-----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, C1hUnhJz6xvGJ2ReVf8zV4cXm/ju1e4s9bkBbHD/COXKrw27M2iNlBD9ANAY5cpU LA8TdM0qIoa+S6zrd8Ka6g== 0000941157-98-000010.txt : 19980331 0000941157-98-000010.hdr.sgml : 19980331 ACCESSION NUMBER: 0000941157-98-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD 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: 98577494 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, 1997 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 Registrant's Registrant's 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 X 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 2,245,076 shares of Common Stock-Voting held by non-affiliates of the registrant at March 13, 1998 (based on the average of high and low prices on March 13, 1998) was $44,340,251. 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 13, 1998 was 3,603,732. Documents Incorporated By Reference Portions of the following documents are incorporated by reference in the following parts of this report; Parts I and II - the Registrant's 1997 Annual Report to Shareholders; Part III -- the Registrant's definitive proxy statement as filed or to be filed with the Securities and Exchange Commission and as used in connection with the solicitation of proxies for the Registrant's annual meeting of shareholders to be held on May 19, 1998. 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, 1997, the Company had consolidated assets and deposits of $522.4 million and $469.8 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. 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 fifteen banking offices are located in Monroe, 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. 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 thirteen full-service community banking offices, twelve of which have drive-up facilities, plus the Buffalo and Syracuse offices. Automated teller machines (ATM's) are located at the eleven Monroe County banking offices, and customers may use ATM's throughout the United States and abroad through ATM networks. The Bank opened its newest banking office in Monroe County (Town of Perinton) in March 1996. Three new Monroe County banking offices were opened in 1995. The Bank is engaged in general commercial banking, providing a wide range of loan and deposit services. As of December 31, 1997, the Bank had approximately 48,087 deposit accounts and 12,841 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 and operates a merchant credit card program. 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 twelve 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 $5.4 million, or 8.4%, from $64.6 million at year end 1996 to $70 million at year end 1997, 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, 1997, the Company had 243 employees of whom 46 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 eight 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 Banks pay 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 included in the Company's Annual Report to Shareholders for the year ended December 31, 1997 Item 2. Properties The Bank operates fifteen banking offices and one loan production office. Eight of the offices are owned (five are on leased land), six are leased, one is rented on a month to month basis, and 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 2016 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 Bank has also entered into land leases for new offices to be built in the Town of Victor (Ontario County) and Village of Brockport and a new office to be built on Monroe Avenue to replace the existing Pittsford Banking Office. The three new facilities will be opened and the leases will commence in the second half of 1998. Additionally the Bank has leased space to open an office in a Rochester supermarket. The opening date is expected to be in the second quarter of 1998. The growth of the Bank and the anticipated growth from the new offices requires additional space for operations. To fulfill that need, the Bank has leased additional office space in the Powers Building. 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 1 E. Main St., Rochester, NY Subleased 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 Monthly 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 12/24/15 Pittsford/Palmyra Rd. & Rt. 250 Perinton Banking Office LL 03/31/16 Rochester, NY 3349 Monroe Ave., Rochester, NY Pittsford Banking Office (new) LL * 2018 6660 Fourth Section Rd., Brockport, NY Brockport Banking Office LL ** 2018 Rt 96, Victor-Pittsford Rd., Victor, NY Victor Banking Office LL ** 2018 289 Upper Falls Blvd., Rochester, NY Upper Falls Banking Office L *** 2003
* Moving an existing office. Construction of building not yet started. ** OCC domestic branch approval obtained. Construction of building not yet started. ***OCC domestic branch approval obtained. In store office is under construction and expected to open April 1, 1998. The Banking Offices in the above table range in size from approximately 2,000 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 subleased. Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1997, no matter was submitted to 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, 1997 and December 31, 1996. 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 trades on the over-the-counter market and is quoted on the NASDAQ National Market System under the symbol FNBR. Price Quotations Dividends Bid Price (low-high) Declared --------- ---------- --------- 1997 First quarter ..................... $ 12.00 - 15.75 Second quarter .................... 12.25 - 15.13 $ .07 Third quarter ...................... 14.00 - 17.50 Fourth quarter ..................... 16.00 - 20.25 $ .10 -------- -------- $ 12.00 - 20.25 -------- -------- 1996 First quarter ...................... $ 9.38 - 10.00 Second quarter ..................... 9.00 - 10.25 Third quarter ...................... 8.63 - 10.38 Fourth quarter ..................... 10.13 - 13.13 $ .05 -------- -------- $ 8.63 - 13.13 -------- -------- 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 13, 1998, the Company had approximately 748 shareholders of record. Item 6. Selected Financial Data The financial information included under the caption "Five-year Summary of Selected Financial Information" in the Company's Annual Report to Shareholders for the year ended December 31, 1997, submitted herewith as an exhibit, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report to Shareholders for the year ended December 31, 1997, submitted herewith as an exhibit, is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information under the caption "Quantitative and Qualitative Disclosures About Market Risk" included in the Company's Annual Report to Shareholders for the year ended December 31, 1997, submitted herewith as an exhibit, is incorporated herein by reference. Item 8. Consolidated Financial Statements and Supplementary Data The consolidated statements of financial condition of FNB Rochester Corp. and Subsidiary as of December 31, 1997 and 1996 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997 together with the related notes and the report of KPMG Peat Marwick LLP, independent auditors, dated January 20, 1998, and the information under the caption "Quarterly Financial Information" (unaudited), all contained in the Company's 1997 Annual Report to Shareholders, submitted herewith as an exhibit, are incorporated herein by reference. 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. The information in response to this item is incorporated herein by reference to the information under the caption "Nominees for Election as Directors" and "Executive Officers" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 1998 annual meeting of shareholders to be held on or about May 19, 1998. Item 11. Executive Compensation. The information in response to this item is incorporated herein by reference to the information under the caption "Executive Compensation" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A in connection with the Company's 1998 annual meeting of shareholders to be held on or about May 19, 1998, provided, however, that information appearing under the captions "Compensation Committee Report on Executive Compensation" and "Share Performance Graph" is not incorporated herein and should not be deemed included in this document for any purpose. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information in response to this item is incorporated herein by reference to the information under the caption "Beneficial Ownership of the Company's Stock by Certain Persons and Management" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 1998 annual meeting of shareholders to be held on or about May 19, 1998. Item 13. Certain Relationships and Related Transactions. The information in response to this item is incorporated herein by reference to the information under the captions "Certain Relationships and Related Party Transactions" and "Compensation Committee Interlocks and Insider Participation" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 1998 annual meeting of shareholders to be held on or about May 19, 1998. 