June 27, 1996. The agreement, which contained certain automatic extension provisions, expires on June 30, 2000. This agreement provides for an initial annual base salary of $185,000 plus benefits, with the base amount subject to increases by the Board of Directors based on performance, inflation and other factors. The agreement is terminable by the Company at the direction of the Board of Directors. Under such circumstances, Mr. Carballada would be entitled to salary, benefits, and other compensation for the greater of one year or the remainder of the term unless his employment has been terminated for "cause" as defined in the agreement. If Mr. Carballada resigns for "good reason" as defined in the agreement, he is entitled to salary, benefits, and other compensation for the lesser of one year or the remainder of the term. Payments after termination will cease if Mr. Carballada accepts employment with any other financial institution directly in competition with the Company in one or more contiguous counties. Certain change of control provisions contained in the agreement have been superseded by a Change of Control Employment Agreement entered into between Mr. Carballada and the Company (see "Change of Control Employment Agreements," below). Change of Control Employment Agreements On February 1, 1996, the Company entered into Change of Control Employment Agreements (the "Agreements") with Mr. Carballada and with certain other senior officers of the Company, including each of the Executive Officers. The Agreements provide that in the event a "Change of Control" of the Company occurs, the Agreements will become effective and govern the terms and conditions under which the covered officer will continue to be employed by the Company. The Agreements provide that each such officer will then be employed by the Company for a period of 18 months (24 months in the case of Mr. Carballada) in the same position, with the same compensation and benefits, that applied immediately prior to the Change of Control. Under the Agreements, a Change of Control is generally defined as: (i) the acquisition by any person of beneficial ownership of 35% or more of the combined voting power of the Company's voting securities, (ii) individuals who are on the Board of Directors, or who are nominated by the Board of Directors, ceasing to constitute a majority of the Board, (iii) approval by the shareholders of the Company of a reorganization, merger or consolidation unless following the transaction more than 65% of the common stock and combined voting power of voting stock of the surviving corporation is owned in substantially the same proportions by persons who were stockholders of the Company immediately prior to the transaction, or (iv) approval by the Company's stockholders of any sale, lease, exchange or other transfer of all or substantially all of the assets of the Company other than to a controlled entity. Generally, the Agreements provide that, if the covered officer is actually or constructively terminated from his or her position during the employment period, he or she will be entitled to receive a severance payment equal to his or her annual compensation (1.67 times annual compensation in the case of Mr. Carballada). In addition, if the officer is still employed by the Company 12 months after the date of the Change of Control, the officer may during a 30 day "Window Period" voluntarily terminate his or her employment and receive a severance payment equal to one-half of annual compensation (full annual compensation in the case of Mr. Carballada). The Agreements are not intended to deter combinations, but to reduce the uncertainty and stress attendant upon a potential change of control and thereby help to retain the Company's key officers and help to assure the full and impartial consideration of any acquisition proposal by the Company's officers. The Window Period provision is intended to help hold together an effective management team for a one year period during which an acquisition may be pending but before it has been completed. Director Compensation For 1998, Directors received compensation of $500 for attendance at each Board of Directors' meeting and $300 for attendance at each Board committee meeting. No executive officer of the Company who also serves as a director receives fees for Board or committee meetings attended. The Company's 1995 Non-Employee Director Plan provides for a one-time grant of options to purchase 2,500 shares of the Company's common stock to (a) each person who was serving as a non-employee director on October 3, 1995, and (b) each person who first becomes a non-employee director after that date. Generally, such options vest over a two-year period, are exercisable at fair market value on the date of grant, and have a term of ten years. Compensation Committee Interlocks and Insider Participation Mr. Lobozzo, Mr. Falcone, Mr. Russell and Mr. Ryan are members of the Nominating and Compensation Committee of the Board of Directors. During 1998, each of the Nominating and Compensation Committee members, or members of their immediate families, borrowed or had outstanding, either directly or indirectly, loans in excess of $60,000 from the Bank. In each instance the loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectibility or present other unfavorable features. Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners The following table shows the name, address, and beneficial ownership of the Company's common stock as of March 10, 1999 of each person known to the Company to be a beneficial owner, directly or indirectly, of more than 5% of any class of its outstanding securities entitled to vote: Name and Address of Common Shares Beneficial Owner (1) (2) Beneficially Owned Percent of Class ________________________ __________________ ________________ William Levine 313,057(3) 8.6% c/o Alleson of Rochester 2921 Brighton-Henrietta Town Line Road Rochester, New York 14623 The Banc Funds 326,300(4) 8.9% 208 South LaSalle Street, Suite 200 Chicago, Illinois 60604 John Hancock Advisers, Inc. 252,587(5) 6.9% 101 Huntington Avenue Boston, Massachusetts 02199 (1) Information presented in this table has been obtained from the respective shareholder or from filings made with the Securities and Exchange Commission. Except as otherwise indicated, each holder has sole voting and investment power with respect to the shares indicated. (2) On December 9, 1998, the Company entered into a merger agreement with M&T Bank Corporation ("M&T") and granted an option to M&T to purchase up to 721,535 shares of the Company's common stock upon the occurrence of certain events, none of which has occurred. The Company's Form 8-K filed on December 17, 1998, which describes the M&T option, is incorporated herein by reference. (3) Includes 340 shares held by Mr. Levine's wife, 45,000 shares held by the William and Mildred Levine Foundation and 98,343 shares held by Mr. Levine as Trustee for the benefit of certain members of his family. (4) The Banc Funds share ownership is as follows: 35,302 shares are held by Banc Fund III L.P., an Illinois Limited Partnership; 108,198 shares are held by Banc Fund III Trust, 39,030 shares are held by Banc Fund IV L.P., an Illinois Limited Partnership, 131,270 shares are held by Banc Fund IV Trust and 12,500 shares are held by Banc Fund V L.P., an Illinois Limited Partnership Each of the foregoing entities has sole voting and investment powers with respect to the shares indicated. (5) John Hancock Advisers, Inc. has sole voting and investment powers with respect to the shares under Advisory Agreements with the following funds: John Hancock Regional Bank Fund (197,837 shares); John Hancock Financial Industries Fund (34,250 shares); and Southeastern Thrift and Bank Fund, Inc. (20,500 shares). Security Ownership of Directors and Officers The following table shows the name, address, and beneficial ownership of the Company's common stock as of March 10, 1999 of each Director of the Company, of each executive officer who is named in the Summary Compensation Table ("Named Officer") and of all directors and executive officers of the Company as a group, respectively: Name and Address* Shares owned Percent of Class ________________ ____________ ________________ R. Carlos Carballada 112,889 (1) 3.0% Michael J. Falcone 131,549 (2) 3.6% Joseph M. Lobozzo II 17,500 (3) ** Francis T. Lombardi 8,224 (2) ** Carl R. Reynolds 18,170 (2,4) ** H. Bruce Russell 7,500 (2) ** James D. Ryan 7,998 (2,5) ** Linda Cornell Weinstein 31,852 (6) ** Donald R. Aldred 31,107 (7) ** Robert B. Bantle 31,289 (7) ** Stacy C. Campbell 30,551 (7) ** Robert E. Gilbert 30,920 (7) ** All directors and executive officers as a group (13 persons) 484,580 (8) 12.4% * The address of each Director and Named Officer is c/o FNB Rochester Corp., 35 State Street, Rochester, New York 14614. ** Less than 1%. (1) Includes options to purchase 106,050 common shares that are exercisable within 60 days. (2) Includes options to purchase 2,500 common shares that are exercisable within 60 days. (3) Includes 14,500 shares held by Mr. Lobozzo's spouse, with Mr. Lobozzo sharing investment power. (4) Held jointly with Mr. Reynolds' spouse. (5) Includes 3,499 shares held by Mr. Ryan's spouse. (6)Includes 14,852 shares held by the Cornell/Weinstein Family Foundation, as to which shares Ms. Weinstein has shared voting and investment power, and 5,000 shares held by Ms. Weinstein's spouse. (7) Includes options to purchase 28,825 common shares that are exercisable within 60 days. (8) Except as otherwise indicated above, members of the group have sole voting and investment power with respect to such shares. Includes options exercisable within 60 days to purchase 257,675 shares. Item 13. Certain Relationships and Related Transactions The Bank leases the Henrietta Community Banking Office (South Town Plaza), at an annual rental of $100,667, from a partnership that includes a member of the immediate family of William A. Levine, who beneficially owns more than 5% of the Company's outstanding common stock. This lease terminates on January 31, 2016. The lease is believed to be on comparable terms to agreements for similar space similarly situated, and the space is adequate for the Company's needs. The Bank has from time to time made and has outstanding loans to executive officers, directors and shareholders owning in excess of 5% of the outstanding shares of the Company, and entities related to such persons, which loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectibility or present other unfavorable features. It is anticipated that the Bank will continue to make such loans from time to time in the future. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: (1.0) Consolidated Financial Statements, as indicated below, are filed as a part of this report at Item 8: - Independent Auditors' Report.......................................Page 34 - Consolidated Statements of Financial Condition as of December 31, 1998 and 1997.........................................Page 35 - Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996..................................Page 36 - Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997, and 1996..............Page 38 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 .................................Page 39 - Notes to Consolidated Financial Statements.........................Page 41 (2.0) Schedules Schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements or notes thereto. (3.0) Exhibits Exhibit incorporation by by Reference or page in sequential numbering where exhibit may be found: (2.1) Agreement and Plan of Reorganization, Exhibit 2.1 to Form 8-K filed dated as of December 9, 1998, among FNB December 17, 1998 Rochester Corp., M&T Bank Corporation and Olympia Financial Corp. (3.1) Certificate of Incorporation, of the Exhibits 4.2-4.5 to Registration Registrant, as amended 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 amended Form 10-K for the year ended December 31, 1992 (10.1) 1992 Stock Option Plan (as amended Appendix to Proxy Statement dated May 19, 1998)* April 15, 1998 for Annual Meeting of Shareholders held May 19, 1998 (10.2) 1995 Non-employee Director Stock Exhibit 10.2 to Annual Report on Option Plan* Form 10-K for the year ended December 31, 1997 (10.3) Employment Agreement dated June Exhibit 1 to Form 8-K filed 8, 1992 between the Registrant and R. June 23, 1992 Carlos Carballada* (10.4) Extension of Employment Exhibit 10.1 to Form 10-Q for Agreement between the Registrant and R. period ended June 30, 1996 Carlos Carballada* (10.5) Change of Control Employment Exhibit 10.4 to Annual Report on Agreement among the Registrant, Form 10-K for the year ended First National and R. Carlos Carballada* December 31, 1995 (10.6) Form of Change of Control Exhibit 10.5 to Annual Report on Employment Agreement between First Form 10-K for the year ended National and each Executive Officer December 31, 1995 other than R. Carlos Carballada* (10.7) Forms of Stock Option Agreements Exhibit 4.2 to Form S-8 pursuant to 1992 Stock Option Plan between Registration Statement No. the Registrant and each Executive Officer* 333-66413, filed October 30, 1998 (10.8) Form of Stock Option Agreement Exhibit 4.4 to Form S-8 pursuant to 1995 Non-employee Director Registration Statement No. Stock Option Plan between the Registrant 333-15325, filed November 1,1996 and each outside Director of the Registrant* (10.9) 401(k) Stock Purchase Plan * Exhibit 4.5 to Form S-8 Registration Statement No. 333-15325, filed November 1, 1996 (10.10) Employee Stock Purchase Plan * Exhibit 4.6 to Form S-8 Registration Statement No. 333-15325, filed November 1, 1996 (10.11) Loan agreement between First Page 83 National and Pyramid Sherlyle Co., related to Michael J. Falcone (10.12) Loan agreements between First Exhibit 10.19 to Form 8 filed National and Carl R. Reynolds April 22, 1992 (10.13) Commercial Line of Credit Exhibit 10.17 to Annual Report on Form agreements between First 10-K for year ended December 31, National and JML Optical Industries, 1993 Inc., related to Joseph M. Lobozzo II (10.14) Lease Agreement between Exhibit 10.2 to Form 10-Q for period Southtown Plaza Associates, related to ended June 30, 1995 William Levine, and First National (10.15) Commercial Line of Credit Exhibit 10.3 to Form 10-Q for Agreement between GLC Outsourcing period ended September 30, 1995 Services, Inc., related to James D. Ryan, and First National (10.16) Commercial Loan Agreements Exhibit 10.26 to Annual Report Form 10- between Fred Kravetz on Form 10-K for year ended and William Levine Partners, December 31, 1996 related to William Levine, and First National (10.17) Commercial Line of Credit Exhibit 10.1 to Form 10-Q for Agreement between First National and period ended September 30, 1998 James D. Ryan (10.18) Commercial Loan Agreement Page 106 between First National and Powder Mill Land Company, related to James D. Ryan (10.19) Stock Option Agreement, dated Exhibit 10.1 to Form 8-K filed as of December 9, 1998, between FNB December 17, 1998 Rochester 1998 Corp. and M&T Bank Corporation (10.20) Form of Voting Agreement, dated as Exhibit 99.1 to Form 8-K filed of December 9, 1998, between each director December 17, 1998 of FNB Rochester Corp. and M&T Bank Corporation (21) Subsidiaries Page 124 (23) Consent of KPMG LLP Page 125 (27) Financial Data Schedule Page 126 * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report pursuant to Item 14 (c). (b) Reports on Form 8-K: A Current Report on Form 8-K was filed on December 17, 1998 to disclose that an Agreement and Plan of Reorganization dated as of December 9, 1998 had been entered into among the Company, M&T Bank Corporation, a New York corporation ("M&T") and Olympia Financial Corp., a Delaware corporation and wholly-owned subsidiary of M&T ("Olympia") pursuant to which the Company will be merged with and into Olympia pursuant to the terms of an Agreement and Plan of Merger dated as of December 9, 1998 between the Company and Olympia and joined in by M&T. The proposed merger is subject to various conditions, including the approval of the shareholders of the Company and the receipt of all requisite regulatory approvals. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB ROCHESTER CORP. March 23, 1999 By: s/ R. Carlos Carballada ________________________ R. Carlos Carballada, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date _________ _____ ____ (I) Principal Executive Officer: President and Chief March 23, 1999 Executive Officer s/ R. Carlos Carballada _______________________ R. Carlos Carballada) (ii) Principal Accounting and Senior Vice President and March 23, 1999 Financial Officer: Chief Financial Officer s/ Stacy C. Campbell _____________________ (Stacy C. Campbell) (iii) Directors: s/ R. Carlos Carballada _______________________ Director March 23, 1999 (R. Carlos Carballada) ____________________ Director March __, 1999 (Michael J. Falcone) s/ Joseph M. Lobozzo II _______________________ Director March 23, 1999 (Joseph M. Lobozzo II) s/ Francis T. Lombardi ______________________ Director March 23, 1999 (Francis T. Lombardi) s/ Carl R. Reynolds Director March 23, 1999 ______________________ (Carl R. Reynolds) s/ James D. Ryan ______________________ Director March 23, 1999 (James D. Ryan) s/ H. Bruce Russell _____________________ Director March 23, 1999 (H. Bruce Russell) s/ Linda Cornell Weinstein ___________________________ Director March 23, 1999 (Linda Cornell Weinstein) INDEX OF EXHIBITS Exhibit Incorporation by Reference or page in sequential numbering where exhibit may be found: (2.1) Agreement and Plan of Reorganization, Exhibit 2.1 to Form 8-K filed dated as of December 9, 1998, among FNB December 17, 1998 Rochester 1998 Corp., M&T Bank Corporation and Olympia Financial Corp. (3.1) Certificate of Incorporation, Exhibits 4.2-4.5 to Registration of the Registrant, as amended 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 as amended Form 10-K for the year ended December 31, 1992 (10.1) 1992 Stock Option Plan Appendix to Proxy Statement dated (as amended May 19, 1998) April 15, 1998 for Annual Meeting of Shareholders held May 19, 1998 (10.2) 1995 Non-employee Director Exhibit 10.2 to Annual Report on Stock Option Plan Form 10-K for the year ended December 31, 1997 (10.3) Employment Agreement dated Exhibit 1 to Form 8-K filed June 8, 1992 between the Registrant June 23, 1992 and R. Carlos Carballada (10.4) Extension of Employment Agreement Exhibit 10.1 to Form 10-Q for between the Registrant and R. Carlos period ended June 30, 1996 Carballada (10.5) Change of Control Employment Exhibit 10.4 to Annual Report on Agreement among the Registrant, First Form 10-K for the year ended National and R. Carlos Carballada December 31, 1995 (10.6) Form of Change of Control Exhibit 10.5 to Annual Report on Employment Agreement between First Form 10-K for the year ended National and each Executive Officer December 31, 1995 other than R. Carlos Carballada (10.7) Forms of Stock Option Agreements Exhibit 4.2 to Form S-8 pursuant to 1992 Stock Option Plan between Registration Statement No. the Registrant and each Executive Officer 333-66413, filed October 30, 1998 (10.8) Form of Stock Option Agreement Exhibit 4.4 to Form S-8 pursuant to 1995 Non-employee Director Registration Statement No. Stock Option Plan between the Registrant 333-15325, filed November 1, 1996 and each outside Director of the Registrant (10.9) 401(k) Stock Purchase Plan Exhibit 4.5 to Form S-8 Registration Statement No. 333-15325, filed November 1, 1996 (10.10) Employee Stock Purchase Plan Exhibit 4.6 to Form S-8 Registration Statement No. 333-15325, filed November 1, 1996 (10.11) Loan agreements between First Page 83 National and Pyramid Sherlyle Co., related to Michael J.Falcone (10.12) Loan agreements between Exhibit 10.19 to Form 8 filed First National and Carl R. Reynolds April 22, 1992 (10.13) Line of Credit agreements Exhibit 10.17 to Annual Report on between First National and JML Form 10-K for year ended December Optical Industries, Inc., 31, 1993 related to Joseph M. Lobozzo II (10.14) Lease Agreement between Exhibit 10.2 to Form 10-Q for Southtown Plaza Associates, period ended June 30, 1995 related to William Levine, and First National (10.15) Commercial Line of Credit Exhibit 10.3 to Form 10-Q for Agreement between GLC Outsourcing period ended September 30, 1995 Services, Inc., related to James D. Ryan, and First National (10.16) Commercial Loan Agreements Exhibit 10.26 to Annual Report on between Fred Kravetz and William Form 10-K for year ended Levine Partners, related December 31, 1996 to William Levine, and First National (10.17) Commercial Line of Credit Exhibit 10.1 to Form 10-Q for Agreement between First National period ended September 30, 1998 and James D. Ryan (10.18) Commercial Loan Agreement between Page 106 First National and Powder Mill Land Company, related to James D. Ryan (10.19) Stock Option Agreement, Exhibit 10.1 to Form 8-K filed dated as of December 9, 1998, December 17, 1998 Between FNB Rochester Corp. and M&T Bank Corporation (10.20) Form of Voting Agreement, Exhibit 99.1 to Form 8-K filed dated as of December 9, 1998, between December 17, 1998 each director of FNB Rochester Corp. and M&T Bank Corporation (21) Subsidiaries Page 124 (23) Consent of KPMG LLP Page 125 (27) Financial Data Schedule Page 126 EX-10.11 2 EXHIBIT 10.11 AMENDED AND RESTATED PROMISSORY NOTE Principal Amount: $875,000.00 Syracuse, New York September 16, 1998 BORROWER: PYRAMID SHERLYLE COMPANY 1010 James Street Syracuse, New York 13203 BANK: FIRST NATIONAL BANK OF ROCHESTER BANK'S ADDRESS: 35 State Street, Rochester, New York 14614 INTEREST RATE: The interest rate per annum for the initial sixty (60) months shall be equal to seven and one half percent (7.50%). The interest rate per annum for the next sixty (60) months shall be equal to the weekly average of United States Treasury securities adjusted to a constant maturity of five (5) years plus two hundred (200) basis points as published by the United States