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 are contained in the Company's 1997 Annual Report to Shareholders which, as indicated below, is included as Exhibit 13 of this report. Page - Independent Auditors' Report..........................................74 - Consolidated Statements of Financial Condition as of December 31, 1997 and 1996...........................................75 - Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996, and 1995.............................................................76 - Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996, and 1995...............78 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ....................................79 - Notes to Consolidated Financial Statements...........................81 (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 Reference or page in sequential numbering where exhibit may be found: (3.1) Certificate of Incorporation, of the Exhibits 4.2-4.5 to Registration Statement Registrant, as amended No. 33-7244, filed July 22, 1986 (3.2) Amendment to Certificate of Exhibit 3 to Form 10-Q for period ended Incorporation of Registrant dated August 6, June 30, 1992 1992 (3.3) By-laws of the Registrant, as Exhibit 3.3 to Annual Report on Form 10-K amended for the year ended December 31, 1992 (10.1) 1992 Stock Option Plan (as amended Page 19 May 28, 1996)* (10.2) 1995 Non-employee Director Stock Page 25 Option Plan * (10.3) Employment Agreement dated June Exhibit 1 to Form 8-K filed June 23, 1992 8, 1992 between the Registrant and R. Carlos Carballada* (10.4) Extension of Employment Agreement Exhibit 10.1 to Form 10-Q for period ended between the Registrant and R. Carlos 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 December 31, 1995 National and R. Carlos Carballada* (10.6) Form of Change of Control Exhibit 10.5 to Annual Report on Form 10-K Employment Agreement between First for the year ended December 31, 1995 National and each Executive Officer other than R. Carlos Carballada* (10.7) Form of Stock Option Agreement Exhibit 4.2 to Form S-8 Registration Statement pursuant to 1992 Stock Option Plan between No. 333-15325, filed November 1, 1996 the Registrant and each Executive Officer* (10.8) Form of Stock Option Agreement Exhibit 4.4 to Form S-8 Registration pursuant to 1995 Non-employee Director Statement No. 333-15325, filed November 1, Stock Option Plan between the Registrant 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 Exhibits 10.14 and 10.15 to Form 8 filed National and Executive Square Associates, April 22, 1992 related to Estate of Fred B. Kravetz (10.12) Loan agreement between First Exhibit 10.17 to Form 8 filed April 22, 1992 National and Pioneer Daycare Company, related to Michael J. Falcone (10.13) Loan agreements between First Exhibit 10.19 to Form 8 filed April 22, 1992 National and Carl R. Reynolds (10.14) Line of Credit agreements between Exhibit 10.17 to Annual Report on First National and JML Optical Industries, Form 10-K for the year ended Inc., related to Joseph M. Lobozzo II December 31, 1993 (10.15) Loan agreements between First Exhibit 10.13 to Annual Report on Form National and Joseph M. Lobozzo II 10-K for the year ended December 31, 1994 (10.16) Loan modification agreements Exhibit 10.15 to Annual Report on Form 10-K between First National and Executive Square for year ended December 31, 1994 Associates, related to Estate of Fred B. Kravetz (10.17) Loan modification agreements Exhibit 10.16 to Annual Report on Form 10-K between First National and Pioneer Daycare for year ended December 31, 1994 Company, related to Michael J. Falcone (10.18) Residential Mortgage Loan Exhibit 10.1 to Form 10-Q for period ended Agreement between Stacy C. Campbell and June 30, 1997 First National (10.19) Lease Agreement between Exhibit 10.2 to Form 10-Q for the period ended Southtown Plaza Associates, related to June 30, 1995 William Levine, and First National (10.20) Residential Mortgage Loan Exhibit 10.1 to Form 10-Q for period ended Agreements between Russell Family September 30, 1995 Associates, related to H. Bruce Russell, and First National (10.21) Commercial Loan Agreements Page 30 between V & K Associates, related to Estate of Fred B. Kravetz, and First National (10.22) Commercial Line of Credit Exhibit 10.3 to Form 10-Q for period ended Agreement between GLC Outsourcing September 30, 1995 Services, Inc., related to James D. Ryan, and First National (10.23) Commercial Loan Agreements Exhibit 10.23 to Annual Report on Form 10-K between Estate of Fred B. Kravetz and First for year ended December 31, 1996 National (10.24) Commercial Loan Agreements Exhibit 10.24 to Annual Report on Form 10-K between Deal Road Associates, L.P., related for year ended December 31, 1996 to Estate of Fred B. Kravetz, and First National (10.25) Commercial Line of Credit Exhibit 10.25 to Annual Report on Form 10-K Agreements between Laurie Kuskin and for year ended December 31, 1996 First National (10.26) Commercial Loan Agreements Exhibit 10.26 to Annual Report on Form 10-K between Fred Kravetz and William Levine for year ended December 31, 1996 Partners, related to the Estate of Fred B. Kravetz and to William Levine, and First National (13) Annual Report to Shareholders for Page 47 the year ended December 31, 1997 (21) Subsidiaries Page 107 (23) Consent of KPMG Peat Marwick LLP Page 108 (27) Financial Data Schedule Page 109
* 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: None 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 17, 1998 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 17, 1998 Executive Officer s/ R. Carlos Carballada --------------------------- (R. Carlos Carballada) (ii) Principal Accounting and Senior Vice President and March 17, 1998 Financial Officer: Chief Financial Officer s/ Stacy C. Campbell --------------------------- (Stacy C. Campbell) (iii) Directors: s/ R. Carlos Carballada Director March 17, 1998 --------------------------- (R. Carlos Carballada) s/ Michael J. Falcone __________________________ Director March 20, 1998 (Michael J. Falcone) s/ Gayle C. Johnston Director March 17, 1998 ------------------------- (Gayle C. Johnston) s/ Joseph M. Lobozzo II Director March 17, 1998 -------------------------- (Joseph M. Lobozzo II) s/ Francis T. Lombardi Director March 17, 1998 -------------------------- (Francis T. Lombardi) s/ Carl R. Reynolds Director March 13, 1998 -------------------------- (Carl R. Reynolds) s/ James D. Ryan Director March 17, 1998 -------------------------- (James D. Ryan) Director March __, 1998 -------------------------- (H. Bruce Russell) s/ Linda Cornell Weinstein Director March 20, 1998 ------------------------- (Linda Cornell Weinstein) INDEX OF EXHIBITS
Exhibit Incorporation by Reference or page in sequential numbering where exhibit may be found: (3.1) Certificate of Incorporation, of the Registrant, Exhibits 4.2-4.5 to Registration Statement No. as amended 33-7244, filed July 22, 1986 (3.2) Amendment to Certificate of Incorporation Exhibit 3 to Form 10-Q for period ended of Registrant dated August 6, 1992 June 30, 1992 (3.3) By-laws of the Registrant, as amended Exhibit 3.3 to Annual Report on Form 10-k for the year ended December 31, 1992 (10.1) 1992 Stock Option Plan (as amended May Page 19 28, 1996) (10. 2) 1995 Non-employee Director Stock Option Page 25 Plan (10.3) Employment Agreement dated June 8, 1992 Exhibit 1 to Form 8-K filed June 23, 1992 between the Registrant and R. Carlos Carballada (10.4) Extension of Employment Agreement Exhibit 10.1 to Form 10-Q for period ended between the Registrant and R. Carlos Carballada June 30, 1996 (10.5) Change of Control Employment Agreement Exhibit 10.4 to Annual Report on Form 10-K among the Registrant, First National and R. Carlos for the year ended December 31, 1995 Carballada (10.6) Form of Change of Control Employment Exhibit 10.5 to Annual Report on form 10-K Agreement between First National and each for the year ended December 31, 1995 Executive Officer other than R. Carlos Carballada (10.7) Form of Stock Option Agreement pursuant Exhibit 4.2 to Form S-8 Registration to 1992 Stock Option Plan between the Registrant Statement No. 333-15325, filed November 1, and each Executive Officer 1996 (10.8) Form of Stock Option Agreement pursuant Exhibit 4.4 to Form S-8 Registration to 1995 Non-employee Director Stock Option Statement No. 333-15325, filed November Plan between the Registrant and each outside 1, 1996 (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 National Exhibits 10.14 and 10.15 to Form 8 and Executive Square Associates, related to Estate filed April 22, 1992 of Fred B. Kravetz (10.12) Loan agreements between First National Exhibit 10.17 to Form 8 filed April 22, 1992 and Pioneer Daycare Company, related to Michael J. Falcone (10.13) Loan agreements between First National Exhibit 10.19 to Form 8 filed April 22, 1992 and Carl R. Reynolds (10.14) Line of Credit agreements between First Exhibit 10.17 to Annual Report on Form National and JML Optical Industries, Inc., related 10-K for year ended December 31, 1993 to Joseph M. Lobozzo II (10.15) Loan agreements between First National Exhibit 10.13 to Annual Report on Form 10-K and Joseph M. Lobozzo II for year ended December 31, 1994 (10.16) Loan modification agreements between Exhibit 10.15 to Annual Report on Form 10-K First National and Executive Square Associates, for year ended December 31, 1994 related to Estate of Fred B. Kravetz (10.17) Loan modification agreements between Exhibit 10.16 to Annual Report on Form 10-K First National and Pioneer Daycare Company, for year ended December 31, 1994 related to Michael