Federal Reserve Board for the week immediately prior to the fifth (5th) anniversary of the date of this Note. The Principal Amount is being amortized over a twenty (20) year period beginning on October 1, 1998. PAYMENT SCHEDULE: This Note shall be due and payable in one hundred twenty (120) monthly installments of principal and interest combined, the initial sixty (60) payments to be equal monthly installments of principal and interest of Seven Thousand Forty Eight and 94/100 Dollars ($7,048.94), the next fifty nine (59) installments to be in an amount to be determined in accordance with the foregoing paragraph and a final installment of all remaining principal plus all accrued and unpaid interest, commencing on November 1, 1998 and continuing on the same day of each successive month until payment in full. There shall be a payment of interest only on October 1, 1998 for the period from the date of this Note through and including September 30, 1998. This Note may be prepaid, in whole or in part at any time, but each prepayment must be accompanied by prepayment charges computed as follows: if prepayment is made prior to the first anniversary of the date of this Note, Borrower shall pay Bank a prepayment charge equal to five percent (5.0%) of the principal amount prepaid. If prepayment is made after the first, but before the second, anniversary date of this Note, Borrower shall pay Bank a prepayment charge equal to four percent (4.0%) of the principal amount prepaid. If prepayment is made after the second, but before the third, anniversary date of this Note, Borrower shall pay Bank a prepayment charge equal to three percent (3.0%) of the principal amount prepaid. If prepayment is made after the third, but before the fourth, anniversary date of this Note, Borrower shall pay Bank a prepayment charge equal to two percent (2.0%) of the principal amount prepaid. If prepayment is made after the fourth anniversary date of this Note and before July 1, 2008, Borrower shall pay Bank a prepayment charge equal to one percent (1.0%) of the principal amount prepaid. NONRECOURSE OBLIGATION: Borrower shall not be liable for the payment of amounts payable under this Note. The sole recourse of the holder of this Note for the collection of such amounts shall be against the property covered by the Mortgage securing this Note and against any other collateral held by the holder as security for this Note; provided, however, that nothing herein contained shall be construed to release or impair the indebtedness evidenced by this Note or the lien of the Mortgage securing this Note. Notwithstanding the foregoing, Borrower shall be liable to Bank for any loss or damage incurred by Bank resulting from (i) Borrower's misappropriating any insurance condemnation proceeds or awards; (ii) Borrower's failing to turn over rents collected by Borrower following an event of default and an acceleration of the indebtedness evidenced by this Note to a receiver of rents appointed by a court on behalf of the Bank; (iii) Borrower's failing to comply with the provisions of the Mortgage or other loan documents relating to hazardous or toxic substances; (iv) there being any fraud or material misrepresentations by Borrower made in connection with the Bank's loan to Borrower; or (v) Borrower's failing, following an event of default and an acceleration of the indebtedness under the Note, to deliver to the Bank or a court appointed receiver of rents, on demand, all security deposits relating to the property covered by the Mortgage securing this Note. 1. Promise to Pay. FOR VALUE RECEIVED, the Borrower (jointly and severally if more than one) promises to pay to the order of the Bank, the Principal Amount; together with interest in accordance with the Payment Schedule and at the Interest Rate on the unpaid principal balance hereof from time to time outstanding. Notwithstanding the foregoing, from and after maturity (including any accelerated maturity), all principal and other amounts outstanding and payable under this Note shall bear interest at the rate of three percent (3.0%) per annum above the rate in effect at the time of acceleration or maturity. All interest payable hereunder shall be computed on the basis of the actual number of days elapsed using a three hundred sixty (360) day year. 2. Payment Provisions. All sums payable hereunder are payable in lawful money of the United States of America and in immediately available funds at the Bank's Address or at such place or places as the Bank, its successors or assigns (collectively, the "Holder"), may designate in writing. If this Note or any payment hereunder becomes due on a Saturday, Sunday or other holiday on which the Bank is authorized to close, the due date of this Note or payment shall be extended to the next succeeding business day, but any interest or fees shall be calculated based on the actual time of payment. 3. Incorporation of Mortgage. This Note is the Note referred to in, and is entitled to the benefits of, the Mortgage Modification and Extension Agreement ("Mortgage") by and between the parties of even date herewith which, among other things, contains provisions (i) for the acceleration of the maturity hereof upon the happening of certain stated events (individually and collectively in the Mortgage and in this Note, an "Event of Default"), and also (iii) for prepayment on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. 4. Late Fees. If the entire amount of any principal and/or interest is not paid in full within ten (10) days after the same is due, the Borrower shall pay to the Bank a late fee equal to six percent (6.0%) of the required payment or Fifty and 00/100 Dollars ($50.00), whichever is greater. 5. Fees and Expenses. The Borrower will pay all expenses incurred by the Holder in connection with the enforcement of the rights of the Holder in connection with this Note and the Mortgage, including, but not limited to, the reasonable fees of its counsel, plus the disbursements of said counsel. 6. Waiver. The Borrower expressly waives presentment, notice of dishonor, protest and notice of non-payment. 7. Joint and Several Obligations. If this Note is signed by more than one Borrower, all obligations of the Borrower are their joint and several obligations. 8. Choice of Law. This Note shall be construed in accordance with and governed by the local laws (excluding the conflict of laws rules, so-called) of the State of New York. PYRAMID SHERLYLE COMPANY By: Sherlyle Properties Company By: S/ Sherwood Finn ________________ Sherwood Finn, Partner MORTGAGE MODIFICATION AND EXTENSION AGREEMENT THIS MORTGAGE AGREEMENT ("Mortgage") is made September 16, 1998, by and between PYRAMID SHERLYLE COMPANY, a New York partnership with a place of business at 1010 James Street, Syracuse, New York 13202 ("Mortgagor"), and FIRST NATIONAL BANK OF ROCHESTER, a national banking association organized under the laws of the United States of America with offices at 35 State Street, Rochester, New York 14614 ("Mortgagee"). WITNESSETH: WHEREAS, Pyramid Sherlyle Company is the owner of premises located in the County of Onondaga and State of New York, as more particularly described in attached Exhibit "A" (the "Premises"); and WHEREAS, the Premises are encumbered by the lien of a certain Mortgage (hereinafter referred to as the "Existing Mortgage"), as more particularly set forth in attached Exhibit "B"; and WHEREAS, the Existing Mortgage has been assigned to the Mortgagee; and WHEREAS, the parties hereto agree that there is due and owing on the promissory note secured by the Existing Mortgage an aggregate principal balance of Nine Hundred Forty Thousand Four Hundred Fifty Two and 53/100 Dollars ($940,452.53) (the "Existing Note") with interest from the date hereof as hereinafter provided without offset or defense; and WHEREAS, the Mortgagor and the Mortgagee each desire to modify and extend the terms of the Existing Mortgage in accordance with the terms, covenants and conditions contained in this Mortgage in order to secure repayment of the indebtedness evidenced by that certain promissory note of even date herewith in the principal sum of Eight Hundred Seventy Five Thousand and 00/100 Dollars ($875,000.00), a true copy of which is attached hereto as Exhibit "C" (which note, together with any and all modifications, amendments, replacements, substitutions, extensions, renewals, consolidations and refundings thereof, is collectively referred to herein as the "Amended and Restated Note"). NOW, THEREFORE, in consideration of the mutual promises contained herein, and intending to be legally bound hereby, the parties agree as follows: 1. MODIFICATION 1.1 Amount Due. There is due and owing on the date hereof, without offset or defense, an aggregate unpaid principal balance of Nine Hundred Forty Thousand Four Hundred Fifty Two and 53/100 Dollars ($940,452.53). Subsequent to modification of the Existing Note, there will be due and owing on the date hereof, without offset or defense, an aggregate unpaid principal balance of Eight Hundred Seventy Five Thousand and 00/100 Dollars ($875,000.00) pursuant to the Amended and Restated Note. 1.2 Granting Clause. This Mortgage shall constitute a lien on all of the following described premises (collectively hereinafter referred to as the "Mortgaged Premises"), whether now owned or held or hereafter acquired: (a) all that certain plot, piece or parcel of land, with the buildings and improvements thereon erected, situate, lying and being in the County of Onondaga, and State of New York being more particularly described on Exhibit "A" annexed (the "Premises"). (b) all of the Mortgagor's right, title and interest in any and all buildings and improvements now or hereafter erected on the Premises (collectively, the "Improvements"), and all machinery, apparatus, equipment, appliances, floor coverings, furniture, furnishings, supplies, materials, fittings and fixtures of every kind and nature whatsoever, now or hereafter located in or upon, affixed to or intended for use in or upon the Premises (whether stored thereon or elsewhere), or any part thereof, now owned or hereafter acquired by Mortgagor, and used or usable in connection with any present or future operation or maintenance of the Premises, and all replacements thereof, including, but without limiting the generality of the foregoing, all heating, lighting, ventilating and power equipment, pipes, ducts, pumps, tanks, compressors, engines, motors, conduits, plumbing and cleaning equipment, fire-extinguishing systems, refrigerating and ventilating apparatus, air-cooling and air conditioning apparatus, gas, water and electrical equipment, elevators, escalators, attached cabinets, shelving, partitions, carpeting, communications equipment and all of the right, title and interest of the Mortgagor in and to any equipment which may be subject to any title retention or security agreement superior in lien to the lien of this Security Agreement (collectively, the "Equipment"); (c) all right and title of the Mortgagor in and to strips and gores of lands adjacent to or adjoining the Premises; (d) all appurtenant rights and easements, rights of way, and other rights used in connection with the Premises and/or the buildings and improvements erected thereon or to provide a means of access thereto or to provide utility service thereto, privileges, franchises, development, air and other rights and appendages now or in the future belonging to or in any way appertaining to the Premises, including without limitation, streets, alleys, water rights, mineral rights and all tenements, servitudes, hereditaments and appurtenances thereof and thereto pertaining or belonging, and all underground and overhead passageways and licenses in connection therewith; (e) all right, title and interest of the Mortgagor in and to the land lying in the streets and roads in front of and adjoining the Premises; (f) all insurance and condemnation proceeds, and the right to receive the same, and any and all awards or payments, including interest thereon, and the right to receive the same, which may be made with respect to the Mortgaged Premises as a result of (i) the alteration of the grade of any street, or (ii) any other injury to or decrease in the value of the Mortgaged Premises; (g) all present and future leases, income, rents, issues, profits and revenues of the Mortgaged Premises from time to time accruing (including without limitation, all payments under leases or tenancies) and all right, title and interest of the Mortgagor thereunder, including, without limitation, cash or securities deposited thereunder to secure performance by the lessees of their obligations thereunder, whether such cash or securities are to be held until the expiration of the terms of such leases or applied to one or more of the installments of rent coming due immediately prior to the expiration of such terms, including, further, the right upon the happening of an Event of Default (as hereinafter defined), to receive and collect the rents thereunder; (h) the right, title and interest of Mortgagor in, to and under all agreements, if any, including the proceeds from time to time payable thereunder, now or hereafter entered into for the sale and purchase of the Premises; (i) any deposits or other sums at any time credited by or due from the Mortgagee to the Mortgagor, and any securities or property of the Mortgagor which at any time are in the possession of Mortgagee may at all times be held and treated as security for the payment of the Indebtedness hereunder. The Mortgagee may apply or set off such deposits, sums, securities or property against the Indebtedness after the occurrence of an Event of Default; (j) to the extent assignable, any and all plans, specifications, drawings, renderings and schematics, from time to time prepared for use in connection with the construction of the Premises; (k) to the extent assignable, all contracts and agreements now or hereafter entered into, relating to or involving the performance of any work, rendering of any services, the supply of any materials or the conduct of operations in the management of Premises including, without limitation, construction contracts, architect agreements, management agreements, options and other agreements, affecting the Premises; (l) to the extent assignable, any and all permits, licenses, certificates, approvals, and authorizations, for theoperation and use of the Premises, including, without limitation, building permits, environmental certificates, certificates of operation, warranties and guarantees; and (m) all other title, estates, interests or rights of the Mortgagor in the Premises, whether now existing or hereafter acquired, and the Mortgagor expressly covenants and agrees that the lien of this Mortgage will attach, extend to, cover and be a lien on any leasehold, fee simple or other estate, however acquired in connection with the Premises or the Improvements. TO HAVE AND TO HOLD unto the Mortgagee, its successors and assigns forever. PROVIDED ALWAYS, that if Mortgagor shall pay in full the Indebtedness according to the conditions and agreements of the Amended and Restated Note and of this Mortgage and abide by and comply with each and every covenant and agreement set forth herein, then this Mortgage and the estate hereby granted shall cease, terminate, and become void. 1.3 Modification and Extension. The terms, provisions, covenants and conditions set forth in the Existing Mortgage, are hereby modified and amended so that the terms, provisions, covenants and conditions set forth in this Mortgage and the Amended and Restated Note shall in all respects supersede the terms, provisions, covenants and conditions of the Existing Mortgage, and the obligations secured thereby. 2. REPRESENTATIONS OF THE MORTGAGOR The Mortgagor represents and warrants to the Mortgagee as follows: 2.1 Title Warranties. The Mortgagor has good and marketable title to an indefeasible fee estate in the Mortgaged Premises, subject to the exceptions to title set forth in the title insurance policy insuring the lien of this Mortgage. This Mortgage is and shall remain a valid and enforceable first lien on the Mortgaged Premises. The Mortgagor will preserve such title, and will forever warrant and defend the validity and priority of the lien hereof against the claims of all persons and parties whomsoever. The Mortgagor will not initiate, join in or consent to any change in any covenant, zoning ordinance, easement, or other restriction, limiting or defining the uses which may be made of the Mortgaged Premises, or any part thereof, without the Mortgagee's prior written consent. 2.2 Power and Authority of Mortgagor. The Mortgagor has full power and lawful authority to subject the Mortgaged Premises to the lien of this Mortgage in the manner and form herein done or intended hereafter to be done. No consent of any other person or entity and no consent, license, approval or authorization of, exemption or registration or declaration is required by Mortgagor in connection with the execution, delivery or performance of this Mortgage or any portion thereof. 2.3 Permits for Operation of the Premises. The Mortgagor has all necessary certificates, licenses, authorizations, registrations, permits and/or approvals necessary for the use and operation of the Mortgaged Premises or any part thereof or the commencement or continuance of construction thereon, as the case may be, and the present and/or contemplated use and/or occupancy of the Premises does not conflict with or violate any such certificate, license, authorization, registration, permit and/or approval. The Premises are in full compliance with all standards and requirements specified under or required by Title III of the Americans With Disabilities Act of 1990 (the "ADA"), 42 U.S.C. 12101, et seq., including, but not limited to all applicable Accessibility Guidelines and any other regulations promulgated thereunder. 3. COVENANTS OF THE MORTGAGOR 3.1 Payment of Indebtedness. Subject to the non-recourse provisions of the Amended and Restated Note and this Mortgage, the Mortgagor will punctually pay the Amended and Restated Note according to the terms thereof and will pay all other sums now or hereafter secured hereby at the time and in the manner provided under the Amended and Restated Note, this Mortgage, and any instrument evidencing and/or securing the Indebtedness, and Mortgagor will otherwise perform, comply with and abide by each and every of the stipulations, agreements, conditions and covenants contained in the Amended and Restated Note and this Mortgage. 3.2 Payment of Realty Taxes and Assessments. The Mortgagor, from time to time when the same shall become due and payable, will pay and discharge all taxes of every kind and nature, all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges, and all other public charges whether of a like or different nature, imposed upon or assessed against the Mortgaged Premises or any part thereof or upon the revenues, rents, issues, income and profits of the Mortgaged Premises or arising in respect of the occupancy, use or possession thereof. The Mortgagor will, upon the request of the Mortgagee, deliver to the Mortgagee, receipts evidencing the payment of all such taxes, assessments, levies, fees, rents and other public charges imposed upon or assessed against the Mortgaged Premises or the revenues, rents, issues, income or profits thereof. 3.3 Mechanics Liens. The Mortgagor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers and others which, if unpaid, might result in, or permit the creation of, a lien on the Mortgaged Premises or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom and in general will do or cause to be done, everything necessary so that the lien hereof shall be fully preserved, at the cost of the Mortgagor, without expense to the Mortgagee. 3.4 Intentionally Omitted. 3.5 Insurance Requirements. The Mortgagor shall comply with all of the following provisions with regard to insurance and related matters: (a) Hazard Insurance. The Mortgagor shall keep the Improvements and the Equipment insured against loss by fire, casualty and such other risks as may be specified by and for the benefit of the Mortgagee with extended coverage endorsement, in amounts sufficient to prevent Mortgagor or Mortgagee from becoming a co-insurer of any partial loss under the applicable policies, but in any event in amounts not less than the full replacement cost of the Improvements to the Premises, without deduction for depreciation. (b) Flood Insurance. If the Premises are located in an area which has been identified by the Secretary of Housing and Urban Development as a flood hazard area, the Mortgagor will keep the Improvements covered until the repayment in full of all sums evidenced by the Amended and Restated Note by flood insurance in an amount at least equal to the full amount of the Amended and Restated Note or the maximum limit of coverage available for the Premises under the National Flood Insurance Act of 1968, whichever is less. (c) Business Interruption. Rent or business interruption insurance against loss of income arising out of any hazard against which the Premises are required to be insured hereunder, in an amount not less than reasonably determined by Mortgagee. (d) Regarding Policies. All such insurance shall be fully paid for by the Mortgagor and shall be written in forms, amounts and by companies satisfactory to the Mortgagee (Best's Rating of "A" or better) for the benefit of the Mortgagee, and losses thereunder shall be payable to the Mortgagee pursuant to a standard first mortgage endorsement substantially equivalent to the New York standard mortgagee endorsement. All policies shall require at least thirty (30) days prior written notice to Mortgagee before cancellation, amendment, non-renewal or termination. (e) Losses and Recoveries. All policy or policies of such insurance shall be delivered to the Mortgagee. Mortgagor covenants and agrees that the Mortgagee is hereby authorized and empowered, at its option, to adjust, compromise or settle any loss under any insurance policies maintained pursuant hereto, and to collect and receive the proceeds from any policy or policies. Each insurance company is hereby authorized and directed to make payment for all such losses directly to Mortgagee, instead of to Mortgagor and Mortgagee jointly. In the event any insurance company fails to disburse directly and solely to Mortgagee but disburses instead either solely to Mortgagor or to Mortgagor and Mortgagee jointly, Mortgagor agrees immediately to endorse and transfer such proceeds to Mortgagee. Upon the failure of Mortgagor to endorse and transfer such proceeds as aforesaid, Mortgagee may execute such endorsements or transfers for and in the name of Mortgagor, and Mortgagor hereby irrevocably appoints Mortgagee at its agent and attorney in-fact to do so. 3.6 Condemnation. The Mortgagor, immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Mortgaged Premises or any portion thereof, will notify the Mortgagee of the pendency of such proceedings. The Mortgagee may participate in any such proceedings and the Mortgagor from time to time will deliver to the Mortgagee all instruments requested by it to permit such participation. All condemnation awards or compensation payable in connection with condemnation of any portion of the Mortgaged Premises is hereby assigned to and in the event of such condemnation proceedings, shall be paid to the Mortgagee. The Mortgagee shall be under no obligation to question the amount of any such award or compensation and may accept the award in the amount in which the award shall be paid. In any such condemnation proceedings, the Mortgagee may be represented by counsel selected by the Mortgagee. 3.7 Application of Insurance Proceeds and Condemnation Awards. Provided that Mortgagor is not then in default of its obligations under this Mortgage, all proceeds of insurance and all proceeds of condemnation received in connection with the Mortgaged Premises or any portion thereof, after the deduction therefrom and repayment to the Mortgagee of any and all costs incurred by the Mortgagee in the recovery thereof, including attorneys' fees, may be applied by Mortgagor, at its sole option (i) to a prepayment of the Indebtedness, whether or not due, or (ii) to the repair and/or restoration of the Improvements, upon such conditions as Mortgagor may determine, all without reducing or impairing the lien of this Mortgage or any obligations secured hereby. Any balance of such proceeds then remaining shall be paid to Mortgagor or the person or entity lawfully entitled thereto. Notwithstanding anything herein to the contrary, Mortgagee shall not be obligated to see to the proper application of any amount paid over to Mortgagor and shall not be held responsible for any failure to collect any insurance proceeds due under the terms of any policy or any condemnation awards, regardless of the cause of such failure. If Mortgagor shall elect to apply such proceeds to any then unpaid installments of the principal balance of the Amended and Restated Note in the inverse order of their maturity, the regular payments, if any, under the Amended and Restated Note shall not be reduced or altered in any manner. Any reduction in the principal balance of the Indebtedness evidenced by the Amended and Restated Note from the application insurance or condemnation proceeds shall be without penalty. 3.8 Maintenance of Improvements. The Mortgagor will not threaten, commit, permit or suffer to occur any waste on the Mortgaged Premises or make any change in the use of the Mortgaged Premises which will in any way increase any ordinary fire or other hazard arising out of construction or operation. The Mortgagor will, at all times, maintain the Improvements in good operating order and condition and will promptly make, from time to time, all repairs, renewals, replacements, additions and improvements in connection therewith which are necessary or desirable to such end. The Improvements shall not be removed, demolished or substantially altered, nor shall any Equipment be removed, without the prior written consent of the Mortgagee, except where appropriate replacements of Equipment, free of superior title, liens and claims, are immediately made of value at least equal to the value of the Equipment removed. 3.9 Compliance With Laws. The Mortgagor will promptly comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental authority or court applicable to the Mortgagor or the Mortgaged Premises or any part thereof. 3.10 Escrow to Pay Realty Taxes and Insurance. If Mortgagor fails to pay any installment of taxes or an insurance premium when due, the Mortgagee shall require the deposit by the Mortgagor, at the time of each payment of any installment of interest or principal under the Amended and Restated Note, of an additional amount sufficient to discharge the obligations under Sections 3.2, 3.4 and 3.5 when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with the Mortgagee, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by the Mortgagee in its sole discretion. Such amounts shall be held by the Mortgagee without interest and applied to the payment of the obligations in respect to which such amounts were deposited or, at the option of the Mortgagee, to the payment of said obligations in such order or priority as the Mortgagee shall determine, on or before the respective dates on which the same or any of them would become delinquent. If one month prior to the due date of any of the aforementioned obligations the amount then due on deposit therefor shall be insufficient for the payment of such obligation in full, the Mortgagor, within ten (10) days after demand, shall deposit the amount of the deficiency with the Mortgagee. Nothing herein contained shall be deemed to affect any right or remedy of the Mortgagee under any provisions of this Mortgage or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the legal rate to the indebtedness hereby secured. 3.11 Financial Records. The Mortgagor will keep adequate records and books of account in accordance with generally accepted accounting principles consistently applied and will permit the Mortgagee, by its agents, accountants and attorneys, to visit and inspect the Mortgaged Premises and examine its records and books of account and make copies of same and to discuss its affairs, finances and accounts with the officers of the Mortgagor, at such reasonable times as may be required by the Mortgagee. 3.12 Financial Statements. The Mortgagor will deliver to the Mortgagee compilation level financial statements in such form and detail as required by Mortgagee within one hundred twenty (120) days after the end of Mortgagor's fiscal year prepared by a certified public accountant and satisfactory to Mortgagee. In addition, all guarantors of the Amended and Restated Note shall annually provide to Mortgagee their fully executed, personal financial statements in such form and detail as may be required by Mortgagee, together with their fully executed, United States Personal Income Tax Returns, with all schedules attached. 3.13 Estoppel Certificates. The Mortgagor, within three (3) days upon request in person or within five (5) days upon request by mail, will furnish to Mortgagee a written statement duly acknowledged of the amount due whether for principal or interest on this Mortgage and whether any offsets of defenses exist against the Mortgagee. 3.14 Real Property Law Sec. 291-f. The Mortgagor shall not, without the prior written consent of the Mortgagee, accept prepayments of rents more than one month in advance or modify, amend, extend, cancel or accept surrender of any lease or sublease of the Mortgaged Premises. The agreement contained in this Section has been made with reference to Section 291-f of the New York Real Property Law. 3.15 Assignment of Rents. The Mortgagor hereby assigns to the Mortgagee all of its right, title and interest to the rents, issues and profits of the Mortgaged Premises as further security for the payment of the Indebtedness, and the Mortgagor grants to the Mortgagee the right to enter upon and to take possession of the Mortgaged Premises for the purpose of collecting the rents and to let the Mortgaged Premises or any part of them, and to apply the sums, rents, issues and profits, after payment of all necessary charges and expenses, on account of the Indebtedness. This assignment and grant shall continue in effect until all sums secured by this Mortgage are paid. The Mortgagee hereby waives the right to enter upon and to take possession of the Mortgaged Premises for the purpose of collecting those sums, rents, issues and profits, and the Mortgagor shall be entitled to collect and receive those sums, rents, issues and profits until an Event of Default (as defined in Section 5 hereof) shall occur, and agrees to use those sums, rents, issues and profits in payment of principal and interest becoming due on this Mortgage and in payment of taxes, assessments, sewer rents, water rents and carrying charges becoming due against the Mortgaged Premises, but that right of the Mortgagor may be revoked by the Mortgagee upon an Event of Default. The Mortgagor will not, without the written consent of the Mortgagee, receive or collect rent from any tenant of the Mortgaged Premises or any part thereof for a period of more than one month in advance, and upon an Event of Default under this Mortgage will pay monthly in advance to the Mortgagee, or to any receiver appointed to collect those rents, issues and profits, the fair and reasonable rental value for the use and occupation of the Mortgaged Premises or of such part as may be in the possession of the Mortgagor, and upon default in any such payment will vacate and surrender the possession of the Mortgaged Premises to the Mortgagee or to such receiver, and in default of that payment may be evicted by summary proceedings. 3.16 Effect of Sale or Transfer. The entire unpaid principal of the Amended and Restated Note then outstanding (if not then due and payable) and all accrued and unpaid interest thereon shall at the election of the Mortgagee become due and payable immediately in the event of the sale, conveyance, exchange, assignment or other transfer (whether by gift, bequest, operation of law, merger, acquisition, consolidation or any other method or manner whatsoever) (i) of the Mortgaged Premises or any portion thereof or interest therein; or (ii) any of the Mortgaged Premises, rents, revenues, proceeds, issues, profits or income stream of the Mortgaged Premises or any portion thereof. For purposes of this Section, if the Mortgagor is a partnership or corporation, a sale, transfer, or change in ownership percentage, of more than fifty percent (50%) of the Partnership interests or stock, as the case may be, shall be deemed a transfer. Notwithstanding the foregoing a sale, transfer, or change in ownership percentage, of more than 50% of the partnership interests of Mortgagor shall not be deemed a transfer violative of this paragraph if made by reason of the death, disability or estate planning of any individual partner of Mortgagor. 3.17 Environmental Matters. (a) As used herein the term "Hazardous Substance" means any substance (i) the presence of which requires investigation or remediation under any law; or (ii) which is or becomes defined as a "hazardous waste", "hazardous substance", "toxic substance, pollutant or contaminant" under the Comprehensive Environmental Response, Compensation and Liability Act, as amended (42 U.S.C. section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.) as amended and/or the Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801 et seq.) and/or the Toxic Substances Control Act, as amended (U.S.C. Section 2601, et seq.), and/or Articles 15 or 27 of the New York State Environmental Conservation Law, or any other applicable law or any regulations promulgated under any of the foregoing; or (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, the State of New York or any political subdivision thereof; or (iv) the presence of which on the Mortgaged Premises causes or threatens to cause a nuisance upon the Mortgaged Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Mortgaged Premises; or (v) which contains gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) which contains polychlorinated biphenols (PCBs), asbestos or urea formaldehyde foam insulation. (b) The Mortgagor shall keep or cause the Mortgaged Premises to be kept free of Hazardous Substances, except as permitted by this Section. The Mortgagor shall comply with and ensure compliance by all tenants and subtenants with all applicable federal, state and local laws, ordinances, rules and regulations, and with administrative or consent orders issued by governmental agencies. The Mortgagor shall promptly provide Mortgagee with a copy of all notifications which it gives or receives relating to any past or present release or the threat of any release of Hazardous Substances on or from the Mortgaged Premises or any adjacent property. The Mortgagor shall conduct and complete all investigations and testing, and all remedial, removal, and other actions necessary to clean up and remove all Hazardous Substances, on, from, or affecting the Mortgaged Premises (i) in accordance with all applicable federal, state and local laws, ordinances, rules, regulations, and policies, and (ii) in accordance with the orders and directives of all federal, state and local governmental authorities. (c) The Mortgagor shall defend, indemnify, and hold harmless the Mortgagee, its employees, agents, officers, and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to, the presence, disposal, release, or threatened release of any Hazardous Substances including, without limitation, attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. The provisions of this paragraph shall be in addition to any and all other obligations and liabilities the Mortgagor may have to the Mortgagee at common law or by separate agreement, and shall survive payment in full of the Indebtedness, foreclosure of this Mortgage, or acceptance by Mortgagee or its nominee of a deed in lieu of foreclosure. 3.18 Leases. The Mortgagor will not execute any lease (which term shall also include subleases as the context may require) of any portion of the Mortgaged Premises except with the prior written consent of the Mortgagee. Mortgagor shall (i) fulfill or perform each and every material provision of any lease or leases of the Mortgaged Premises on the part of Mortgagor to be fulfilled or performed, (ii) promptly send to Mortgagee copies of all notices of default which Mortgagor shall send or receive under such leases and (iii) enforce the performance or observance of the material provisions of such leases by the tenants thereunder. 3.19 Further Assurances. The Mortgagor will, at the cost of the Mortgagor, and without expense to the Mortgagee, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignment, transfers and assures as the Mortgagee shall from time to time require, for the better assuring, conveying, assigning, transferring and confirming unto the Mortgagee the property and rights hereby conveyed or assigned or intended now or hereafter so to be, or which the Mortgagor may be or may hereafter become bound to convey or assign to the Mortgagee, or for carrying out the intention or facilitating the performance of the terms of this Mortgage, or for filing, registering or recording this Mortgage and, on demand, will execute and deliver, and hereby authorizes the Mortgagee to execute and file in the name of the Mortgagor, to the extent it may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien hereof upon the Equipment. 3.20 Intentionally Omitted. 3.21 Advances to Cure Defaults. If the Mortgagor shall fail to perform any of the covenants contained in this Mortgage involving the payment of money within fifteen (15) days after notice and demand for payment thereof from Mortgagee, Mortgagee may make advances to perform the same on its behalf, and all sums so advanced shall be a lien upon the Mortgaged Premises and shall be secured hereby. The Mortgagor will repay on demand all sums so advanced on its behalf with interest at the rate provided in the Amended and Restated Note plus 300 basis points (3.0%) (the "Default Rate"). The provisions of this Section shall not prevent any default in the observance of any covenant contained in any of said sections from constituting an Event of Default. 3.22 Corporate Existence. The Mortgagor, if a corporation will, so long as it is the owner of the Mortgaged Premises, do all things necessary to preserve and keep in full force and effect, its existence, franchises, rights and privileges as a business or stock corporation under the laws of the state of its incorporation and the state where the property is located. 3.23 Liens. Except for Permitted Liens, Mortgagor will not create, incur, assume or suffer to exist any lien or encumbrance on or with respect to the Mortgaged Premises or any part thereof or Mortgagor's or Mortgagee's interest therein or any income or profits arising therefrom, irrespective of whether such lien or encumbrance is junior to the lien of this Mortgage. As used herein, the term "Permitted Liens" shall mean: (a) mechanics' liens or liens for real property taxes and assessments either not delinquent or being contested in good faith and by appropriate proceedings, provided, however, that the Mortgagor may in good faith contest such liens or taxes only if (i) it shall have first notified Mortgagee of such contest, (ii) no Event of Default under this Mortgage shall have occurred and be continuing, and (iii) the Mortgage shall have set aside adequate reserves for any such taxes or liens. If the Mortgagor demonstrates to the satisfaction of the Mortgagee and certifies to the Mortgagee by delivery of a written certificate that the nonpayment of any such items will not endanger the lien of this Mortgage as to any part of the Mortgaged Premises or subject the Mortgaged Premises or any part thereof to loss or forfeiture, the Mortgagor may permit such liens or taxes so contested to remain unpaid during the period of such contest and any appeal therefrom. Otherwise, such liens and taxes shall be paid promptly by the Mortgagor or secured by the Mortgagor's posting a bond in form and substance satisfactory to the Mortgagee. (b) utility, access and other easements and rights of way that benefit or do not materially impair the utility or the value of the Mortgaged Premises affected thereby for the purposes for which it is intended. (c) liens or encumbrances listed in any title insurance policy issued to Mortgagee in connection with this Mortgage. 3.24 Expenses Incurred in Protecting or Enforcing Rights. If Mortgagee shall incur or expend any sums, including reasonable attorneys' fees, to the extent permitted by law, whether in connection with any action or proceeding or not, to sustain the lien of this Mortgage or its priority, or to protect or enforce any of its rights hereunder, or to recover any indebtedness hereby secured, or for any title examination or title insurance policy relating to the title to the Mortgaged Premises if obtained for any of the purposes described in this paragraph, all such sums, to the extent permitted by law, shall on notice and demand be paid or caused to be paid by Mortgagor, together with interest thereon at the Default Rate and shall be a lien on the Mortgaged Premises, if and to the extent permitted by applicable law, prior to any right of title to, interest in or claim upon, the Mortgaged Premises subordinate to the lien of this Mortgage, and shall be deemed to be part of the debt secured hereby. 4. SECURITY AGREEMENT 4.1 Grant of Security. This Mortgage shall, in addition to constituting a mortgage, constitute a Security Agreement within the meaning of the Uniform Commercial Code with respect to (a) all machinery, apparatus, equipment, appliances, floor coverings, furniture, furnishings, supplies, materials, fittings and fixtures of every kind and nature whatsoever, now or hereafter located in or upon, affixed to or intended for use in or upon the Premises (whether stored thereon or elsewhere), or any part thereof, now owned or hereafter acquired by Mortgagor, and used or usable in connection with any present or future operation or maintenance of the Premises, and all replacements thereof, including, but without limiting the generality of the foregoing, all heating, lighting, ventilating and power equipment, pipes, ducts, pumps, tanks, compressors, engines, motors, conduits, plumbing and cleaning equipment, fire-extinguishing systems, refrigerating and ventilating apparatus, air-cooling and air conditioning apparatus, gas, water and electrical equipment, elevators, escalators, attached cabinets, shelving, partitions, carpeting, communications equipment and all of the right, title and interest of the Mortgagor in and to any equipment which may be subject to any title retention or security agreement superior in lien to the lien of this Security Agreement (collectively, the "Equipment"), (b) if such property includes any instruments, all instrument collateral, (c) the proceeds, products and accessions thereof and thereto, (d) all replacements and substitutions therefor, and (e) to the extent not otherwise included, all records (including but not limited to records maintained on computer software) of debtor evidencing or otherwise relating to the things referred to in this sentence (subsections "a", "b", "c", "d" and "e" shall, collectively, be referred to as the "Collateral"). The Mortgagor hereby grants the Mortgagee a security interest in and to the Collateral for the benefit of the Mortgagee to secure the payment of the Indebtedness. Mortgagor will not sell or offer to sell or otherwise transfer the Collateral or any interest in it nor remove the Collateral from the State of New York. 4.2 Financing Statements. No financing statement executed by Mortgagor covering the Equipment or any part of it or any proceeds from it is on file in any public office, and at the request of Mortgagee the Mortgagor will join with Mortgagee in executing one or more financing statements in a form satisfactory to Mortgagee and will pay the costs of filing same in all public offices wherever filing is considered by Mortgagee to be necessary or desirable. In addition, Mortgagor hereby authorizes Mortgagee (as Secured Party) to file without the signature of the Mortgagor, one or more financing statements in all public offices wherever Mortgagee considers filing to be necessary or desirable and Mortgagor will pay such filing costs. 