J. Falcone (10.18) Residential Mortgage Loan Agreement Exhibit 10.1 to Form 10-Q for period ended between Stacy C. Campbell and First National June 30, 1997 (10.19) Lease Agreement between Southtown Exhibit 10.2 to Form 10-Q for period Plaza Associates, related to William Levine, and ended June 30, 1995 First National (10.20) Residential Mortgage Loan Agreements Exhibit 10.1 to Form 10-Q for period ended between Russell Family Associates, related to H. September 30, 1995 Bruce Russell, and First National (10.21) Commercial Loan Agreements between V Page 30 & K Associates, related to Estate of Fred B. Kravetz, and First National (10.22) Commercial Line of Credit Agreement Exhibit 10.3 to Form 10-Q for period ended between GLC Outsourcing Services, Inc., related to September 30, 1995 James D. Ryan, and First National (10.23) Commercial Loan Agreements between Exhibit 10.23 to Annual Report on Form 10-K Estate of Fred B. Kravetz and First National for year ended December 31, 1996 (10.24) Commercial Loan Agreements between Exhibit 10.24 to Annual Report on Form 10-K Deal Road Associates, L.P., related to Estate of Fred for year ended December 31, 1996 B. Kravetz, and First National (10.25) Commercial Line of Credit Agreements Exhibit 10.25 to Annual Report on Form 10-K between Laurie Kuskin and First National for year ended December 31, 1996 (10.26) Commercial Loan Agreements between Exhibit 10.26 to Annual Report on Form 10-K Fred Kravetz and William Levine Partners, related for year ended December 31, 1996 to the Estate of Fred B. Kravetz and to William Levine, and First National (13) Annual Report to Shareholders for the year Page 47 ended December 31, 1997 (21) Subsidiaries Page 107 (23) Consent of KPMG Peat Marwick LLP Page 108 (27) Financial Data Schedule Page 109
EX-10.1 2 EXHIBIT 10.1 FNB ROCHESTER CORP. 1992 STOCK OPTION PLAN (As Amended) 1. PURPOSES OF THE PLAN The purpose of the FNB Rochester Corp. 1992 Stock Option Plan ("Plan") is to provide a method by which those employees of FNB Rochester Corp. and its wholly owned subsidiaries ("the Corporation") who are largely responsible for the management, growth and protection of the Corporation's business, and who are making and can continue to make substantial contributions to the success of such business, may be encouraged to acquire a larger stock ownership in the Corporation, thus increasing their proprietary interest in such business, providing them with greater incentive for their continued employment, and promoting the interests of the Corporation and all its stockholders. Accordingly, the Corporation will from time to time during the term of the Plan grant to such employees as may be selected in the manner provided in the Plan options to purchase shares of Common Stock of the Corporation, subject to the conditions provided in the Plan. 2. DEFINITIONS Unless the context clearly indicates otherwise, the following terms have the meanings set forth below. "Board of Directors" or "Board" means the Board of Directors of the Corporation. "Code" means the Internal Revenue Code of 1986. "Common Stock" means the Common Stock of the Corporation, $1 par value. "Corporation" means FNB Rochester Corp. and its wholly owned subsidiaries. "Grant Date" as used with respect to a particular option, means the date as of which such option is granted by the Committee pursuant to the Plan. "Grantee" means an individual to whom an Incentive Stock Option or Nonqualified Stock Option is granted by the Committee pursuant to the Plan. "Option" means an option, granted by the Committee pursuant to Section 5 of the Plan, to purchase shares of Common Stock and which shall be designated as either an "Incentive Stock Option" or a "Nonqualified Stock Option." "Incentive Stock Option" means an option that qualified as an Incentive Stock Option as described in Section 422 of the Code. "Nonqualified Stock Option" means any option granted under the Plan, other than an Incentive Stock Option. "Plan" means this Stock Option Plan as set forth herein and as may be amended from time to time. "Total and Permanent Disability" as applied to a Grantee, means that the Grantee; (i) has established to the satisfaction of the Corporation that the Grantee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months (all within the meaning of Section 22(e)(3) of the Code); and (ii) has satisfied any requirement imposed by the Committee. 3. ADMINISTRATION OF THE PLAN The Plan shall be administered by a Committee (the "Committee") composed of three or more members who are appointed by the Board of Directors. The Committee shall select one of the Committee's members as Chairman. The Committee shall hold meetings at such times and places as it may determine, subject to such rules as to procedures to the extent not inconsistent with the provisions of the Plan as are prescribed by the Board or by the Committee. A majority of the authorized number of members of the Committee shall constitute a quorum for the transaction of business. Acts reduced to or approved in writing by a majority of the members of the Committee then serving shall be the valid acts of the Committee. No member of the Committee shall be eligible to be granted options under the Plan while a member of the Committee. The Committee shall be vested with full authority to make such rules and regulations as it deems necessary or desirable to administer the Plan and to interpret the provisions of the Plan. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive and binding upon all optionees and any person claiming under or through an optionee unless otherwise determined by the Board. Any determination, decision or action of the Committee provided for in the Plan may be made or taken by action of the Board if it so determines, with the same force and effect as if such determination, decision or action had been made or taken by the Committee. No member of the Committee or of the Board shall be liable for any determination, decision or action made in good faith with respect to the Plan or any option granted under the Plan. The fact that a member of the Board shall at the time be, or shall theretofore have been or thereafter may be, a person who has received or is eligible to receive an option shall not disqualify him or her from taking part in and voting at any time as a member of the Board in favor of or against any amendment or repeal of the Plan. 4. STOCK SUBJECT TO THE PLAN (a). The stock to be issued upon exercise of options granted under the Plan shall be the Corporation's Common Stock, which shall be made available, at the discretion of the Board, either from authorized but unissued Common Stock or from Common Stock reacquired by the Corporation, including shares purchased in the open market. The aggregate number of shares of Common Stock which may be issued under options granted under the Plan (as adjusted in a manner equivalent to the adjustments made under Section 15 of the Plan) shall not exceed 325,000 shares. The limitation established by the preceding sentence shall be subject to adjustment as provided in Section 15 of the Plan. (b). In the event that any outstanding option under the Plan for any reason expires or is terminated, the shares of Common Stock allocable to the unexercised portion of such option may again be made subject to another option granted under the Plan. 5. GRANT OF OPTIONS The Committee may from time to time, subject to the provisions of the Plan, grant options to key employees of the Corporation to purchase shares of Common Stock allotted in accordance with Section 4. The Committee may designate any option granted as either an Incentive Stock Option or a Nonqualified Stock Option, or the Committee may designate a portion of the option as an "Incentive Stock Option" and the remaining portion as a "Nonqualified Stock Option." Any portion of an option that is not designated as an "Incentive Stock Option" shall be a "Nonqualified Stock Option." 6. OPTION PRICE The purchase price per share shall be 100 percent of the fair market value of one share of Common Stock as reported for trading on the national securities exchange on which the Common Stock may be principally traded on the date the option is granted, except that the purchase price per share shall be 110 percent of such fair market value (or the fair market value as determined below) in the case of an Incentive Stock Option granted to an individual described in Section 7(b) of this Plan. The fair market value of a Share on any day shall be: (i) if the Shares are traded in the over-the-counter market, the mean between the bid and the asked prices of the Shares in the over-the-counter market as reported on the National Association of Security Dealers Automatic Quotation System (NASDAQ); (ii) if the Shares are traded in the over-the-counter market and are designated as National Market System securities, the reported last sale price of the Shares, or (iii) if the Shares are traded on one or more securities exchanges, the average of the closing prices on all such exchanges on such day; or in the event that there are no reports for such day, the preceding day for which there is such a report. The purchase price shall be subject to adjustment only as provided in Section 15 of the Plan. 7. ELIGIBILITY OF OPTIONEES (a). Options shall be granted only to persons who are key full time salaried employees of the Corporation, as determined by the Committee. The term "key employees" shall include officers as well as other employees of the Corporation, but shall not include members of the Committee. (b). Any other provision of the Plan notwithstanding, an individual who owns more than 10 percent of the total combined voting power of all classes of outstanding stock of the Corporation, shall not be eligible for the grant of an Incentive Stock Option unless the special requirements set forth in Sections 6 and 9(a) of the Plan are satisfied. For purposes of this subsection (b), in determining stock ownership, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his or her brothers and sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries. Stock with respect to which such individual holds an option shall not be counted. "Outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the option. "Outstanding stock" shall not include shares authorized for issue under outstanding options held by the optionee or by any other person. (c). Subject to the terms, provisions and conditions of the Plan and subject to review by the Board, the Committee shall have exclusive jurisdiction (i) to select the employees to be granted options (it being understood that more than one option may be granted to the same person); (ii) to determine the number of shares subject to each option; (iii) to determine the date or dates when the options will be granted; (iv) to determine the purchase price of the shares subject to each option in accordance with Section 6 of the Plan; (v) to determine the date or dates when each option may be exercised within the term of the option specified pursuant to Section 9 of the Plan; (vi) to determine whether or not an option constitutes an Incentive Stock Option; and (vii) to prescribe the form, which shall be consistent with the Plan, of the documents evidencing any options granted under the Plan. (d). Neither anything contained in the Plan or in any document under the Plan nor the grant of any option under the Plan shall confer upon any optionee any right to continue in the employ of the Corporation or limit in any respect the right of the Corporation to terminate the optionee's employment at any time and for any reason. 8. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be assignable or transferable by the optionee other than by will or the laws of descent and distribution, and during the lifetime of an optionee the option shall be exercisable only by such optionee. 9. TERM AND EXERCISE OF OPTIONS (a). Each option granted under the Plan shall terminate on the date determined by the Committee and specified in the option agreement; provided that each Incentive Stock Option granted to an individual described in Section 7(b) of the Plan shall terminate not later than five years after the date of grant, and each other option shall terminate not later than 10 years after the date of grant. The Committee at its discretion may provide further limitations on the exercisability of options granted under the Plan. An option may be exercised only during the continuance of the optionee's employment, except as provided in Sections 10 and 11 of the Plan. (b). A person electing to exercise an option shall give written notice to the Corporation of such election and of the number of shares he or she has elected to purchase, in such forms as the Committee shall have prescribed or approved, and shall at the time of exercise tender the full purchase price of the shares he or she has elected to purchase. The purchase price shall be paid in full in cash upon the exercise of the option; provided, however, that in lieu of cash, with the approval of the Committee at or prior to exercise, an optionee may exercise his or her option by tendering to the Corporation shares of Common Stock owned by him or her and having a fair market value equal to the cash exercise price applicable to his or her option, with the fair market value of such stock to be determined in the manner provided in Section 6 of the Plan (with respect to the determination of the fair market value of Common Stock on the date an option is granted). (c). An optionee or a transferee of an option shall have no rights as a stockholder with respect to any shares covered by his or her option until the date the stock certificate is issued evidencing ownership of the shares. No adjustments shall be made for dividends (ordinary or extraordinary), whether in cash, securities or other property, or distributions or other rights, for which the record date is prior to the date such stock certificate is issued, except as provided in Section 15 hereof. (d). A person may, in accordance with the other provisions of the Plan, elect to exercise options in any order, notwithstanding the fact that options granted to him or her prior to the grant of the options selected for exercise are unexpired. (e). The aggregate fair market value (determined on the date the option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by an individual grantee during any calendar year shall not exceed $100,000. 10. TERMINATION OF EMPLOYMENT If an optionee's employment with the Corporation is terminated for any reason other than death, any option granted to him or her under the Plan shall terminate, and all rights under the option shall cease, in accordance with rules adopted by the Committee. In any event: (a). In the case of an Incentive Stock Option held by an optionee who is not permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code), such Incentive Stock Option shall terminate no more than three months after the termination of employment. (b). In the case of an Incentive Stock Option held by an optionee who is permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code), such Incentive Stock Option shall terminate 12 months after the termination of employment. (c). In the case of a Nonqualified Option, if the Committee has not adopted an applicable rule concerning such termination, such Option shall terminate no later than three months after termination of employment. (d). The foregoing notwithstanding, no option shall be exercisable after its expiration date. Whether an authorized leave of absence or an absence for military or governmental service shall constitute termination of employment, for the purposes of the Plan, shall be determined by the Committee, which determination shall be final, conclusive and binding upon the affected optionee and any person claiming under or through such optionee. 11. DEATH OF OPTIONEE If an optionee dies while in the employ of the Corporation or after cessation of such employment but within the period during which he or she could have exercised the option under Section 10 of the Plan, then the option may be exercised by the executors or administrators of the optionee's estate or by any person or persons who have acquired the option directly from the optionee by bequest or inheritance, within 12 months after the termination of the optionee's employment for Incentive Stock Options and within a period prescribed by the Committee for Nonqualified Options; provided, however, that no option shall be exercisable after its expiration date. 12. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS Subject to the terms and conditions and within the limitations of the Plan, the Committee may modify, extend or renew outstanding options granted under the Plan or accept the surrender of outstanding options (to the extent not theretofore exercised) and authorize the granting of new options in substitution therefor. Without limiting the generality of the foregoing, the Committee may grant to an optionee, if he or she is otherwise eligible and consents thereto, a new or modified option in lieu of an outstanding option for a number of shares, at an exercise price and for a term which are greater or lesser than under the earlier option, or may do so by cancellation and regrant, amendment, substitution or otherwise, subject only to the general limitations and conditions of the Plan. The foregoing notwithstanding, no modification of an option shall, without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted under the Plan. 13. PERIOD IN WHICH OPTIONS MAY BE GRANTED Options may be granted pursuant to the Plan at any time on or before the tenth anniversary of the Effective Date of the Plan, as defined in Section 17 herein. 14. AMENDMENT OR TERMINATION OF THE PLAN The Board may at any time terminate, amend, modify or suspend the Plan provided that, without the approval of the stockholders of the Corporation, no amendment or modification shall be made by the Board which: (a). Increases the maximum number of shares as to which options may be granted under the Plan; (b). Alters the method by which the option price is determined; (c). Extends any option for a period longer than 10 years after the date of grant; (d). Materially modifies the requirements as to eligibility for participation in the Plan; or (e). Alters this Section 14 so as to defeat its purpose. Further, no amendment, modification, suspension or termination of the Plan shall in any manner affect any option theretofore granted under the Plan without the consent of the optionee or any person validly claiming under or through the optionee. 