4.3 Multiple Remedies. Upon the occurrence of an Event of Default as defined in Section 5, Mortgagee shall have the rights and remedies provided by the applicable laws, including, but not limited to, the New York Uniform Commercial Code and this Mortgage; the right to enter on the Mortgaged Premises or any other place or places where the Equipment or any part of it may be; the right to take possession of the Equipment with or without demand or with or without process of law, using whatever force may be necessary, including forcible entry of the building in which the Equipment or any part of it may be found or located; and the right to sell and dispose of the Equipment and distribute the proceeds according to law. All requirements of reasonable notice shall be met if Mortgagee sends notice to Mortgagor at least five (5) days prior to the date of sale, disposition or other event giving rise to the required notice. Public sale of the Equipment by auction conducted in any county in which the Equipment was repossessed or in which the Premises are located, after advertisement of the time and place of the sale in a newspaper circulated in the county, city or village in which the sale is to be held, shall be considered to be a commercially reasonable disposition of the Equipment. Mortgagee may bid at any sale held pursuant to these provisions after the occurrence of an Event of Default. At the request of Mortgagee, the Mortgagor shall assemble the Equipment and make it available to the Mortgagee upon the Mortgaged Premises at such time as Mortgagee reasonably may specify. Mortgagee may sell the Equipment or any part of it at any private sale. Notwithstanding anything contained herein to the contrary, upon the occurrence of an Event of Default hereunder, Mortgagee shall have the option of proceeding as to both real and personal property in accordance with its rights and remedies in respect of the real property, in which event the default provisions of the Uniform Commercial Code shall not apply. 4.4 Expenses of Disposition of Equipment. The Mortgagor shall reimburse the Mortgagee, on demand, for all reasonable expenses of retaking, holding, preparing for sale, lease or other use or disposition, selling, leasing or otherwise using or disposing of the Equipment which are incurred or paid by the Mortgagee, including, without limitation, all attorneys' fees, legal expenses and costs, and all such expenses shall be added to the Mortgagor's obligations to the Mortgagee and shall be secured hereby. 5. EVENTS OF DEFAULT Each and every one of the following constitutes an Event of Default under this Mortgage: 5.1 Monetary Defaults. Failure by Mortgagor to pay (i) any installment of principal or interest under the Amended and Restated Note or other indebtedness secured by this Mortgage or any other sum that may be due and payable under this Mortgage or any instrument secured hereby, within fifteen (15) days from the date when due and payable. 5.2 Defaults In Other Covenants. Failure by Mortgagor duly to observe or perform any other covenant or condition on the part of the Mortgagor in the Amended and Restated Note, or in this Mortgage contained, and such default shall have continued for a period of thirty (30) days after the Mortgagor has actual knowledge (including, but not limited to, any written notice from Mortgagee) of such default. If the default cannot reasonably be cured within the thirty (30) day period Mortgagor shall not be in default provided Mortgagor commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default. 5.3 Appointment of Receiver. The appointment, by the order of a court of competent jurisdiction, of a trustee, receiver (except pursuant to Section 6.12 hereof) or liquidator of the Mortgaged Premises or any part thereof, or of the Mortgagor, and such order shall not be discharged or dismissed within sixty (60) days after such appointment. 5.4 Voluntary Bankruptcy. The filing by the Mortgagor of a petition in bankruptcy or for reorganization of the Mortgagor pursuant to the Federal Bankruptcy Code or any similar law, federal or state, or the Mortgagor's making an assignment for the benefit of the creditors, or admitting in writing its inability to pay its debts generally as they become due, or consenting to the appointment of a receiver or receivers of all or any part of its property. 5.5 Involuntary Bankruptcy. The filing by any of the creditors of the Mortgagor of a petition in bankruptcy against the Mortgagor or for reorganization of the Mortgagor pursuant to the Federal Bankruptcy Code or any similar law, federal or state, and such petition shall not be discharged or dismissed within sixty (60) days after the date on which the petition was filed. 5.6 Monetary Judgments and Tax Liens. The rendering of final judgment for the payment of money, against the Mortgagor, or the filing of any tax lien against the Premises, and the Mortgagor shall not discharge the same or cause it to be discharged within sixty (60) days from the entry thereof, or shall not appeal therefrom or from the order, decree or process upon which or pursuant to which said judgment was granted, based or entered, and secure a stay of execution pending such appeal. 5.7 Adjudication of Bankruptcy. The adjudication or declaration, by decree of a court of competent jurisdiction, that the Mortgagor is a bankrupt or insolvent. 5.8 Matters Involving any Guarantor. Any of the events described in Sections 5.4, 5.5, 5.6 or 5.7 shall happen to any Guarantor or to the property of any Guarantor. 5.9 Illegality of Obligation to Pay Certain Taxes. It shall be or become illegal for the Mortgagor to pay any tax referred to in Section 3.4 hereof or the payment of such tax by the Mortgagor would result in the violation of the usury laws of the state in which the Premises are located. 5.10 Intentionally Omitted. 5.11 Intentionally Omitted. 5.12 Other Security Interest or Encumbrance. The creation or sufferance by the Mortgagor of an assignment, mortgage or other security interest or encumbrance in any manner of its interest in the whole or any part of the Mortgaged Premises or of the Improvements or of the rents, revenues, proceeds, issues and profits of any part thereof or the income stream therefrom (other than such other assignments, mortgages, security interests or encumbrances as may be held by the Mortgagee), in each case without the prior written consent of the Mortgagee. 5.13 Untrue Representations and Warranties. Should any representation or warranty made by the Mortgagor in this Mortgage prove to be materially untrue. 6. REMEDIES OF MORTGAGEE 6.1 Acceleration of Debt. During the continuance of any Event of Default, the Mortgagee, by written notice given to the Mortgagor, may declare the entire Indebtedness (including, but not limited to, the Amended and Restated Note) then outstanding (if not then due and payable), and all accrued and unpaid interest thereon, to be due and payable immediately, and upon any such declaration, the Indebtedness accrued and unpaid interest thereon shall become and be immediately due and payable, anything in the Amended and Restated Note or in this Mortgage to the contrary notwithstanding. 6.2 Entry to Premises. To the extent permitted by law, during the continuance of any Event of Default, the Mortgagee personally, or by its agents or attorneys, may enter into and upon all or any part of the Mortgaged Premises, and each and every part thereof, and may exclude the Mortgagor, its agents and servants wholly therefrom; and having and holding the same, may use, operate, manage and control the Mortgaged Premises and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers. 6.3 Maintenance and Management. Following any entry contemplated by Section 6.2 or any other entry by Mortgagee following an Event of Default, the Mortgagee, at the expense of the Mortgagor, from time to time, either by purchase, repairs or construction, may maintain and restore the Mortgaged Premises, whereof it shall become possessed as aforesaid; and likewise, from time to time, at the expense of the Mortgagor, the Mortgagee may make all necessary or proper repairs, renewals and replacements and such useful alterations, additions, betterments and improvements thereto and thereon as to it may seem advisable and may complete the construction of the Improvements and in the course of such completion may make such changes in the contemplated Improvements as it may deem desirable and may insure same; and in every such case the Mortgagee shall have the right to manage and operate the Mortgaged Premises and to carry on the business thereof and exercise all rights and powers of the Mortgagor with respect thereto either in the name of the Mortgagor or otherwise as it shall deem best. 6.4 Rents, Issues, Profits, Etc. Following the occurrence of any Event of Default, the Mortgagee shall be entitled to collect and receive all earnings, revenues, rents, issues, profits and income of the Mortgaged Premises and every part thereof, all of which shall for all purposes constitute property of the Mortgagee; and, after deducting the expenses of conducting the business thereof and of all maintenance, repairs, renewals, replacements, alterations, additions, betterments and improvements and amounts necessary to pay for taxes, assessments, insurance and prior or other proper charges upon the Mortgaged Premises or any part thereof, as well as just and reasonable compensation for the services of the Mortgagee and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, the Mortgagee shall apply the balance of the moneys arising as aforesaid as provided in Section 6.11 hereof. 6.5 Foreclosure. Following the occurrence of any Event of Default, the Mortgagee may institute proceedings for the complete or partial foreclosure of this Mortgage. Mortgagor waives all rights, legal and equitable, it may now or hereafter have to require marshaling of assets or to require upon foreclosure the sale of assets in a particular order. 6.6 Other Actions or Proceedings. Following the occurrence of any Event of Default, the Mortgagee may, personally or by its agents or attorneys insofar as may be applicable, take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Amended and Restated Note or in this Mortgage or in any other instrument or document executed in connection with the loan secured hereby, or in aid of the execution of any power herein or therein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as the Mortgagee shall elect. 6.7 Adjournment of Sale. The Mortgagee may adjourn from time to time any sale by it to be made under or by virtue of this Mortgage by announcement at the time and place appointed for such sale or for such adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, the Mortgagee, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. 6.8 Deficiencies. Subject to the non-recourse provisions of the Amended and Restated Note and this Mortgage, in the event of a sale of the Mortgaged Premises, and of the application of the proceeds of sale, as provided in this Mortgage, to the payment of the debt hereby secured, the Mortgagee shall be entitled to enforce payment of, and to receive all amounts then remaining due and unpaid upon, the Amended and Restated Note, and to enforce payment of all other charges, payments, and costs due under this Mortgage or under any other instrument or document executed in connection with the loan secured hereby, and shall be entitled to recover judgment for any portion of the debt remaining unpaid, with interest. 6.9 Enforcement of Monetary Obligations. Subject to the non-recourse provisions of the Amended and Restated Note and this Mortgage, in the event the Mortgagor should fail forthwith to pay such amounts upon such demand, the Mortgagee shall be entitled and empowered to institute such action or proceedings at law or in equity as may be advised by its counsel for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Mortgagor and collect, out of the property of the Mortgagor, wherever situated, as well as out of the Mortgaged Premises, in any manner provided by law, moneys adjudged or decreed to be payable. The Mortgagee shall be entitled to recover judgment as aforesaid either before or after or during the pendency of any proceedings for the enforcement of the provisions of this Mortgage; and the right of the Mortgagee to recover such judgment shall not be affected by any entry or sale hereunder or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Mortgage or of any other instrument or document executed in connection with the loan secured hereby, or the foreclosure of the lien hereof. In case of proceedings against the Mortgagor in insolvency or bankruptcy or any proceedings for its reorganization or involving the liquidation of its assets, then the Mortgagee shall be entitled to prove the whole amount of principal and interest due upon the Amended and Restated Note to the full amount thereof, and all other payments, charges and costs due under this Mortgage or under any other instrument or document executed in connection with the loan secured hereby, without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Premises. 6.10 Effect of Recoveries. To the extent permitted by law, no recovery of any judgment by the Mortgagor and no levy of an execution under any judgment upon the Mortgaged Premises or upon any other property of the Mortgagor shall affect in any manner or to the extent, the lien of this Mortgage upon the Mortgaged Premises or any part thereof, or any liens, rights, powers or remedies of the Mortgagee hereunder, but such liens, rights, powers and remedies of the Mortgagee shall continue unimpaired as before. 6.11 Application of Proceeds of Sale or Judgments or Collections. The purchase money, proceeds or avails of any sale made under or by virtue of this Section 6, together with any other sums which then may be held by the Mortgagee under this Mortgage, whether under the provisions of this Section 6 or otherwise, together with any other sums which Mortgagee may collect by enforcement of judgments or otherwise in accordance with Section 6.9 shall be applied as follows: FIRST: To the payment of all court costs, all reasonable expenses of such sale (including attorneys' fees and expenses incurred on behalf of Mortgagee), all reasonable costs and expenses of any receiver, and all taxes, assessments or charges, which are prior to the lien of this Mortgage, except any taxes, assessments or other charges subject to which the Mortgaged Premises shall have been sold. SECOND: To the payment of the whole amount then due, owing or unpaid upon the Indebtedness, other than Indebtedness evidenced by the Amended and Restated Note, with interest on the unpaid principal thereof at the Default Rate from and after the happening of any Event of Default described in Section 5 from the due date of any such payment of principal until the same is paid. THIRD: To the payment of all amounts of principal and interest at the time due and payable on the Amended and Restated Note (whether at maturity or by prepayment or by declaration or otherwise), and including, to the extent permitted under applicable law, interest on any overdue interest at the Default Rate. FOURTH: The balance, if any, received or held by Mortgagee after payment in full of all amounts referred to above, shall, unless a court of competent jurisdiction may otherwise direct, be paid to or upon the direction of Mortgagor. 6.12 Appointment of Receiver. After the happening of any Event of Default and during its continuance, or upon the commencement of any proceedings to foreclose this Mortgage or to enforce the specific performance hereof or in aid thereof or upon the commencement of any other judicial proceeding to enforce any right of the Mortgagee, the Mortgagee shall be entitled, as a matter of right, if it shall so elect, without the giving of notice to any other party and without regard to the adequacy or inadequacy of any security for the Indebtedness secured by this Mortgage, forthwith either before or after declaring the unpaid principal of the Amended and Restated Note to be due and payable, to the appointment of a receiver or receivers. If required by the Mortgagee, Mortgagor shall confirm its consent to the appointment of a receiver or receivers of the Mortgaged Premises and of all earnings, revenues, rents, issues, profits and income thereof. Notwithstanding the appointment of any receiver, liquidator or trustee of the Mortgagor, or of any of its property, or the Mortgaged Premises or any part thereof, the Mortgagee shall be entitled to retain possession and control of all property now or hereafter held under this Mortgage. 6.13 No Reinstatement. If an Event of Default under Section 5 shall have occurred and Mortgagee shall have proceeded to enforce any right, power or remedy permitted hereunder, then a tender of payment by Mortgagor or by anyone on behalf of Mortgagor of the amount necessary to satisfy less than all of the sums due hereunder (including the entire amount due of the Indebtedness following an acceleration thereof) made at any time prior to foreclosure, or the acceptance by Mortgagee of any such partial payment so tendered, shall not constitute a reinstatement of the Amended and Restated Note or this Mortgage. 6.14 General Statements Regarding Remedies. Subject to the non-recourse provisions of the Amended and Restated Note and this Mortgage, no remedy herein conferred upon or reserved to the Mortgagee is intended to be exclusive of any other remedy or remedies, each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of the Mortgagee to exercise any right or power accruing upon any Event of Default shall impair any such right or power, or shall be construed to be a waiver of any such Event of Default or any acquiescence therein; and every power and remedy given by this Mortgage to the Mortgagee may be exercised from time to time as often as may be deemed expedient by the Mortgagee. Subject to the non-recourse provisions of the Amended and Restated Note and this Mortgage, nothing in this Mortgage or in the Amended and Restated Note or in any other instrument or document executed in connection with the loan secured hereby shall affect the obligation of the Mortgagor to pay the principal of, and interest on, the Amended and Restated Note in the manner and at the time and place therein respectively expressed. 7. MISCELLANEOUS 7.1 Severability. In the event any one or more of the provisions contained in this Mortgage or in the Amended and Restated Note or in any other instrument or document executed in connection with the loan secured hereby shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall, at the option of the Mortgagee, not affect any other provisions of this Mortgage, but this Mortgage shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. 7.2 Notices. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes when presented personally or sent by registered mail or certified mail, return receipt requested, to any party hereto at its address above stated or at such other address of which it shall have notified the party giving such notice in writing. Whenever in this Mortgage the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person or persons entitled to receive such notice. 7.3 Successors and Assigns. All of the grants, covenants, terms, provisions and conditions herein shall run with the land and shall apply to, bind and inure to the benefit of, the successors and assigns of the Mortgagor and the indorsees, transferees, successors and assigns of the Mortgagee. 7.4 Waivers, Extensions. Modifications and Amendments. (a) The Mortgagor recognizes that, in general, borrowers who experience difficulties in honoring their loan obligations, in an effort to inhibit or impede lenders from exercising the rights and remedies available to lenders pursuant to mortgages, notes, loan agreements or other instruments evidencing or affecting loan transactions, frequently present in court the argument, without merit, that some loan officer or administrator of lender made an oral modification or made some statement which could be interpreted as an extension or modification or amendment of one or more debt instruments and that the borrower relied to its detriment upon such "oral modification of the loan document." For that reason, and in order to protect the Mortgagee from such allegations in connection with the transaction contemplated by this Mortgage, the Mortgagor acknowledges that this Mortgage, the Amended and Restated Note, and all instruments referred to in any of them can be extended, modified or amended only in writing executed by the Mortgagee and that none of the rights or benefits of the Mortgagee can be waived permanently except in a written document executed by the Mortgagee. The Mortgagor further acknowledges the Mortgagor's understanding that no officer or administrator of the Mortgagee has the power or the authority from the Mortgagee to make an oral extension or modification or amendment of any such instrument or agreement on behalf of the Mortgagee. (b) If the Mortgagee (i) grants forbearance or an extension of time for payment of any sums secured hereby; (ii) takes other or additional security for the payment of any sums secured hereby; (iii) waives or does not exercise any right granted herein or in the Amended and Restated Note; (iv) releases any part of the Mortgaged Premises from the lien of this Mortgage or otherwise changes any of the terms, covenants, conditions or agreements of the Amended and Restated Note or this Mortgage; (v) consents to the filing of any map, plat or replat affecting the Mortgaged Premises; or (vi) makes or consents to any agreement subordinating the lien hereof, any such act or omission shall not release, discharge, modify, change or affect the original liability under the Amended and Restated Note, this Mortgage, the Indebtedness, or any other obligation of Mortgagor or any subsequent purchaser of the Mortgaged Premises or any part thereof, or any maker, co signer, endorser, surety or guarantor; nor shall any such act or omission preclude Mortgagee from exercising any right, power or privilege granted or intended to be granted in the event of any default then made or of any subsequent default. 