15. CHANGES IN CAPITALIZATION (a). In the event that the shares of the Corporation, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares or otherwise) or if the number of such shares of stock shall be increased through the payment of a stock dividend, then subject to the provisions of subsection (c) below, there shall be substituted for or added to each share of stock of the Corporation which was theretofore appropriated, or which thereafter may become subject to an option under the Plan, the number and kind of shares of stock or other securities into which each outstanding share of stock of the Corporation shall be so changed or for which each such share shall be exchanged or to which each such share shall be entitled, as the case may be. Outstanding options shall also be appropriately amended as to price and other terms, as may be necessary to reflect the foregoing events. (b). If there shall be any other change in the number of kind of the outstanding shares of the stock of the Corporation, or of any stock or other securities into which such stock shall have been changed, or for which it shall have been exchanged, and if the Board or the Committee (as the case may be), shall in its sole discretion, determine that such change equitably requires an adjustment in any option which was theretofore granted or which may thereafter be granted under the Plan, then such adjustment shall be made in accordance with such determination. (c). A dissolution or liquidation of the Corporation, or a merger or consolidation in which the Corporation is not the surviving corporation, shall cause each outstanding option to terminate, except to the extent that another corporation may and does in the transaction assume and continue the option or substitute its own options. In either event, the Board or the Committee (as the case may be) shall have the right to accelerate the time within which the option may be exercised. (d). Fractional shares resulting from any adjustment in options pursuant to this Section 15 may be settled as the Board or the Committee (as the case may be) shall determine. (e). To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Notice of any adjustment shall be given by the Corporation to each holder of an option which shall have been so adjusted. (f). The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, to consolidate, to dissolve, to liquidate or to sell or transfer all or any part of its business or assets. 16. TRANSFER OF OPTION SHARES Shares acquired by persons subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, pursuant to the exercise of an option or portion thereof, shall not be sold or transferred for at least six months after the date of grant. 17. PLAN EFFECTIVE DATE The "Effective Date" of the Plan is the date on which it was first approved by the Corporation's shareholders, namely August 5, 1992. Unless sooner terminated by the Board, the Plan will terminate 10 years from its Effective Date and no options may be granted under the Plan after such termination date. EX-10.2 3 EXHIBIT 10.2 FNB ROCHESTER CORP. 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1.0 PURPOSE The purpose of the FNB Rochester Corp. 1995 Non-Employee Director Stock Option Plan (the "Plan") is to attract and retain in the service of FNB Rochester Corp. (the "Company") Outside Directors (as defined below) who are considered essential to the long-range success of the Company by providing them an opportunity to become owners of stock of the Company through options, and to solidify the common interests of directors and stockholders in enhancing the value of the Company's common stock so as to benefit directly from the Company's growth, development and financial success. Stock options granted under this Plan (the "Options") are not intended to qualify as incentive stock options under section 422A of the Internal Revenue Code of 1986 (the "Code"). 2.0 ADMINISTRATION OF THE PLAN 2.01 The Plan shall be administered by a committee consisting of the Company's Chief Executive Officer, Chief Financial Officer and Counsel (the "Committee"), which shall have full authority to construe and interpret the Plan, to establish, amend and rescind rules and regulations relating to the Plan, and to take all such actions and make all such determinations in connection with the Plan as it may deem necessary or desirable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Plan Participants and their legal representatives and beneficiaries. 2.02 Administrative costs in connection with the Plan shall be paid by the Company. 2.03 The provisions of the Plan shall not apply to or affect any option hereafter granted under any other stock option plan of the Company, and all such options shall be governed by and subject to the applicable provisions of the stock option plan pursuant to which they were granted. 3.0 SHARES SUBJECT TO THE PLAN 3.01 Options may be granted by the Company from time to time under the Plan to purchase up to an aggregate of 25,000 of the Company's common shares, par value $1.00 per share ("Shares"). Shares may consist either in whole or in part of either shares of the Company's authorized but unissued common shares or shares of the Company's authorized and issued common shares reacquired by the Company and held by its treasury, as may from time to time be determined by the Committee. If an Option granted under the Plan for any reason ceases to be exercisable in whole or in part, the Shares which were subject to any such Option but as to which the Option so ceases to be exercisable shall be available for further Options to be granted under the Plan. Any Shares subject to an Option granted under the plan which for any reason expires or is terminated unexercised as to such Shares shall not be charged against such number and shall again be available for issuance under the Plan. 3.02 If there is any change in the shares of the Company as a result of reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or such shares, the Committee may make such adjustments, if any, proportionate to such change, in the number and kind of Shares authorized by the Plan and in the number and kind of Shares under outstanding awards as it shall deem appropriate to preserve the relative value of awards to be granted and shall make such adjustments and changes in the price of Shares under outstanding awards to preserve the relative value of outstanding awards under the Plan. The determination of the Committee as to whether any adjustments are required under the terms of this Section 3.03 and the determination of the Committee as to the extent and nature of any such adjustment shall be final and binding upon all persons. 4.0 DIRECTORS ELIGIBLE FOR OPTIONS Awards may be granted by the Company from time to time only to Outside Directors of the Company. An Outside Director is any Director who is not then a full-time employee (as defined in section 3401(c) of the Code) of the Company or a subsidiary. 5.0 GRANTING OF OPTIONS 5.01 PERSONS TO WHOM OPTIONS SHALL BE GRANTED. Subject to Section 3.01, Options shall be granted to each person who (a) is an Outside Director on the fifth business day following the public release of the Company's quarterly financial results for the period ended September 30, 1995 (the "Commencement Date"), or (b) first becomes an Outside Director after the Commencement Date. 5.02 WHEN OPTIONS SHALL BE GRANTED. Each person who is an Outside Director on the Commencement Date shall be granted, as of the Commencement Date, an Option to purchase 2,500 Shares. Subject to the limitations on the maximum number of Shares available for purchase under the Plan, each person who is elected to serve as an Outside Director after the Commencement Date, shall receive, as of the date of his or her election and qualification as a director, an Option to purchase 2,500 Shares. 6.0 OPTION TERMS AND CONDITIONS All Options granted under this Plan shall be on the following terms and conditions: 6.01 PRICE. The Option Price per Share shall be determined by the Committee from time to time, subject to the limitations set forth in this Section. The Option price shall not be less than the fair market value of the Shares on the date the Option is granted. In no event shall the purchase price for Shares purchased under an Option be less than the par value thereof. 6.02 FAIR MARKET VALUE. The fair market value of a Share on any day shall be: (i) if the Shares are traded in the over-the- counter market, the mean between the bid and asked prices of Shares in the over-the-counter market as reported on the National Association of Security Dealers Automatic Quotation System (NASDAQ); (ii) if the Shares are traded in the over-the-counter market and are designated as National Market System securities, the reported last sale price of Shares, or (iii) if the Shares are traded on one or more securities exchanges, the average of the closing prices on all such exchanges on such day; or, in the event that there are no such reports for such day, the fair market value shall be such price based on the first preceding day for which there is such a report. 6.03 PERIOD OF OPTION. Each Option shall expire at such time as the Committee may determine when such Option is granted, and no Option shall have a term which shall extend more than 10 years from the date such Option is granted. Subject to the preceding sentence, terms established by the Committee for exercise of an Option may be modified or waived by the Committee in his sole discretion. Each Option shall be subject to earlier termination as provided elsewhere in the Plan. The instrument evidencing the Option shall be signed by an officer of the Company. The Commencement Date or respective anniversary thereof on which Options are issued shall be the date on which the Option is considered granted. 