7.5 Limitation on Interest. This Mortgage and the Amended and Restated Note are subject to the express condition that at no time shall Mortgagor be obligated or required to pay interest on the principal balance due under the Amended and Restated Note at a rate which could subject the holder of the Amended and Restated Note to either civil or criminal liability as a result of being in excess of the maximum interest rate which Mortgagor is permitted by law to contract or agree to pay. If by the terms of this Mortgage or the Amended and Restated Note, Mortgagor is at any time required or obligated to pay interest on the principal balance due under the Amended and Restated Note at a rate in excess of such maximum rate, the rate of interest under the Amended and Restated Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Amended and Restated Note. 7.6 Waiver of Jury Trial. Both Mortgagor and Mortgagee hereby irrevocably waive all right to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Mortgage. 7.7 Counterparts. This Mortgage may be executed in any number of counterparts and each of such counter parts shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Mortgage. 7.8 Joint and Several Liability. If the Mortgagor is comprised of more than one party, such parties shall be jointly and severally bound and liable under this Mortgage. 7.9 Time of the Essence. TIME IS OF THE ESSENCE with respect to each and every covenant, agreement, and obligation of the Mortgagor under this Mortgage, the Amended and Restated Note and any and all other loan documents. 7.10 Governing Law. This Mortgage shall be construed and enforced in accordance with the laws of the State of New York. 7.11 Trust Fund Provisions. This Mortgage is subject to the trust fund provisions of Section 13 of the Lien Law. 7.12 Nonrecourse Obligation. Mortgagor shall not be liable for the payment of amounts payable under or secured by this Mortgage. The sole recourse of the holder of this Mortgage for the collection of such amounts shall be against the property covered by the Mortgage and against any other collateral held by the holder hereof as security for the Amended and Restated Note; provided, however, that nothing herein contained shall be construed to release or impair the indebtedness evidenced by the Amended and Restated Note or the lien of this Mortgage. Notwithstanding the foregoing, Mortgagor shall be liable to Mortgagee for any loss or damage incurred by Mortgagee resulting from (i) Mortgagor's misappropriating any insurance condemnation proceeds or awards; (ii) Mortgagor's failing to turn over rents collected by Mortgagor following an event of default and an acceleration of the indebtedness evidenced by the Amended and Restated Note to a receiver of rents appointed by a court on behalf of the Mortgagee; (iii) Mortgagor's failing to comply with the provisions of this Mortgage or other loan documents relating to hazardous or toxic substances; (iv) there being any fraud or material misrepresentations by Mortgagor made in connection with the Mortgagee's loan to Mortgagor; or (v) Mortgagor's failing, following an event of default and an acceleration of the indebtedness under the Amended and Restated Note, to deliver to the Mortgagee or a court appointed receiver of rents, on demand, all security deposits relating to the property covered by this Mortgage. IN WITNESS WHEREOF, this Mortgage has been duly executed by the Mortgagor. PYRAMID SHERLYLE COMPANY By: Sherlyle Properties Company, Partner By: s/ Sherwood Finn ________________ Sherwood Finn, Partner FIRST NATIONAL BANK OF ROCHESTER By: s/ David T. Reaske ___________________ David T. Reaske, Vice President EXHIBIT "A" All that tract or parcel of land, situate in the City of Syracuse, County of Onondaga and State of New York, being part of Farm Lot No. 241 and part of block no. four hundred fifty one (451) bounded and described as follows: Beginning at a point in the center line of Oak Street and two hundred sixty feet (260) feet north from the intersection of the said center line with the north line of James Street; thence east parallel with the north line of James Street one hundred and eighty three (183) feet; thence north parallel with the center line of Oak Street Seventy five (75) feet; thence west parallel with the north line of James Street to the center of Oak Street; thence south along the center line of Oak Street seventy five (75) feet to the place of beginning. Also all that tract or parcel of land, situate in the City of Syracuse, County of Onondaga and State of New York and known and distinguished on a map of said City made by Borden and Griffin as being part of block number four hundred fifty one (451) Syracuse and bounded and described as follows, viz: Beginning at the intersection of the center of Oak Street with the northerly line of James Street; thence easterly on the northerly line of James Street to a point one hundred fifty (150) feet east of the east line of Oak Street; thence northerly parallel to Oak Street two hundred sixty (260) feet; thence westerly parallel to James Street to the center of Oak Street; thence southerly on the center of Oak Street two hundred sixty (260) feet to the place of beginning. Also all that tract or parcel of land situate in the City of Syracuse, County of Onondaga and State of New York known and distinguished as being part of Farm Lot No. 241 in said City and also part of block number 451 Syracuse, New York, described as follows: Beginning at a point in the easterly line of the premises of Minnie B. Martin 232 feet north of the intersection of the easterly line of the said Minnie B. Martin's premises with the northerly line of James Street running thence northerly and parallel with the center line of Oak Street 194 feet to the southerly line of lands conveyed by John A. Weis and tine J. Weis, his wife, by Carleton A. Chase being deed dated August 16,1 912 and recorded in the Onondaga County Clerk's Office on August 28, 1912 in Book 427 of Deeds at Page 19 etc., thence westerly and along the southerly line of lands so conveyed to said John A. Weis and Tine J. Weis, his wife, and lands conveyed by the said Chase to the Tine J. Weis by another deed dated August 16, 1912 and recorded in said Clerk's Office on August 28, 1912 in Book 427 of Deeds at Page 20 etc., 87 feet more or less to the northeasterly line of lands devised to Marjory H.C. Bell by the Will of said Carleton A. Chase; thence southerly along the line of the lands so devised to Marjory H.C. Bell and parallel with the easterly line of Oak Street 91 feet more or less to southeasterly corner of said lands so devised to said Marjory H.C. Bell as aforesaid; thence southwesterly along the southerly line of said lands so devised to said Marjory H.C. Bell as aforesaid and parallel with James Street 54 feet to the westerly line of lands owned by said Carleton A. Chase at the time of his death which line was the westerly line of the premises which were conveyed to the said Carleton A. Chase by Clifford D. Beebe and wife by deed dated July 25, 1911 and recorded in said Clerk's Office on August 1, 1911 in Book 408 of Deeds at Page 367 etc., thence southerly along the westerly line of said lands so conveyed to said Chase by said Beebe and wife and parallel with the center line of Oak Street 106 feet to a point; thence easterly and parallel with the northerly line of James Street 141.03 feet to the place of beginning. The above premises are more particularly described according to a recent survey made by Lehr Land Surveyors dated August 25, 1998 as follows: ALL THAT TRACT OR PARCEL OF LAND situate in the City of Syracuse, County of Onondaga and State of New York and being a portion of Block #451, in said City and being more particularly described as follows: BEGINNING at the intersection of the present northwesterly line of James Street with the present northeasterly line of Oak Street; thence N.34-17'10"W., along said northeasterly line of Oak Street, a distance of 334.59 feet to a point; thence N.55-42'-20"E., a distance of 204.00 feet to the most easterly corner of property now or formerly owned by M.E. DeRosa, as recorded in the Onondaga County Clerks Office, in Liber of Deeds #3671, Page #1; thence N.34-17'-10"W., along the northeasterly line of said DeRosa property, a distance of 91.00 feet to the most northerly corner of said DeRosa property; thence N.55-42'-20"E., a distance of 87.00 feet to a point; thence S.34-17'10"E., along the southwesterly lines of properties now or formerly owned by T.D. & A.A. Summers and M.A. Conti, a distance of 193.80 feet to the most northerly corner of property now or formerly owned by A.J. & M.P. Vigliotti, as recorded in the Onondaga County Clerk's Office in Liber of Deeds #3618, Page #311; thence S.54-31'-42"W., along the northwesterly line of said Vigliotti property, a distance of 141.03 feet to a point; thence S.34-17'-10"E., along the southwesterly line of said Vigliotti property, a distance of 229.00 feet to its intersection with said northwesterly line of James Street; thence S.55-44'-50"W., along said northwesterly line of James Street, a distance of 150.00 feet to the place of beginning. EXHIBIT "B" Mortgage in the amount of $1,100,000.00 made by Pyramid Sherlyle Company, Inc. to the Savings Bank of Utica dated and recorded September 15, 1972 in the Onondaga County Clerk's Office in Book of Mortgages 2478 at Page 505&c. Mortgage Consolidation and Modification Agreement in the amount of $255,153.45 made by Pyramid Sherlyle Company to the Savings Bank of Utica dated July 29, 1986 and recorded July 30, 1986 in the Onondaga County Clerk's Office in Book of Mortgages 4101 at page 84&c. Note: The above mortgages were consolidated and modified to constitute a single lien in the amount of $1,100,000.00 by Agreement dated July 29, 1986 and recorded on July 30, 1986 in the Onondaga County Clerk's Office in Book 4101 at Page 84&c. Note: The above mortgage was assigned to John Alden Life Insurance Company of New York by Assignment dated October 27, 1989 and recorded October 31, 1989 in Book 5344 at Page 154. Loan Extension Agreement by and between Pyramid Sherlyle Company and John Alden Life Insurance Company of New York dated October 6, 1997 and recorded October 28, 1997 in the Onondaga County Clerk's Office in Book 9218 at page 49 to secure the sum of $966,782 EXHIBIT "C" [Form of Note] LIMITED GUARANTY OF PAYMENT Borrower: PYRAMID SHERLYLE COMPANY Dated: September 14, 1998 In consideration of a loan in the principal amount of Eight Hundred Seventy Five Thousand and 00/100 Dollars ($875,000.00) (the "Indebtedness") by First National Bank of Rochester, a national banking association having its chief executive office at 35 State Street, Rochester, New York 14614 ("Bank"), to the entity identified above as "Borrower," the undersigned ("Guarantor") does hereby agree and make this Guaranty as follows: 1. Definition of Certain Terms. As used in this Guaranty: (a) "Obligations" shall mean and include the Indebtedness, and all liabilities and obligations of Borrower to Bank related to the Indebtedness (including, but not limited to, any Borrower obligation to pay principal, interest, costs, expenses and attorneys' fees) and all extensions, renewals and modifications thereof; (b) "Collateral" shall mean all property, real, personal (including both tangible and intangible personal property) and mixed, located at premises owned by Borrower and commonly known as 1001 James Street, Syracuse, New York and upon which there has been conveyed or will be conveyed by Borrower to Bank a security interest and mortgage to secure payment of the Indebtedness (collectively, the "Mortgage"); and (c) "Event of Default" shall mean (i) any event or condition of default under any agreement between Borrower and Bank governing or related to the Obligations including, but not limited to, a failure to make payment when due under the note evidencing the Indebtedness (the "Note") or the Mortgage; and (ii) any other event, occurrence or condition that results in the Obligations, or any part of the Obligations, being immediately due and payable by Borrower to Bank. 2. Unconditional Guaranty of Payment. Guarantor does hereby unconditionally guarantee the punctual payment to Bank when due, whether at a stated maturity, by acceleration or otherwise, of fifty percent (50%) of any sums necessary for Borrower or Bank to discharge the Obligations, in accordance with the terms and provisions of the Note, Mortgage and all other loan documents executed by Borrower related to the Indebtedness (the Note, Mortgage and all other loan documents executed by Borrower related to the Indebtedness shall hereinafter, collectively, be referred to as the "Loan Documents") and subject to all rights of Bank arising from or related to the Obligations. The duty, liability and obligation of Guarantor pursuant to this Guaranty shall not be diminished, altered, terminated or changed in any respect, notwithstanding any law, regulation, decree, action, proceeding, equitable doctrine or other circumstance that would or might otherwise diminish, alter, terminate, void or change the liability or obligations of Borrower, any other guarantor or any other entity or person to pay any or all of the Obligations. Any payments required to be made pursuant to this Guaranty shall be made in United States dollars in immediately available funds at such place and time as shall be designated by Bank. This Guaranty shall be construed at all times to be a guaranty of payment and not a guaranty of collection. 3. Certain Rights of Bank. Bank, in its sole discretion and without notice to or further assent from Guarantor at any time or from time to time, either before or after the occurrence of an Event of Default, and without diminishing, altering, terminating or changing in any respect the liability and Obligations of Guarantor pursuant to this Guaranty, may: (a) decrease the amount of, extend, change, or amend the time, manner, place, amount or terms of payment of the Obligations; (b) exchange, release, surrender, substitute or sell any Collateral, or fail unintentionally or otherwise to perfect its interest or create a valid security interest in any of the Collateral; (c) waive, fail to exercise or delay in exercising any right or remedy granted to Bank by any agreement or by law with respect to Borrower, the Obligations, any guarantor or the Collateral; (d) release, agree not to sue, settle or compromise with Borrower, any guarantor or any other entity or person who is otherwise obligated to pay the Obligations; (e) subordinate the payment of the Obligations to the payment of any other debt owed by Borrower to any other entity or person; (f) sell or purchase all or any part of the Collateral at any public or private sale, and after deduction of all expenses incurred therefor, including attorneys' fees, apply the proceeds to the Obligations in such manner as is set forth in the Mortgage; or (g) act or refuse to act in any other manner which might constitute a legal or equitable discharge or defense of a guarantor. 4. Financial Information. Until there are no further Obligations outstanding between Borrower and Bank, Guarantor shall provide Bank, promptly upon Bank's request, with (a) annual personal financial statements fully executed by Guarantor, in form satisfactory to Bank; and (b) a copy of Guarantor's fully executed annual federal income tax return, together with all schedules attached. 5. Bank's Rights Upon Event of Default. Upon the occurrence of any Event of Default, or at any time thereafter, the Obligations, at the sole option of Bank, shall immediately become due and payable in full, together with interest and all costs and expenses of enforcing this Guaranty or the Obligations, including court costs and reasonable attorneys' fees. In such circumstances, the liability of Guarantor to Bank shall be absolute, and it shall not constitute a defense, counterclaim, set-off or recoupment thereto that Bank has not made any demand or instituted any action or proceeding against Borrower or against any other party who may be liable for all or any of the Obligations or that Bank has not validly taken or perfected a security interest in the Collateral or has not or has improperly foreclosed upon the Collateral or any part of it, nor shall Bank be required to perform any of the above acts against Borrower, any guarantor or the Collateral as a condition to enforcing its rights against Guarantor in accordance with the terms of this Guaranty. 6. Persons or Entities Bound. If this Guaranty is executed by two or more persons or entities, they shall be jointly and severally liable, and all provisions of this Guaranty shall apply to them. The termination of this Guaranty or similar agreement as to one or more of such persons or entities shall not terminate this Guaranty as to any remaining persons or entities. This Guaranty shall be binding upon the heirs, executors, trustees, transferees, administrators, assigns and successors of Guarantor and shall inure to the benefit of and be enforceable by Bank, its successors, transferees and assigns. 7. Reinstatement of Guarantor's Liability. In the event any payment or recovery is received by Bank with respect to the Obligations during the time that this Guaranty is effective and such payment or recovery is subsequently invalidated, declared fraudulent or preferential or otherwise set aside under the terms of any federal or state law or equitable doctrine, then the liability of Guarantor shall be reinstated and Guarantor shall be responsible for the amount of such payment or recovery to Bank under the terms of this Guaranty, notwithstanding the fact that this Guaranty was terminated voluntarily or by law at the time that the payment or recovery was set aside or invalidated as described above. 8. Waiver of Subrogation and Similar Rights. Until the Obligations are finally and irrevocably paid in full, Guarantor irrevocably waives each and every right of subrogation, indemnity, contribution and reimbursement and each and every similar right that Guarantor would have against either or both of Borrower and any other guarantor of the Obligations because of any payment by Guarantor of any portion of the Obligations or because of the provision by Guarantor of any collateral security for such Obligations. To the extent that any of the foregoing rights survive such waiver, Guarantor assigns such rights to Bank as collateral security for payment of the Obligations. 9. New York Law; Consent to Jurisdiction and Venue; Waiver of Trial by Jury. This Guaranty shall be governed by and interpreted and enforced in accordance with the internal law of the State of New York, without regard to principles of conflict of laws. Guarantor consents to the jurisdiction of the courts of the State of New York and agrees that any court located in the county in which Bank has its chief executive office shall be the proper forum for any action or proceeding between them unless either (a) Bank, in its sole discretion, chooses another forum or (b) applicable law requires another forum. Guarantor also waives the right to assert in any such action or proceeding any unrelated offsets or counterclaims which it may otherwise have or claim to have. GUARANTOR AND BANK WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BETWEEN THEM BASED UPON, ARISING OUT OF, OR IN ANY WAY CONNECTED TO, THIS GUARANTY, THE OBLIGATIONS, OR ANY TRANSACTION CONTEMPLATED HEREBY. 