6.04 RESTRICTIONS ON EXERCISE OF OPTION. The Committee may at its discretion establish the time or times within the Option period when the Options may be exercised in whole or in part. In addition, the Committee may require the satisfaction of such other conditions, as the Committee may stipulate in the Option, prior to the exercise of the Option in whole or in part. Notwithstanding any other provision of this Plan, no Option shall be exercisable in a manner that would disqualify the Plan from satisfying the requirements of Rule 16b-3 of the Securities and Exchange Commission, and, to the extent necessary, no Option shall be exercisable for at least six months after the date the Option is granted, and no Share may be sold until at least six months after it is purchased by the Optionee (or such other periods as may be specified from time to time by such Rule). 6.05 EXERCISE OF OPTION. After the satisfaction of all conditions which may be prescribed by, or in accordance with, the Plan, the Option may be exercised during the balance of the Option period according to its terms. Receipt by the Company of written notice from the Grantee specifying the number of Shares to be purchased, accompanied by payment in full of the purchase price for such Shares, shall constitute exercise of the Option as to such Shares. The Committee, in its discretion, may determine that payment upon the exercise of an Option may be made with Shares of the Company owned by the Option holder having a fair market value on the exercise date equivalent to the amount which would otherwise be payable, or any combination of cash and such Shares equivalent to such amount. Until Shares are purchased and issued upon exercise of an Option, the Option holder shall not have any rights of a shareholder with respect thereto. 6.06 TERMINATION OF SERVICE. (a) If the service of the Grantee with the Company as a Director shall have terminated for any reason (other than death, disability, or termination for cause), the Grantee or his or her legal representative may exercise the Option to the extent it was exercisable on the date when the Grantee's service terminated, at any time prior to the expiration date of the Option or within six months of the date of termination of service, whichever is earlier. For all purposes of this Plan, termination of service shall be the effective time at which a person serving as a Director ceases to be a member of the Board for any reason. (b) If the service of the Grantee with the Company shall have terminated due to disability, the Grantee or his or her legal representative may exercise the Option to the extent it was exercisable on the date when the Grantee's service terminated, at any time prior to the expiration date of the Option or within one year of the date of termination of service, whichever is earlier. (c) If the service of the Grantee with the Company shall have terminated for cause, the Option shall terminate upon receipt by the Grantee of notice of such termination or the effective date of the termination, whichever is earlier. The Committee shall have the right to determine whether the Grantee has been terminated for cause for purposes of the Plan and the date of such termination. (d) No Option shall be exercised after the effective date of any merger or consolidation of the Company with or into another corporation, the acquisition by another corporation or person of substantially all the Company's assets or the liquidation or dissolution of the Company. 6.07 DEATH OF GRANTEE. If the Grantee dies while in the service of the Company, the person or persons to whom the Grantee's rights under the Option shall pass by will or by the applicable laws of descent and distribution may exercise the Option, in whole or in part at any time, prior to the expiration date of the Option or within one year of the date of death of the Grantee, whichever is earlier. 6.08 OTHER PROVISIONS. The Option may contain such other terms, provisions and conditions not inconsistent with the Plan as shall be determined by the Committee. 7.0 MISCELLANEOUS PROVISIONS 7.01 A Grantee shall not have any rights as a shareholder with respect to any Shares of the Company covered by an Option until the Shares are purchased and the stock certificates therefor are transferred to the Grantee. 7.02 Nothing in this Plan or in any Option granted under it shall confer any right upon the Grantee to continue in the service of the Company or interfere in any way with the right of the Company to terminate the service of the Grantee pursuant to law and the By-laws of the Company. 7.03 In no event shall a Grantee be entitled to fractional Shares, whether upon exercise of an Option or otherwise. The Committee in its sole discretion may elect to round to the nearest whole Share or to settle fractional Shares in cash. 7.04 No Option or any rights or interest therein of the Grantee thereof shall be assignable or transferrable by such recipient except by will or the laws of descent and distribution. During the lifetime of the Grantee, the Option shall be exercised only by him or her by his or her legal representative, and any rights and privileges pertaining thereto shall not be transferred, assigned, pledged or hypothecated by the Grantee in any way, whether by operation of law or otherwise, and shall not be subject to execution, attachment or similar process. 7.05 No Shares shall be issued or transferred upon the exercise of any Option granted hereunder unless and until (a) all legal requirements applicable to the issuance or transfer of such Shares have been complied with, and (b) all requirements of any national securities exchange or association upon which or by which the Company's shares of common stock are listed, traded or quoted have been met, in each case to the satisfaction of the Committee and free of any conditions not acceptable to the Committee. The Committee shall have the right to condition any issuance of any Shares made to any person hereunder on such persons undertaking in writing to comply with such restrictions on his or her subsequent disposition of such Shares as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such Shares may be legended to reflect any such restriction. 7.06 The Company shall have the right to deduct from all awards or any other compensation paid to the Grantee from the Company and Federal, state or local taxes required by law to be withheld with respect to the granting or exercise of any awards under this Plan. 7.07 Except as specifically provided in this Plan, no person shall have any claim or right to be granted any award under this Plan. 7.08 This Plan and the awards issued pursuant thereto shall be governed by and construed in accordance with the laws of the State of New York. 8.0 AMENDMENT, SUSPENSION OR DISCONTINUANCE OF PLAN 8.01 The Committee may amend, suspend or discontinue the Plan, in whole or in part, at any time and from time to time. In no event, however, shall any amendment, without the approval of the shareholders of the Company: (a) increase the number of Shares as to which awards may be granted as nonqualified stock options under the Plan; (b) change the minimum Option exercise price; (c) increase the maximum period during which Options may be exercised; (d) extend the effective period of the Plan; (e) otherwise materially increase the benefits accruing to participants under the Plan; (f) materially modify the requirements as to eligibility for participation in the Plan; (g) result in a material increase in the cost of the Plan to the Company; and (h) no amendment, modification or termination of the Plan shall in any manner adversely affect any Option then outstanding under the Plan without the consent of the holder of such Option. 8.02 Articles 4.0 and 5.0 of this Plan shall not be amended more than once every six months other than to comport with the Code and the rules thereunder. 8.03 With the consent of the affected Grantee, the Committee may amend any outstanding Option so as to incorporate in respect of the same any terms that could have been incorporated in such award at the time of the original grant. 9.0 EFFECTIVE DATE AND DURATION OF THE PLAN 9.01 The Plan shall become effective upon approval by a majority of all directors and approval by a majority of the Directors of the Company who are not eligible for the grant of options under the Plan, provided, however, that, notwithstanding anything to the contrary provided in the Plan, no options granted under the Plan shall become exercisable until after the Plan has been approved and ratified at a meeting of shareholders of the Company by the vote of the holders of a majority of all outstanding shares entitled to vote thereon. 