10. Certain Consents and Waivers; Miscellaneous Provisions. (a) Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of the Guaranty in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. (b) This Guaranty constitutes the final, complete and exclusive agreement between Bank and Guarantor with respect to the guarantee by Guarantor of the Obligations. (c) No delay by Bank in exercising any right hereunder, or under the Obligations, shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude other or further exercises thereof or the exercise of any other right. No waiver, amendment, modification or release of this Guaranty or any provision of this Guaranty or of the Obligations shall be enforceable against Bank unless it is in a writing signed by an officer of Bank and expressly referring to this Guaranty. (d) All rights granted Bank pursuant to this Guaranty shall be cumulative and shall be in addition to those granted or available to Bank with respect to the Obligations, any other guaranty agreement and under applicable law, and nothing herein shall be construed as limiting any such other right. (e) Guarantor represents and warrants that the execution, delivery and performance of this Guaranty does not and will not contravene any law, agreement, charter, by-law or undertaking to which it is a party or by which it may in any way be bound. (f) Guarantor waives notice of presentment, dishonor and protest of the Obligations and of this Guaranty, and furthermore waives promptness in the commencement of any action relating to this Guaranty or the Obligations and in the giving of notice or making of demand upon it or upon any other entity or person. (g) Words of the neuter gender may mean and include correlative words of the masculine and feminine gender as appropriate and vice versa. Words noting the singular number shall mean and include the plural number as appropriate and vice versa. (h) The headings used in this Guaranty are for convenience only and are not of substantive effect. s/ Robert J. Congel ___________________ Robert J. Congel s/ Michael J. Falcone _____________________ Michael J. Falcone EX-10.18 3 EXHIBIT 10.18 MORTGAGE NOTE Rochester, New York $530,000.00 October 6, 1998 FOR VALUE RECEIVED, the undersigned, POWDER MILL LAND COMPANY, with offices at 15 Fishers Road, Suite 220, Pittsford, New York 14534, ( the "Borrower" or "Mortgagor"), promises to pay to the order of FIRST NATIONAL BANK OF ROCHESTER (the "Bank" or "Mortgagee"), a national banking association with its principal office at 35 State Street, Rochester, New York 14614 in lawful money of the United States and in immediately available funds, the sum of Five Hundred Thirty Thousand and No/100 Dollars ($530,000.00) (the "Principal Sum") and interest on the unpaid portion of the Principal Sum as provided below (collectively the "Loan"). Definitions As used in this Note, the following capitalized terms shall have the meanings set forth below: "Holder" means the Holder of this Note. "Loan Documents" mean this Note and the Mortgage secured thereby. "Maturity Date" means October 6, 2008. "Mortgage" means the Mortgage of even date herewith securing this Note. "Person" means any individual, partnership, corporation, trust or unincorporated organization, and any government agency or political subdivision or branch thereof. "Premises" means certain real property owned by Mortgagor commonly known as Powder Mill Office Park, Building No. 1, located at 1151 Pittsford-Victor Road, in the Town of Perinton, County of Monroe, and State of New York. "Taxes" mean all real estate and similar taxes and assessments (including assessments for local or municipal improvements and payments in lieu of taxes), personal property taxes and assessments, sales, use and occupancy taxes, water and sewer rates, rents and charges, water pollution control charges, charges for public utilities, fees for governmental approvals, and all other governmental charges and fees, of any kind and nature whatsoever, which may at any time during the term of the Loan be assessed or levied against or imposed upon or be payable with respect to or become a lien on the Premises or any part thereof. Introduction This Note is secured by a Mortgage of even date herewith on the Premises. Payment Terms (a) During the first five (5) years of the term of the Loan beginning on the date hereof, interest shall be fixed at and accrue on the Principal Sum or so much thereof as is outstanding from time to time at the rate of 7.90% per annum. On the first day November, 1998, Mortgagor shall make one (1) payment of interest only to the Bank. Thereafter, on the first day of December, 1998, and on the first day of each and every month thereafter during said first five (5) years of the term, Mortgagor shall make a constant monthly payment of principal and interest to Bank in the sum of Four Thousand Four Hundred and 20/100 Dollars ($4,400.20). (b) On the fifth annual anniversary of the date hereof, the interest rate shall be modified to a rate of 2.25% per annum higher than the weekly average yield on United States Treasury securities adjusted to a constant maturity of five (5) years, as made available by the Federal Reserve Board for the week immediately prior to said fifth anniversary, or if such yield is not so published, a similar rate based on a comparable index chosen by the Bank in its sole discretion; the interest rate shall be fixed at and accrue on the Principal Sum or so much there as is outstanding from time to time at such modified rate until the Maturity Date. (c) The principal and interest payment shall be readjusted as of the first day of the second month following the interest rate adjustment in subparagraph (b) above in order to fully re-amortize the Loan over the months remaining in the original amortization period of the Loan. (d) The entire unpaid Principal Sum of the Loan, together with all accrued and unpaid interest thereon, shall become due and payable on the Maturity Date, (e) Interest shall be calculated on the basis of a year consisting of 360 days for the actual number of days any portion of the principal amount of the Loan is outstanding. There shall be no negative amortization. Prepayment The Mortgagor shall have the option of paying the Loan to the Holder in advance in full, or in part, at any time and from time to time upon written notice received by the Holder at least 30 days prior to making such payment; provided, however, that upon making any payment in full or in part, the Mortgagor shall pay to the Holder all interest and all other amounts owing pursuant to this Note and remaining unpaid, and together with any such payment in full the Mortgagor shall pay to the Holder (a) a premium equal to 5% of the amount prepaid if paid on or after the date hereof and before October 6, 1999, (b) a premium equal to 4% of the amount prepaid if paid on or after October 6, 1999, and before October 6, 2000, (c) a premium equal to 3% of the amount prepaid if paid on or after October 6, 2000, and before October 6, 2001, (d) a premium equal to 2% of the amount prepaid if paid on or after October 6, 2001, and before October 6, 2002, (e) a premium equal to 1% of the amount prepaid if paid on or after October 6, 2002, and before October 6, 2008. In the event the Maturity Date of this Note is accelerated following a default by the Mortgagor, any tender of payment of the amount necessary to satisfy the entire indebtedness made after such default shall be expressly deemed a voluntary payment. In such a case, to the extent permitted by law, the Holder shall be entitled to the amount necessary to satisfy the entire indebtedness plus the appropriate prepayment premium in accordance with the terms of this Note. Tax Escrow In the event of any delinquency by Mortgagor in the payment of any Taxes or installments thereof due on the Premises, and failure to pay in full and cure said delinquency upon five (5) days notice thereof from Bank to Mortgagor, then in order to more fully protect the security of the Mortgage, the Bank, in addition to and without prejudice to its continuing right to demand immediate payment of any said delinquencies, may at its option require Mortgagor to deposit with the Mortgagee concurrently with payments of interest and principal and in addition thereto on each monthly due date as set forth above after the date hereof until this Note is fully paid, a sum equal to the Taxes due on the premises (all as estimated annually by the Mortgagee) less all sums already deposited therefor divided by the number of months to elapse before one month prior to the date when such Taxes will become due, such sums to be held by the Mortgagee to pay said items. All payments calculated as aforesaid in the preceding portion of this paragraph and all payments of principal and interest shall be added together and the aggregate amount thereof shall be paid by the Mortgagor each month in a single payment to be applied by the Mortgagor to the following items in the order set forth: (a) Taxes, (b) late payment charges, (c) interest; (d) principal. Any deficiency in the amount of such aggregate monthly payment shall, unless paid prior to the due date of the next such payment, constitute a default under this mortgage, whereupon at the option of the Mortgagee the whole of the principal sum and any other sums of money secured by this Mortgage shall forthwith or thereafter become due and payable. Any excess funds accumulated under the provisions of this paragraph after the payment of the items herein mentioned shall be credited to subsequent monthly payments of the same nature required hereunder; but if any such item shall exceed the estimate therefor, the Mortgagor shall without demand forthwith pay the deficiency. Place of Payment All payments of principal and interest required to be made hereunder, and all other sums due hereunder, shall be payable to Mortgagee at 35 State Street, Rochester, New York 14614 or at such other office or place as Mortgagee may designate in writing. Late Payment Charge If the Borrower defaults in the making of any payment owing pursuant to this Note for more than ten (10) days after due, the Borrower shall immediately pay to the Holder of this Note a late charge equal to Fifty Dollars ($50.00), or 6% of the total of such payment due, whichever is greater. Events of Default The payment of this Note is secured by the Mortgage. Upon or at any time or from time to time after the occurrence or existence of any event or condition specified in this Note or the Mortgage as an Event of Default and the passage of any applicable grace period in connection therewith, all amounts owing pursuant to this Note shall, at the sole option of the Holder and without any notice, demand, presentment or protest of any kind (each of which is waived by the Borrower), become immediately due. Without limitation thereto by the specification thereof, either of the following shall be deemed events of default: (i) any transfer of any legal or equitable interest in the Premises or any portion thereof without the Bank's prior written consent, which may be withheld in its sole and absolute discretion, except upon written notice to Mortgagee, transfers between and among the partners of the Mortgagor and between and among immediate family members of the Mortgagors, shall be permitted. However, all obligations of James D. Ryan, Philip A. O'Brien and Daniel C. O'Brien under the Guarantees and all other documents, as applicable, will remain in full force and effect. (ii) the placement of any other mortgage, security interest, or other lien or encumbrance on the Premises or any portion thereof without the Bank's prior written consent, which may be withheld in its sole and absolute discretion. Acceptance of payments by the Mortgagee subsequent to any such conveyance, transfer, or encumbering shall not be deemed a waiver of any of the Mortgagee's rights. Post-Maturity Date and Default Rate On each day subsequent to the Maturity Date or an event of default, whether by acceleration or otherwise, the Borrower shall pay interest on the outstanding Principal Sum at a rate per year equal to 3% above the rate otherwise applicable during the term of the Loan immediately prior to said Maturity Date or event of default; provided, however, that (i) in no event shall such interest be payable at a rate in excess of the maximum rate permitted by applicable law and (ii) solely to the extent necessary to result in such interest not being payable at a rate in excess of such maximum rate, any amount that would be treated as part of such interest under a final judicial interpretation of applicable law shall be deemed to have been a mistake and automatically canceled, and, if received by the Bank, shall be refunded to the Borrower, it being the intention of the Bank and of the Borrower that such interest not be payable at a rate in excess of such maximum rate. Mortgagor To Pay Expenses The Borrower shall pay to the Holder on demand each cost and expense (including, but not limited to, the reasonable fees and disbursements of counsel to the Holder, whether retained for advice, for litigation or for any other purpose) incurred by the Holder, in endeavoring to (1) collect any amount owing pursuant to this Note, (2) enforce, or realize upon, any guaranty, endorsement or other assurance, any collateral or other security or any subordination, directly or indirectly securing, or otherwise directly or indirectly applicable to, any such amount or (3) preserve or exercise any right or remedy of the Holder pursuant to this Note. Waivers and Consents To the extent permitted by law, Mortgagor (a) waives and renounces any and all exemption rights and the benefit of all valuation and appraisal privileges as against the indebtedness secured by the Mortgage or any renewal or extension thereof, (b) waives presentment or payment, demand, protest, notice of protest and notice of dishonor and any and all lack of diligence or delays in the collection or enforcement of said indebtedness, (c) waives the right to assert in any foreclosure action any defense based upon or relating to the failure by Mortgagee to produce and/or introduce into evidence in such action any of the notes, bonds or other obligations which are secured by the Mortgage other than this Note and (d) consents to any extension of time, release of any collateral securing this Note, acceptance of other collateral therefor, or any other indulgence or forbearance whatsoever. Any such extension, release, acceptance, indulgence or forbearance may be made, to the extent permitted by law, without notice to Mortgagor. Compliance with Usury Requirements This Note is subject to the express condition that at no time shall Mortgagor be obligated or required to pay interest on the principal amount of the Loan at a rate which could subject Mortgagee to either civil or criminal liability as a result of being in excess of the maximum interest rate which Mortgagor is permitted by law to contract or agree to pay. If by the terms of this Note Mortgagor would at any time be required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and the interest payable thereafter shall be computed at a rate not to exceed such maximum rate and all previous payments in excess of such maximum rate shall be deemed to have been payments in reduction of the principal balance of the Loan instead of payments of interest thereon. Modifications and Amendments No change, amendment, modification, cancellation or discharge of this Note, or of any part hereof, shall be valid unless Mortgagee shall have consented thereto in writing. Successors and Assigns The covenants and obligations of this Note shall be binding upon Mortgagor, its successors and assigns and shall inure to the benefit of Mortgagee, its successors and assigns and all subsequent holders of the Mortgage. Financial Statements The Borrower shall provide to the Bank a signed federal income tax return with all schedules attached, satisfactory to the Bank, within 120 days after the end of each fiscal year of Borrower. Governing Law This Note shall be governed by and construed in accordance with the laws of the State of New York. Waiver of Trial By Jury TO THE EXTENT PERMITTED BY LAW, MORTGAGOR WAIVES THE RIGHT TO TRIAL BY JURY IN ANY FORECLOSURE ACTION. IN WITNESS WHEREOF, Mortgagor has caused this Note to be duly executed as of the day and year first above written. POWDER MILL LAND COMPANY By: S/ James D. Ryan _________________ JAMES D. RYAN Its General Partner Locol Properties By: S/ David C. O'Brien ___________________ DAVID C. O'BRIEN Its General Partner MORTGAGE THIS MORTGAGE, made the 6th day of October, 1998, between POWDER MILL LAND COMPANY, a New York Limited Liability Company, with its principal office at 15 Fishers Road, Suite 220, Pittsford, New York 14534, (herein called the "Mortgagor"), and FIRST NATIONAL BANK OF ROCHESTER, a national banking association with its principal office at 35 State Street, Rochester, New York 14614, (herein called the "Mortgagee"). WITNESSETH, to secure the payment of an indebtedness in the sum of Five Hundred Thirty Thousand and No/100 ($530,000.00) lawful money of the United States (or so much as may be advanced) to be paid with interest thereon to be computed from the date hereof, to be paid according to a certain Mortgage Note, bearing even date herewith ("Note"), together with all refinancings, modifications, extensions or renewals thereof, the Mortgagor hereby mortgages to the Mortgagee the premises described in Schedule "A" attached hereto and made a part hereof (herein called the "Mortgaged Premises" or "Premises"). TOGETHER with all the right, title and interest of the Mortgagor in and to any and all unearned premiums accrued, accruing or to accrue under any and all insurance policies now or hereafter obtained by the Mortgagor on the Mortgaged Premises, TOGETHER with the appurtenances and all the estate and rights of the Mortgagor in and to said Premises, TOGETHER with all and singular the tenements, hereditaments, and appurtenances belonging or in anyway appertaining to said Premises, and the reversions, remainder and remainders, rents, issues and profits thereof, TOGETHER with and including any and all strips and gores of land adjoining or abutting said Premises, TOGETHER with all right, title, and interest of the Mortgagor in and to the land lying in the bed of any street, road, avenue or alley open or proposed, in front of, running through or adjoining said Premises, TOGETHER with all buildings, structures, and improvements now or at any time hereafter erected, constructed or situated upon the Premises, and apparatus, fixtures, chattels, and articles of personal property now or hereafter attached to or used in connection with said Premises, including but not limited to furnaces, boilers, oil boilers, radiators and piping, coal stokers, plumbing and bathroom fixtures, refrigeration, air conditioning and sprinkler systems, wash-tubs, sinks, gas and electric fixtures, stoves, ranges, awnings, screens, window shades, elevators, motors, dynamos, refrigerators, kitchen cabinets, incinerators, plants and shrubbery and all other equipment and machinery, appliances, fittings and fixtures of every kind in or used in the operation of the buildings standing on said Premises, together with any and all replacements thereof and additions thereto. TOGETHER with all awards heretofore and hereafter made to the Mortgagor for taking by eminent domain the whole or any part of said Premises or any easement therein, including any awards for changes of grade of streets, which said awards are hereby assigned to the Mortgagee, who is hereby authorized to collect and receive the proceeds of such awards and to give proper receipts and acquittances therefor, and to apply the same toward the payment of the mortgage debt, notwithstanding the fact that the amount owing thereof may not then be due and payable; and the said Mortgagor hereby agrees, upon request, to make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning said awards to the Mortgagee, free, clear, and discharged of any encumbrances of any kind or nature whatsoever, The Mortgagor covenants with the Mortgagee that: PAY INDEBTEDNESS. The Mortgagor will pay the indebtedness secured hereby with interest thereon as herein provided and according to the Note, and if default shall be made in the payment of part thereof, the Mortgagee shall have power to sell the Mortgaged Premises according to law. INSURANCE. The Mortgagor will keep the buildings on the Premises and the fixtures and articles of personal property covered by the Mortgage insured against loss by fire and other hazards, casualties and contingencies, including flood insurance if required by law, regulation or Mortgagee, for the benefit of the Mortgagee in an amount not less than the unpaid principal balance due hereunder. The fire insurance policy as required hereby shall contain the usual extended coverage endorsement and shall provide for twenty (20) days written notice to Mortgagee prior to cancellation. In addition thereto the Mortgagor within thirty (30) days after notice and demand will keep the Premises insured against war risk and any other hazard that may reasonably be required by law, regulation or Mortgagee. The Mortgagor will assign and deliver said policies to the Mortgagee and the Mortgagor will reimburse the Mortgagee for any premiums paid for the insurance made by the Mortgagee on the Mortgagor's default in so insuring the buildings or in so assigning and delivering the policies. All the provisions of this paragraph or of any other provisions of the Mortgage pertaining to fire insurance or any other additional insurance which may be required hereunder shall be construed in accordance with Section 254 Subdivision 4 of the New York Real Property Law, but, said section to the contrary notwithstanding, the Mortgagor consents that the Mortgagee may without qualification or limitation by virtue of said section, retain and apply the proceeds of any such insurance in satisfaction or reduction of the Mortgage, or it may at its election pay the same, either in whole or in part, to the Mortgagor or his heirs or assigns for the repair or replacement of the buildings or of the insured articles of personal property or for any other purpose or object satisfactory to the holder of the Mortgage, and if the Mortgagee shall receive and retain such insurance money, the lien of the Mortgage shall be affected only by a reduction of the amount of such lien by the amount of such insurance money received and retained by the Mortgagee. ALTERATIONS, DEMOLITION OR REMOVAL. No building, fixtures or personal property covered by the Mortgage shall be removed, demolished, or substantially altered without the prior written consent of the Mortgagee except in accordance with a Building Loan Agreement dated even date herewith. WASTE, MAINTENANCE AND REPAIRS. The Mortgagor will not commit any waste on the Premises or make any change in the use of the Premises which will in any way increase any ordinary fire or other hazard arising out of the construction or operation. The Mortgagor will keep and maintain or cause to be kept and maintained all buildings and other improvements now or at any time hereafter erected upon or constituting any portion of the Mortgaged Premises, and the sidewalks and curbs abutting the same, in good order and condition and in a rentable and tenantable state or repair, and will make or cause to be made, as and when the same shall become necessary, all structural and non-structural exterior and interior, ordinary and extraordinary, foreseen and unforeseen repairs, renewals, and replacements necessary to that end. In the event that the Mortgaged Premises shall be damaged or destroyed in whole or in part, by fire or any other casualty, or in the event of a taking of a portion of the Mortgaged Premises as a result of any exercise of the power of eminent domain, the Mortgagor shall promptly restore, replace, rebuild or alter the same as nearly as possible to the condition they were in immediately prior to such fire, other casualty or taking, provided that proceeds of insurance are made available to Mortgagor, to the extent received by Mortgagee and necessary to such restoration, replacement, rebuilding or alteration. Although damage to or destruction of the Mortgaged Premises, or any portion thereof, shall not of itself constitute a default hereunder, the failure of the Mortgagor to restore, replace, rebuild, or alter the same, as hereinabove provided, shall constitute a default hereunder. The Mortgagor covenants that it will give to the Mortgagee prompt written notice of any damage or injury to the Mortgaged Premises and will give like notice to the Mortgagee of the commencement of any condemnation proceeding affecting the whole or any portion of Mortgaged Premises. The Mortgagor shall have the right, at any time and from time to time, to remove and dispose of building service equipment which may have become obsolete or unfit for use or which is no longer useful in the operation of the building now or hereafter constituting a portion of the Mortgaged Premises. The Mortgagor agrees promptly to replace with other building service equipment, free or superior title, liens or claims, not necessarily of the same character but of at least equal usefulness and quality, any such building service equipment so removed or disposed of, except that, if by reason of technological or other developments in the operation and maintenance of buildings of the general character of the building constituting a portion of the Mortgaged Premises, no replacement of the building service equipment so removed or disposed of is necessary or desirable in the proper operation or maintenance of said building, the Mortgagor shall not be required to replace the same. TAXES, ASSESSMENTS, ETC. The Mortgagor will pay all taxes, assessments, insurance premiums, sewer rents, or water rates, and in default thereof, the Mortgagee may pay the same. Any sums so advanced by the Mortgagee shall bear interest at the maximum legal rate of interest at the time of such advance or at the highest rate of interest set forth herein or in the Note, whichever is greater, and any such sum and the interest thereon shall be a lien on said Premises, prior to any right, or title to, interest in or claim upon said Premises, or accruing subsequent to the lien of the Mortgage and shall be deemed secured hereby. Upon written request from Mortgagee, Mortgagor shall deliver to Mortgagee receipted tax bills showing payment of all taxes on the Premises within the applicable grace period. ESTOPPEL STATEMENT. The Mortgagor within five (5) days upon request in person or within ten (10) days upon request by mail will furnish a written statement duly acknowledged of the amount due on the Mortgage and whether any offsets or defenses exist against the Note and Mortgage. MORTGAGEE MAY CURE MORTGAGOR'S DEFAULTS. The Mortgagor covenants and agrees with the Mortgagee that the holder of the Mortgage may cure any default of Mortgagor on the Mortgage or any prior or subsequent mortgage, including payment of any installments of principal and interest or part thereof, and that all costs and expenses, including reasonable attorneys' fees together with interest thereon at the highest legal rate of interest at the time of such default or at the highest rate of interest set forth herein or in the Note secured by the Mortgage, whichever is the greater, paid by the Mortgagee in so curing said default, shall be repaid by the Mortgagor to the Mortgagee on demand and the same shall be deemed to be secured by the Mortgage and to be collectible in like manner as the principal sum. WARRANTY OF TITLE. The Mortgagor warrants the title to the Premises and will execute any further assurance of the title to the Premises as Mortgagee may require. LIEN LAW COVENANT. The Mortgagor will, in compliance with Section 13 of the New York Lien Law, receive the advances secured hereby and will hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of improvement and will apply the same first to the payment of the cost of the improvements before using any part of the total of the same for any other purpose. ESCROW FOR TAXES. In the event the Mortgagor is delinquent to any extent on payments due hereunder to Mortgagee, or in the payment of property taxes and assessment on the Premises, then the Mortgagee may require that in addition to the monthly payments of principal and interest, the Mortgagor will pay monthly to the Mortgagee on or before the first day of each and every calendar month, until the Note is fully paid, a sum equal to one-twelfth (1/12) of the known or estimated yearly taxes, assessments, liens and charges levied or to be levied against the Mortgaged Premises. The Mortgagee may request at such time that the Mortgagor also escrow for insurance held or required by Mortgagee. The Mortgagee shall hold such payments in trust without obligation to pay interest thereon, except such interest as may be made mandatory by law or regulation, to pay such taxes, assessments, liens, charges and insurance premiums within a reasonable time after they become due. If the total of payments made by the Mortgagor for taxes, assessments, liens, charges and insurance premiums shall exceed the amount of payments actually made by the Mortgagee, such excess shall be credited by the Mortgagee on subsequent payments to be made by the Mortgagor. If the total of payments made by the Mortgagor for taxes, assessments, liens, charges and insurance premiums shall not be sufficient to pay therefor, then the Mortgagor shall pay to the Mortgagee any amount necessary to make up the deficiency on or before the date when such amounts shall be due. LATE CHARGES. If any payment required to be made under the Mortgage or the Note or the obligations secured by the Mortgage shall be overdue in excess of ten (10) days, a late charge of Fifty Dollars ($50.00) or $.06 of each $1.00 so overdue, whichever is larger, will be paid by the Mortgagor for the purpose of defraying the expenses incident to handling such delinquent payments. LEASES. Pursuant to the provisions of Section 291-f of the New York Real Property Law, the Mortgagor shall not accept prepayment of rent or installments of rent for more than one month in advance, without the written consent of the Mortgagee and in the event of any default under the terms of this paragraph the whole of said principal sum shall become due immediately upon the happening thereof at the option of the Mortgagee. In addition thereto, the Mortgagor shall furnish to the Mortgagee, within thirty (30) days after a request by the Mortgagee to do so, a written statement containing the names of all lessees of the Premises, the terms of their respective leases, the space occupied and the rentals payable thereunder. ACCELERATION OF PRINCIPAL ON TRANSFER, ETC. Without the Mortgagee's prior written consent to such conveyance or transfer, which may be withheld in its sole and absolute discretion, the principal sum with interest thereon shall become immediately due and payable in full, upon the legal or equitable, voluntary or involuntary, conveyance or transfer by operation of law or otherwise of all or any part of the Mortgaged Premises, or any interest or estate therein, or any interest in Mortgagor, including testate or intestate succession and conveyance by land contract, including, without limitation thereto, any assignment or sublease of any Lease of any portion of the Premises, each of which must be subordinate to the lien of the Mortgage. Acceptance of payments by the Mortgagee subsequent to any such conveyance, transfer, or encumbering shall not be deemed a waiver of any of the Mortgagee's rights. However, upon written notice to Mortgagee, transfers between and among the partners of the Mortgagor and between and among immediate family members of the Mortgagors, shall be permitted. However, all obligations of James D. Ryan, Philip A. O'Brien and Daniel C. O'Brien under the Guarantees and all other documents, as applicable, will remain in full force and effect. ACCELERATION OF PRINCIPAL ON DEFAULT, ETC. The whole of the principal sum and interest shall immediately become due and payable in full at the option of the Mortgagee, after (a) default in the payment of any installment of principal or of interest for thirty (30) days; or, (b) default in the payment of any tax, water rate, assessment, insurance premiums, or sewer rent for thirty (30) days after notice and demand or default after notice and demand either in assigning and delivering the policies insuring the buildings against any casualty or in reimbursing the Mortgagee for premiums paid on such insurance, as herein provided; or (c) default upon request in furnishing a statement of the amount due and whether any offsets or defenses exist against the mortgage debt, as herein provided; (d) failure to exhibit to the Mortgagee, within ten (10) days after demand, receipts showing payment of all taxes, water rates, sewer rents and assessments; or (e) the actual or threatened alteration, demolition or removal of any building on the Premises without the written consent of the Mortgagee; or (f) the assignment of the rents of the Premises or any part thereof without the written consent of the Mortgagee; or (g) the buildings on said Premises are not maintained in reasonably good repair; or (h) failure to comply with any requirement or order or notice of violation of law or ordinance issued by any governmental department claiming jurisdiction over the Premises within two (2) months from the issuance thereof; or (i) refusal of two or more fire insurance companies lawfully doing business in the State of New York to issue policies insuring the buildings on the Premises; or (j) the removal, demolition or destruction in whole or in part of any of the fixtures, chattels or articles of personal property covered hereby, unless the same are promptly replaced by similar fixtures, chattels and articles of personal property at least equal in quality and condition to those replaced, free from security interests or other encumbrances thereon and free from any reservation of title thereof; or (k) thirty (30) days notice to the Mortgagor, in the event of the passage of any law deducting from the value of land for the purposes of taxation any lien thereon, or changing in any way the laws for the taxation of mortgages or debts secured thereby for state or local purposes; (1) the Mortgagor fails to keep, observe, and perform any of the other covenants, conditions or agreements contained in the Mortgage; or (m) use of said Premises for any unlawful purpose or public or private nuisance; or (n) the Mortgagor commits or permits waste; or (o) any default under any mortgage or other lien on the Premises or any default under any other note, loan agreement or other instrument evidencing Mortgagor's indebtedness to Mortgagee; or (p) the Mortgagor is no longer personally liable for repayment of the indebtedness secured hereby; or (q) any mortgage, lien or other encumbrance is placed on the Premises without Mortgagee's prior written consent. NOTICES. Notice and demand to or request upon the Mortgagor may be oral or in writing and, if in writing, may be served in person or by mail. APPOINTMENT OF RECEIVER. The Mortgagee, in any action to foreclose the Mortgage, shall be entitled, without notice or demand and without regard to the adequacy of any security for the indebtedness hereby or the solvency or insolvency of any person liable for the payment thereof, to the appointment of a receiver of the rents, issues and profits of the Mortgaged Premises. SALE IN ONE PARCEL. In case of a foreclosure sale, said Premises, or so much thereof as may be affected by the Mortgage, may be sold in one parcel, any provision of law to the contrary notwithstanding. ASSIGNMENT OF RENTS. The Mortgagor hereby assigns to the Mortgagee the rents, issues, and profits of the Premises as further security for the payment of said indebtedness, and the Mortgagor grants to the Mortgagee the right to enter upon and to take possession of the Premises for the purpose of collecting the same and to let the Premises or any part thereof, and to apply the rents, issues and profits, after payment of all necessary charges and expenses, on account of said indebtedness. This assignment and grant shall continue in effect until the Mortgage is paid. The Mortgagee hereby waives the right to enter upon and to take possession of said Premises for the purpose of collecting said rents, issues, and profits, and the Mortgagor shall be entitled to collect and receive said rents, issues and profits until default under any of the covenants, conditions, or agreements contained in the Mortgage, and together with any applicable notice thereof and opportunity to cure, and Mortgagor agrees to use such rents, issues and profits in payment of principal and interest and in payment of taxes, assessments, sewer rents, water rates, and carrying charges against said Premises, but such right of the Mortgagor may be revoked by the Mortgagee upon any default, on five (5) days written notice. The Mortgagor will not, without the written consent of the Mortgagee, receive or collect rent from any tenant of said Premises or any part thereof for a period of more than one month in advance, and in the event of any default under the Mortgage will pay monthly in advance to the Mortgagee, or to any receiver appointed to collect said rents, issues and profits, the fair and reasonable rental value for the use and occupation of said Premises or of such part thereof as may be in the possession of the Mortgagor, and upon default in any such payment will vacate and surrender the possession of said Premises to the Mortgagee or to such receiver, and in default thereof may be evicted by summary proceedings. SECURITY AGREEMENT. The Mortgage constitutes a security agreement under the Uniform Commercial Code and creates a security interest in all that property (and the proceeds thereof) included in the Premises which might otherwise be deemed "personal property". Mortgagor shall execute, deliver, file and refile any financing statement, continuation statements, or other security agreements Mortgagee may require from time to time to confirm the lien for the Mortgage with respect to such property. Without limiting the foregoing, Mortgagor hereby irrevocably appoints Mortgagee and its successors in interest as attorney-in-fact for Mortgagor to execute, deliver and file such instruments, for and on behalf of Mortgagor. ANTI-MARSHALLING. The Mortgagee may resort for the payment of any indebtedness, liability, or obligation secured hereby to its several securities therefor, in such order and action to foreclose the Mortgage notwithstanding the pendency of any action to recover any part of the indebtedness secured hereby, or the recovery of any judgment in such action, nor shall the Mortgagee be required during the pendency of any action to foreclose the Mortgage, to obtain leave of any court in order to commence or maintain any other action to recover any part of the indebtedness secured hereby. The Mortgagee shall also have the right in the event of default under the Mortgage or the obligation secured hereby to proceed against any or all interests of the Mortgagor and the Mortgagor agrees that the Mortgagee shall have the right to elect in writing not to cut off any interest that any Mortgagor might have and in the event that Mortgagee shall so elect, Mortgagor agrees that all of its duties and obligations as to such interest shall continue. COMPLIANCE WITH LAWS, ETC. The Mortgagor will comply with, or cause compliance with, all present and future laws, ordinances, rules, regulations, zoning and other requirements of all governmental authorities whatsoever having jurisdiction of or with respect to the Mortgaged Premises or any portion thereof or the use or occupation thereof; provided, however, that the Mortgagor may postpone such compliance if and so long as the validity or legality of any such governmental requirement shall be contested by the Mortgagor, with diligence and in good faith, by appropriate legal proceedings. COMPLIANCE WITH ZONING, ETC. The Mortgagor covenants: (a) that the buildings and improvements now on the Mortgaged Premises are in full compliance with all applicable zoning codes, ordinances and regulations and deed restrictions, if any; and (b) that such compliance is based solely upon Mortgagor's ownership of such Premises, and not upon title to or interest in any other Premises; and (c) buildings or improvements hereafter constructed on such Premises shall be in compliance as in (a) and (b) above, shall lie wholly within the boundaries of such Premises, and shall be independent and self-contained operating units (except for utility lines and conduits coming directly to the Premises from a public road). LEGAL EXPENSES. If any action or proceeding be commenced (except an action to foreclose the Mortgage or to collect the debt secured thereby), to which action or proceeding the Mortgagee is made a party, or in which it becomes necessary to defend or uphold the lien of the Mortgage, all sums paid by the Mortgagee for the expense of any litigation to prosecute or defend the rights and lien created by the Mortgage (including counsel fees), shall be paid by the Mortgagor, together with interest thereon at the legal rate of interest at the time of said payment or at the highest rate of interest set forth herein or in the Note secured by the Mortgage, whichever is greater, and any such sum and interest thereon shall be a lien on said Premises, prior to any right, or title to, interest in or claim upon said Premises attaching or accruing subsequent to the lien of the Mortgage, and shall be deemed to be secured by the Mortgage. If the Mortgage is referred to attorneys for collection or foreclosure, the Mortgagor shall pay all sums, including attorneys' fees, incurred by the Mortgagee, together with all statutory costs, disbursements, and allowances, with or without the institution of an action or proceeding. All such sums with interest thereon at the rate set forth herein shall be deemed to be secured by Mortgage and collectible out of the Mortgaged Premises. INTEREST ON CONDEMNATION AWARD. In the event of condemnation, or taking by eminent domain, the Mortgagee shall not be limited to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award interest on the entire unpaid principal sum at the rate herein provided; the Mortgagor does hereby assign to the Mortgagee so much of the balance of the award payable by the condemning authority as is required to pay such total interest. INTEREST IN THE EVENT OF DEFAULT. If default be made in the payment of the said indebtedness when due, pursuant to the terms hereof, the Mortgagee shall be entitled to receive interest on the entire unpaid principal sum at the legal rate of interest at the time of such default or at the highest rate of interest set forth herein or in the Note secured by the Mortgage, whichever is the greater, to be computed from the due date and until the actual receipt and collection of the entire indebtedness. This charge shall be added to and shall be deemed secured by the Mortgage. The within clause, however, shall not be construed as an agreement or privilege to extend the Mortgage, nor as a waiver of any other right or remedy accruing to the Mortgagee by reason of any such default. NO SECONDARY FINANCING. The Mortgagor will not, without the Mortgagee's prior written consent, mortgage (including the so-called "wrap-around mortgage"), pledge, assign, grant a security interest in, cause any lien or encumbrance to attach to or any levy to be made on the Mortgaged Premises except for (a) taxes and assessments not yet delinquent and (b) any mortgage, pledge, security interest, assignment or other encumbrance to the Mortgagee. BANKRUPTCY. Upon the making of an assignment for the benefit of creditors by, or upon the filing of a petition in bankruptcy by or against the Mortgagor, or any person or corporation who is the guarantor hereof or whose indebtedness is secured hereby, or upon the application for the appointment of a receiver of the property of the Mortgagor or any such person or corporation, or of the property of any person or corporation which may become and be owner of the Mortgaged Premises, or upon any act of insolvency or bankruptcy of the Mortgagor or any such person or corporation or of any such subsequent owner, or upon the legal incapacity of the Mortgagor or any such person or corporation or owner, or any of them, the whole of said indebtedness of every kind or nature held by the Mortgagee and now or hereafter secured hereby shall immediately become due and payable with interest thereon, and Mortgagor and any guarantor(s) hereby waive presentment, demand of payment, protest, notice of non-payment, and/or protest of any instrument on which the Mortgagor or such guarantors are or may become liable now or hereafter secured hereby, and the Mortgagor expressly agrees that the Mortgagee may release or extend the time of any party liable on any such obligation without notice and without affecting his obligation thereon or under this instrument. LIENS. The Premises shall be kept free and clear from any liens and/or encumbrances of any type and description, except as provided herein. Upon the recording of any lien or encumbrance, and the same not having been cleared or bonded of record within thirty (30) days after filing thereof, the entire debt secured hereby shall immediately become due and payable. RIGHT TO INSPECT. The Mortgagee and any persons authorized by Mortgagee shall have the right to enter and inspect the Mortgaged Premises at all reasonable times during usual business hours. WAIVER. No waiver by the Mortgagee of the breach of any of the covenants contained in the Note, the Mortgage, or other loan document, or failure of the Mortgagee to exercise any option given to it, shall be deemed to be a waiver of any other breach of the same or any other covenant, or of its rights thereafter to exercise any such option. MODIFICATION. No change, amendment, modification, cancellation or discharge hereof, or any part hereof, shall be valid unless in writing and signed by the parties hereto or their respective successors and assigns. COVENANTS SHALL RUN WITH THE LAND, ETC. The covenants contained in the Mortgage shall run with the land and bind the Mortgagor, the heirs, personal representatives, successors and assigns of the Mortgagor and all subsequent owners, encumbrances, tenants and subtenants of the Premises , and shall enure to the benefit of the Mortgagee, the personal representatives, successors and assigns of the Mortgagee and all subsequent holders of the Mortgage. ENVIRONMENTAL REPRESENTATIONS, WARRANTIES AND COVENANTS. 