9.02 Unless the Plan is discontinued earlier pursuant to Article 8.0, the Plan shall expire at the close of business on October 3, 2005. No grants shall be made under this Plan after the close of business on October 3, 2005. However, Options granted under the Plan at any time on or prior to October 3, 2005 shall remain in effect until they have been fully exercised, are surrendered, or by their terms expire. FNB ROCHESTER CORP. By s/ R. Carlos Carballada --------------------------------- R. Carlos Carballada, President & Chief Executive Officer EX-10.21 4 EXHIBIT 10.21 MORTGAGE NOTE Rochester, New York $375,000.00 June 30, 1997 FOR VALUE RECEIVED, the undersigned, V & K ASSOCIATES, 277 Alexander Street, Suite 708, Rochester, New York 14607 (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 Three Hundred Seventy Five Thousand Dollars ($375,000.00) (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, and all documentation collateral thereto. "Maturity Date" means June 30, 2007. "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 located at 8-16 East Main Street, Town and Village of Victor, Ontario County, 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. PAYMENT TERMS (a) During the first five (5) years of the term of the Loan, interest shall accrue on the Principal Sum or so much thereof as is outstanding from time to time at the rate of 9.00% per annum. On the 1st day of August, 1997 and on the 1st day of each and every month thereafter to and including July 1, 2002, Mortgagor shall make a constant monthly payment of principal and interest in the amount of Three Thousand Eight Hundred Three and 50/100 Dollars ($3,803.50), an amount which would result in the Principal Sum and interest being amortized in a fifteen (15) year period commencing on the date hereof. (b) On the fifth anniversary of the date hereof the interest rate shall be modified to a rate two and three-quarters percent (2.75%) per annum higher than the weekly average yield on United States Treasury Securities adjusted to a constant maturity of five years (5), 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 so fixed at and accrue on the Principal Sum or so much thereof as is outstanding from time to time at such modified rate until the Maturity Date. (c) During the final five (5) year period of the term of the Loan described in paragraph (b) preceding, the Borrower shall pay the Principal Sum and interest owing pursuant to this Note in monthly installments of principal and interest, due on the first day of each month, through and including June 1, 2007. Each of such installments shall be in the amount that would result in the outstanding Principal Sum and interest at the then applicable rate being amortized in the fifteen (15) year period commencing on the date hereof, with the principal and interest payment being readjusted as of the first day of the second month following the above interest rate adjustment in order to fully amortize the loan over the months remaining in the term. (d) There shall be no negative amortization. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. (e) Notwithstanding anything else herein, if not sooner paid, the entire unpaid Principal Sum and accrued and unpaid interest shall be all due and payable on the Maturity Date. 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 with any regular payment upon written notice received by the Holder at least 30 days prior to making such payment; provided, however, that upon making any such payment in full, 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 June 30, 1998, (b) a premium equal to 4% of the amount prepaid if paid on or after June 30, 1998, and before June 30, 1999, (c) a premium equal to 3% of the amount prepaid if paid on or after June 30, 1999, and before June 30, 2000, (d) a premium equal to 2% of the amount prepaid if paid on or after June 30, 2000, and before June 30, 2001, and (e) a premium equal to 1% of the amount prepaid if paid on or after June 30, 2001, and before the Maturity Date. 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. Regardless of when paid, any such payment in part shall be applied to principal included in the installments provided for herein in the inverse order of such installments becoming due. TAX ESCROW In order to more fully protect the security of this Mortgage, the Mortgagor shall 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, without payment of interest to Mortgagor on such sums held by Bank. 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. 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. EVENT 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 Borrower or the Premises or any portion thereof without the Bank's prior written consent, which may be withheld in its sole and absolute discretion; or (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. DEBT SERVICE COVERAGE RATIO At all times, the net operating income from all leases of the Premises must be sufficient so that the Debt Service Coverage Ratio (net operating income defined below, divided by annual principal and interest payments on the Loan) shall be at least 1.2:1. If the Debt Service Coverage Ration falls below 1.2 at any time, the Bank shall have the option to demand payment of the entire Principal Sum and all accrued interest in full, or at the Bank's option, to allow Borrower to pay down principal (without penalty) to a level acceptable to Bank. Net Operating Income is defined as annual rental income available after payment of annual real estate taxes, utilities, management fees, repairs, maintenance, property insurance, reasonable salaries, reasonable administrative expenses, and other normal operating expenses, exclusive of depreciation, amortization, and interest expense. 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 cancelled, 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 Mortgagor shall provide the Bank with annual financial statements satisfactory to the Bank of "Review" quality and prepared by an independent Certified Public Accountant, to be submitted annually to the Bank within 120 days after the end of each fiscal year of Mortgagor. 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. V & K ASSOCIATES BY: S/ Kenneth R. Vasile ----------------------------------- KENNETH R. VASILE, General Partner CONTINUING UNLIMITED GUARANTY In consideration of any extension of credit by FIRST NATIONAL BANK OF ROCHESTER, (hereinafter called "Bank") to V & K Associates (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 Note of Customer to Bank in the amount of Three Hundred Seventy Five Thousand Dollars ($375,000.00) dated June 30, 1997, 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. 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 signed annual personal financial statements for each in form satisfactory to the Bank on or before April 15th of each year, accompanied by a signed complete copy of a Federal Income Tax Return for each inclusive of all schedules. 14. 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 on the respective dates set forth below. S/ Kenneth R. Vasile ---------------------------- KENNETH R. VASILE S/ Laurie Kuskin ----------------------------- LAURIE KUSKIN MORTGAGE THIS MORTGAGE, made the 30th day of June, 1997, between V & K ASSOCIATES, 277 Alexander Street, Suite 708, Rochester, New York 14607 (herein called the "Mortgagor"), and FIRST NATIONAL BANK OF ROCHESTER, a national banking association with its principal office at 35 State Street, City of Rochester, Monroe County, New York, (herein called the "Mortgagee"). WITNESSETH, to secure the payment of an indebtedness in the sum of Three Hundred Seventy Five Thousand Dollars ($375,000.00) lawful money of the United States 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"), and all renewals, modifications, replacements, extensions and refinancings 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 business assets, equipment and machinery, appliances, personal property, 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 procured 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. 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 insurance premiums on the Premises. 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. 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 of 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 through the escrow established hereunder, 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 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 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 equal to $.06 of each $1.00 so overdue, or Fifty Dollars ($50.00), whichever is greater 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, which Mortgagee may withhold 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 Mortgagor, or any interest or estate therein, including testate or intestate succession and conveyance by land contract. 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. 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 other mortgage, lien or other encumbrance is placed on the Premises without Mortgagee's prior written consent, which consent may be withheld by Mortgagee in its sole and absolute discretion. DEBT SERVICE COVERAGE RATIO. At all times, the net operating income from all leases of the Premises must be sufficient so that the Debt Service Coverage Ratio (net operating income defined below, divided by annual principal and interest payments on the Loan) shall be at least 1.2:1. If the Debt Service Coverage Ratio falls below 1.2 at any time, the Mortgagee shall have the option to demand payment of the entire Principal Sum and all accrued interest in full, or at the Mortgagee's option, to allow Mortgagor to pay down principal (without penalty) to a level acceptable to Mortgagee. Net Operating Income is defined as annual rental income available after payment of annual real estate taxes, utilities, management fees, repairs, maintenance, property insurance, reasonable salaries, reasonable administrative expenses, and other normal operating expenses, exclusive of depreciation, amortization and interest expense. 