1. Mortgagor makes the following representations and warranties to the best of its knowledge, which shall survive the closing of this loan: A. Mortgagor is in compliance in all respects with all applicable federal, state and local laws, including, without limitation, those relating to toxic and hazardous substances and other environmental matters. B. No portion of the Premises is being used or has been used at any previous time, for the disposal, storage, treatment, processing or other handling of any hazardous or toxic substances. 2. Mortgagor agrees that Mortgagee or its agents or representatives may, at Mortgagor's expense, inspect Mortgagor's books and records and inspect and conduct any tests on the property including taking soil samples in order to determine whether Mortgagor is in continuing compliance with all environmental laws and regulations. 3. If any environmental contamination is found on the property for which any removal or remedial action is required pursuant to law, ordinance, order, rule, regulation or governmental action, Mortgagor agrees that it will at its sole cost and expense remove or take such remedial action promptly and to Mortgagee's satisfaction. 4. Mortgagor agrees to defend, indemnify and hold harmless Mortgagee, its employees, agents, officers and directors from and against any claims, actions, demands, penalties, fines, liabilities, settlements, damages, costs or expenses (including, without limitation, attorney and consultant fees, investigation and laboratory fees, court costs and litigation expenses) of whatever kind or nature known or unknown, contingent or otherwise arising out of or in any way related to: A. The past or present disposal, release or threatened release of any hazardous or toxic substances on the Premises; B. Any personal injury (including wrongful death or property damage, real or personal) arising out of or related to such hazardous or toxic substances; C. Any lawsuit brought or threatened, settlement reached or governmental order given relating to such hazardous or toxic substances; and/or D. Any violation of any law, order, regulation, requirement, or demand of any government authority or any policies or requirements of Mortgagee, which are based upon or in any way related to such hazardous or toxic substances. 5. Mortgagor knows of no on-site or off-site locations where hazardous or toxic substances from the operation of the facility on the Premises have been stored, treated, recycled or disposed of. 6. Mortgagor agrees that it will conduct no excavations at the Premises unless it gives Mortgagee ten (10) days' notice of its intention to do so. Mortgagor further agrees that it will not commence such excavation until Mortgagee has had the opportunity to sample and test at the excavation location if Mortgagee so desires. Should the testing results disclose the presence of hazardous or toxic substances which require removal and/or remedy under any environmental laws or regulations, the suspension of excavation activity at such location shall continue until the hazardous or toxic substances are removed and/or remedy conducted pursuant to this paragraph. 7. Unless waived in writing by Mortgagee, the breach of any of the covenants and warranties contained in this section shall be an event of default under the Mortgage. 8. For purposes of this section, "hazardous and toxic substances" includes, without limit, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances or related materials defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the New York State Environmental Conservation Law, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant thereto. The provisions of this section shall be in addition to any other obligations and liabilities Mortgagor may have to Mortgagee at common law, and shall survive the transactions contemplated herein. Mortgagee may, at its option, require Mortgagor to carry adequate insurance to fulfill Mortgagor's obligations under this paragraph. Mortgagor's failure to obtain insurance within thirty (30) days after being requested to do so by Mortgagee, shall constitute an event or default hereunder. 9. When the terms and provisions contained in the foregoing Paragraphs 1-8 in any way conflict with the terms and provisions contained in a certain Environmental Compliance and Indemnification Agreement of even date herewith ("Indemnification Agreement"), the terms and provisions of Indemnification Agreement contained shall prevail, and, in the event of any overlapping terms, covenants and conditions, insofar as possible, the terms, covenants and conditions contained herein and in the Indemnification Agreement shall both be applicable. TAX ON NOTE. In the event that hereafter it is claimed by any governmental agency that any tax or other governmental charge or imposition is due, unpaid and payable by the Mortgagor or the Mortgagee upon the Note (other than a tax on the interest receivable by the Mortgagee thereunder), the Mortgagor will upon sixty (60) days prior written notice either (a) pay such tax and within a reasonable time thereafter deliver to the Mortgagee satisfactory proof of payment thereof or (b) deposit with the Mortgagee the amount of such claimed tax, together with interest and penalties thereon, pending an application for a review of the claim for such tax, and with a reasonable time, deliver to the Mortgagee either (i) evidence satisfactory to the Mortgagee that such claim of taxability has been withdrawn or defeated in which event any such deposit shall be returned to the Mortgagor or (ii) a direction from the Mortgagor to the Mortgagee to pay the same out of the deposit above mentioned, any excess due over the amount of said deposit to be paid by the Mortgagor directly to the taxing authority and any excess of such deposit over such payment by the Mortgagee to be returned to the Mortgagor. Upon the failure of the Mortgagor to comply with the provisions of this Article, the whole of said principal sum and interest secured by the Mortgage shall at the option of the Mortgagee become due and payable. If liability for such tax is asserted against the Mortgagee, the Mortgagee will give to the Mortgagor prompt notice of such claim, and the Mortgagor, upon complying with the provisions of this Article, shall have full right and authority to consent such claim of taxability. CONSTRUCTION. The word "Mortgagor" shall be construed as if it read "Mortgagors" and the word "Mortgagee" shall be construed as if it read "Mortgagees" whenever the sense of the Mortgage so requires. This Mortgage shall be governed by and construed in accordance with the laws of the State of New York. BUILDING LOAN. The Mortgagor will cause the improvements to be constructed in accordance with the terms of the Building Loan Agreement of even date herewith, will proceed with such construction with due diligence and will comply with the covenants made by it in the Building Loan Agreement, all of which are incorporated herein by reference. CONFLICT WITH OTHER LOAN AGREEMENTS. Mortgagor represents and warrants to Mortgagee that the execution and delivery of this Mortgage and all related documents and the performance of any term, covenant, or condition herein provided in any agreement or instrument executed in connection therewith, are not in conflict with, or result in any reach of, or constitute a default under or violate: A. Any of the terms, conditions, or provisions of any agreement, lease or other instrument to which Mortgagor is a party or subject to; or, B. Any Law, regulation, order, writ, injunction or decree of which Mortgagor is subject or any rules of regulations of any administrative agency having jurisdiction over Mortgagor or over any property of Mortgagor that would have a material adverse affect on Mortgagor's business or financial condition. SEVERABILITY. In the event any one or more of the provisions of the Mortgage or the Note shall for any reason be invalid, illegal or unenforceable in whole or in part, then only such provision or provisions shall be deemed to be null and void and of no force or effect, but shall not affect any other provision of the Mortgage or the Note. MARGINAL NOTES OR CAPTIONS. The marginal notes or captions herein are inserted only as a matter of convenience and for reference and are not and shall not be deemed to be any part of the Mortgage. IN WITNESS WHEREOF, the Mortgage has been duly executed by the Mortgagor, the day and year first above written. POWDER MILL LAND COMPANY By: S/ James D. Ryan ________________ JAMES D. RYAN Its General Partner Locol Properties By: S/ David C. O'Brien ___________________ DAVID C. O'BRIEN Its General Partner CONTINUING UNLIMITED GUARANTY In consideration of any extension of credit by FIRST NATIONAL BANK OF ROCHESTER, (hereinafter called "Bank") to POWDER MILL LAND COMPANY (hereinafter called "Customer"), either alone or with one or more persons or any extension or renewal of any or all of the indebtedness hereinafter mentioned, or forbearance of demand or suit or agreement for such forbearance or cancellation of any existing guaranty or other valuable consideration, the undersigned (referred to hereinafter as such or as "Guarantors") do hereby guarantee, jointly and severally, the full and prompt payment to Bank, when due, whether accelerated or not, of any and all indebtedness, liabilities and obligations of every nature and kind, whether heretofore or hereafter arising of Customer to Bank, including, but not limited to, the indebtedness represented by the Mortgage Note of Customer to Bank in the amount of Five Hundred Thirty Thousand and No/100 Dollars ($530,000.00) of even date herewith, all of which is referred to herein as the "Indebtedness". 1. The undersigned further agree to pay all costs, expenses and attorney's fees at any time paid or incurred by the Bank in endeavoring to collect the Indebtedness or any part thereof and in and about the enforcement of this instrument. 2. This instrument is and is intended to be a continuing guaranty for the Indebtedness (irrespective of the aggregate amount thereof, or changes in the same from time to time, and whether or not the same exceeds the amount of this guaranty), independent of and in addition to any other guaranty, endorsement or security held by Bank therefor, and without right of subrogation on the part of the undersigned until the Indebtedness is paid in full. The undersigned acknowledge that this guaranty does not modify or terminate any previous guaranties executed and delivered to Bank by the undersigned or any of them, which guaranties, if any, remain in full force and effect. This guaranty shall remain in full force and effect until (i) the Bank or its successors or assigns shall actually receive signed, written notice of its discontinuance or notice of the death of the undersigned, and (ii) all of the Indebtedness contracted for or created before the receiving of such notice, and any extensions or renewals thereof whether made before or after the receipt of such notice, together with interest accrued thereon, shall be paid in full. In the event of the discontinuance of this guaranty as to any of the undersigned because of receipt by the Bank of notice of death or notice of discontinuance, this guaranty shall, notwithstanding, still continue and remain in full force against the other signatories until discontinued as to them in the same manner. In the event all of the Indebtedness shall at any time, or from time to time, be satisfied, this guaranty shall, nevertheless, continue in full force and effect as to any such Indebtedness contracted for or incurred thereafter, from time to time, before receipt by Bank of written notice of discontinuance or written notice of death of the undersigned. 3. If any default shall be made in the payment of any or all of the Indebtedness, the undersigned hereby agree to pay the same without requiring protest or notice of non-payment or notice of default to the undersigned, to the Customer, or to any other person, without proof of demand and without requiring the Bank to resort first to the Customer or to any other guaranty, security or collateral which it may have or hold. The undersigned hereby waive demands of protest and notice of non-payment and protest to the undersigned, to the Customer, or to any other person; notice of acceptance hereof or assent hereto by Bank; and notice that any Indebtedness has been incurred by the Customer to Bank; and notice of any change whatsoever in any terms of any of the Indebtedness, whether of payment or otherwise, including but not limited to a change in the interest rate or maturity on any or all of the Indebtedness. 4. Upon default being made in the payment of any of the Indebtedness, the undersigned authorize and empower the Bank, in addition to its other remedies, to charge any account of the undersigned, and if the undersigned be more than one person, any account of any or all of the undersigned, with the full amount then due on this guaranty and to sell, at any broker's board or at a public or private sale (with such notice, if any, required under the Uniform Commercial Code) any property of the undersigned in the possession or custody of the Bank and to apply the proceeds thereof to any balance due on this guaranty. Upon any such sale the Bank may itself purchase the whole or any part of any property sold free from any right of redemption, which is expressly waived and released. 5. The undersigned also further agree that the Bank shall have the irrevocable right, in its sole discretion, with or without notice to the undersigned in its sole discretion, either before or after the institution of bankruptcy or other legal proceedings by or against the undersigned or any of them, or before or after receipt of written notice of the death of the undersigned or any of them, or written notice from any of the undersigned of discontinuance of liability of any of the undersigned hereunder, to extend the time given for the payment of the Indebtedness or any part thereof. Bank may accept one or more renewal notes for the Indebtedness which shall be considered not as new obligations but as extensions of the obligation renewed, and no such extensions shall discharge or in any manner affect the liability of the undersigned, or the liability of the estate or estates of any of the undersigned under this guaranty. 6. The liability of the undersigned hereunder shall not be affected or impaired by any acceptance by the Bank of security for payment of the Indebtedness, or any part thereof, or by any disposition of, or failure, neglect or omission on the part of the Bank to realize upon any such security or any security at any time held by or left with the Bank for any or all of the Indebtedness, or upon which a lien may exist therefor, which security may be exchanged, withdrawn or surrendered from time to time or otherwise dealt with by the Bank without notice to or assent from the undersigned, to the same extent as though this guaranty had not been given. Bank shall have the exclusive right to determine how, when and what application of payments and credits, if any, shall be made on the Indebtedness, or any part thereof, and may apply the same upon principal or interest or fees or expenses as it sees fit. The undersigned hereby agree and consent that the Bank shall have the right to make any agreement with the Customer or with any party to or anyone liable for the payment of all or any of the Indebtedness or interest thereon, for the compounding, compromise, payment, settlement, refinance, renewal, extension, discharge or release thereof, in whole or in part, for any modification or alteration of any of the terms thereof, including but not limited to, a change in interest rate, or of any contract between the Bank and the Customer or any other party without notice to or assent from the undersigned. The Bank shall also have the right to discharge or release without notice one or more of the undersigned from any obligation hereunder, in whole or in part, without in any way releasing, impairing or affecting its rights against the other or others of the undersigned. 7. This guaranty is absolute and unconditional and shall not be affected by any act or thing whatsoever, except payment in full of the Indebtedness hereby secured, except as further set forth in Paragraph "14" hereinbelow. This is a guaranty of payment and not collection. The failure of any other person to sign this guaranty shall not release or affect the liability of any signer hereof. This guaranty has been unconditionally delivered to Bank by each of the persons who have signed it. 8. If a claim is made upon Bank at any time for repayment or recovery of any amount of the Indebtedness, or other value received by Bank from any source, in payment of or on account of any of the Indebtedness, and Bank repays or otherwise becomes liable for all or any part of such claim by reason of (a) any judgment, decree, or order of any court or administrative body, or (b) any settlement or compromise of such claim or claims, the undersigned shall remain liable to Bank hereunder for the amount so repaid or for which Bank is otherwise liable, to the same extent as if any such amounts had not been received by Bank, notwithstanding any return or destruction of the original of this guaranty, or termination hereof or cancellation of any note, bond or other obligation which evidences all or a portion of the Indebtedness. 9. The undersigned unconditionally agree that they will not assert, and do hereby waive any right they may have against Customer for indemnity, subrogation, reimbursement and contribution, until the Indebtedness is paid in full. 10. This document is the final expression of this guaranty of the undersigned in favor of Bank, and is the complete and exclusive statement of the terms of this guaranty. No course of prior dealings between the undersigned and Bank, nor any usage of trade, nor any parol or extrinsic evidence of any nature or kind, shall be used or be relevant to supplement, explain or modify this guaranty. 11. All payments of principal or interest made on the Indebtedness by the Customer to the Bank shall be deemed to have been made as agent for the undersigned for the purpose of tolling or renewing the Statute of Limitations. 12. This guaranty and every part hereof shall be binding upon the undersigned and the heirs, legal representatives, successors and assigns of the undersigned, and shall inure to the benefit of the Bank, its successors and assigns. 13. The undersigned shall provide Bank with a signed current personal financial statement on a Bank form, together with a signed complete copy of the guarantor's federal income tax return (with all schedules attached) on or before April 15th of each year. A financial statement prepared by an accountant is acceptable if attached to Bank's form, with all questions answered on the Bank form and the Bank form signed. 14. This guaranty shall be limited in amount to Two Hundred Thirty Five Thousand and No/100 Dollars ($235,000.00) of the principal amount of the Indebtedness, plus and together with all accrued and unpaid interest, premiums and expenses incurred with respect to the Indebtedness and all costs and expenses and fees, including reasonable attorney fees, incurred by the Bank with respect to this guaranty. 15. This instrument cannot be changed or modified or discharged in whole or in part, orally, and shall be governed by New York law. Any litigation involving this guaranty shall, at Bank's option, be tried only in a court of competent jurisdiction located in Monroe County, New York. IN WITNESS WHEREOF the undersigned have signed and sealed this instrument at Rochester, New York this 6th day of October, 1998. S/James D. Ryan _________________ JAMES D. RYAN EX-21 4 EXHIBIT 21 FNB Rochester Corp. Subsidiaries of the Registrant The Registrant has one wholly owned subsidiary: First National Bank of Rochester First National Bank of Rochester was formed in 1965 under the National Bank Act. First National Bank of Rochester has one 99% owned subsidiary: FNB Capital Corp. FNB Capital Corp. was incorporated in 1998 under the law of New York. EX-23 5 EXHIBIT 23 Independent Auditors' Consent The Board of Directors: FNB Rochester Corp.: We consent to incorporation by reference in registration statements Nos. 33-65194, 333-15325, and 333-66413 on Form S-8 of FNB Rochester Corp. of our report dated January 25, 1999, relating to the consolidated statements of financial condition of FNB Rochester Corp. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, which report has been included in the December 31, 1998 annual report on Form 10-K of FNB Rochester Corp. /s/ KPMG LLP Rochester, New York March 23, 1999 EX-27 6 ARTICLE 9 FDS FOR 10-K
9 1,000 YEAR DEC-31-1998 DEC-31-1998 20,031 1,132 1,500 0 132,664 21,862 22,106 394,666 5,258 587,900 501,361 23,840 4,337 20,210 0 0 3,629 34,523 587,900 30,957 9,901 504 41,362 17,405 18,640 22,722 150 24 20,138 6,764 5,036 0 0 5,036 1.39 1.32 4.30 2,831 1,564 0 0 5,580 742 270 5,258 5,258 0 0
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