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 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. 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, which consent may be withheld by Mortgagee in its sole and absolute discretion, 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 waiver 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. Notwithstanding the foregoing provisions of this paragraph, no such event as pertains to any person or corporation who is the guarantor hereof shall result in or constitute any default with respect to the indebtedness or acceleration thereof, provided that the Mortgagor continues to comply with and maintain on a current basis all payment and other obligations to Mortgagee. 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, 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 any reasonable time and 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. COMPLIANCE WITH ARTICLE 31-B OF NEW YORK STATE TAX LAW. The Mortgagor will keep true and complete records pertaining to its acquisition of title to the Premises, all subsequent transfers of any interests in the Premises or any part thereof and all changes in the controlling interest (by way of changes in stock ownership, capital, profits, beneficial interest or otherwise) in the Mortgagor or any related entity which may hereafter own the Premises, including, but not limited to, a copy of the contract of sale, title report, deed, closing statement, transferor's affidavit, questionnaire or return, statement of tentative assessment and any other notices or determinations of tax received from the New York State Department of Taxation and all "capital improvements" made to the Premises or any part thereof and evidence of the payment of any real property transfer gains tax imposed by reason of Article 31-B of the New York State Tax Law and the filing of all reports and any other information or documentation required by the New York State Department of Taxation and Finance by reason of said Article or any regulations promulgated thereunder. All such records shall be made available to Mortgagee for inspection from time to time upon its request. If any real property transfer gains tax shall be due and payable upon the conveyance of the Premises pursuant to a judicial sale in any action suit or proceeding brought to foreclose the Mortgage or by deed in lieu of foreclosure, the Mortgagor will, at Mortgagee's request, (a) provide Mortgagee with a copy of all such records and will prepare, execute, deliver and file any affidavits, records, questionnaires, returns or supplemental returns required of the Mortgagor, as transferor, including, but not limited to, a statement in affidavit form as to the "original purchase price" of the Premises and the cost of all "capital improvements" made to the Premises or any part thereof by the Mortgagor or any related entity and the date or dates on which such improvements were made and (b) pay or cause to be paid any real property transfer gains tax, together with interest and penalties thereon, which may be due and payable by reason of such conveyance. The Mortgagor hereby irrevocably appoints Mortgagee its agent and attorney-in-fact (which appointment shall be deemed to be an agency coupled with an interest), with full power of substitution in the Premises, to prepare, execute, deliver and file on its behalf any and all affidavits, questionnaires, returns and supplemental returns which the Mortgagor, as transferor, has failed or refused to execute and deliver to Mortgagee within ten (10) days after notice and request therefor by Mortgagee. In the event that the Mortgagor fails to pay any such tax, interest and penalties within twenty (20) days after notice and demand for payment is given by Mortgagee, Mortgagee is hereby authorized to pay the same, and the amount thereof so paid by Mortgagee, together with all costs and expenses incurred by Mortgagee in connection with such payment, including, but not limited to, reasonable attorneys' fees and disbursements and interest on all such amounts, costs and expenses at the rate of one percent (1%) in excess of the rate specified in the Note, but in no event in excess of the maximum interest rate permitted by law, shall be paid by the Mortgagor to Mortgagee on demand. Until paid by the Mortgagor, all such amounts, costs and expenses, together with interest thereon, shall be secured by the Mortgage and may be added to the judgment in any suit brought by Mortgagee against the Mortgagor hereon. 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. 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. V & K ASSOCIATES BY: S/ Kenneth R. Vasile ---------------------------- KENNETH R. VASILE General Partner - --------------------------------------------------------------------------- Schedule A The description of the mortgaged premises is omitted from this Exhibit EX-13 5 EXHIBIT 13 FNB Rochester Corp. and Subsidiaries The 1997 Annual Report (Exhibit 13) Contents of the 1997 Annual Report Company Profile.......................................................... 49 Financial Highlights..................................................... 50 Five-Year Summary of Selected Financial Information...................... 51 Quarterly Financial Information (unaudited).............................. 52 Management's Discussion and Analysis of Financial Condition and Results of Operations................... 53 Independent Auditors' Report............................................. 74 Consolidated Financial Statements........................................ 75 Notes to Consolidated Financial Statements............................... 81 Corporate Directory...................................................... 105 THE COMPANY 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. The Bank was established in 1965, in Rochester, New York as a national bank. The Bank comprises the most significant portion of the Company at year-end 1997. The Company's principal sources of income are dividends from the Bank and interest from deposits. The Bank is a full-service, community oriented, commercial bank offering a wide range of commercial and consumer loans, deposit and other banking services to individuals, businesses, and municipalities. In 1993, the Bank expanded its Trust & Investment Division. The Trust & Investment Division's product offerings include 401(k) plans, investment management, corporate and cash management services, mutual funds, annuities, and traditional trust and record-keeping services. 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 fifteen banking offices are located in Monroe, Chemung, Erie, and Onondaga counties in New York State. The Bank also operates a loan production office in Erie County. The Bank considers its primary service and marketing area to be the City of Rochester and surrounding towns which have a total population of approximately one 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 and is a significant operating location for a number of major corporations, including Eastman Kodak Company, Bausch & Lomb Inc., General Motors Corporation, and Xerox Corporation. First National's services are provided through thirteen full-service community banking offices, twelve of which have drive-up facilities, plus the Buffalo and Syracuse offices which primarily provide services to business and professional customers. Automated teller machines (ATM's) are located at the eleven Monroe County banking offices and customers may use ATM's throughout the United States and abroad through ATM networks. The Bank is the only locally owned and managed commercial bank operating in Monroe County. It is subject to intense competition from international and super-regional commercial banks, savings institutions, credit unions, and other financial institutions (including brokerage and investment advisory firms) for all types of deposits, loans, investment, and trust accounts. FNB ROCHESTER CORP. AND SUBSIDIARY Financial Highlights
1997 1996 (in thousands, except share data and ratios) For the year Net interest income $20,785 $18,686 Provision for loan losses 55 - Non-interest income 3,409 3,807 Non- interest expenses 17,494 16,650 Income tax expense 2,126 1,710 Net income $ 4,519 $ 4,133 Net income per common share - basic $ 1.26 $ 1.16 Net income per common share - diluted $ 1.21 $ 1.13 At year end Total assets $522,353 $437,898 Total loans, net of deferred loan costs (fees) 331,520 303,660 Allowance for loan losses 5,580 5,696 Securities held-to-maturity 28,278 29,532 Securities available-for-sale, at fair value 120,819 72,318 Total deposits 469,821 404,771 Total shareholders' equity $34,020 $29,231 Operating ratios Net income as a percent of: Average total assets 0.93 1.00 Average common shareholders' equity 14.36 15.21 Net interest margin (as a percent) 4.53 4.79 Allowance for loan losses as a percent of year-end loans 1.68 1.88 Net charge-offs as a percent of average loans outstanding during the year 0.05 0.03
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, 1997. 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) 1997 1996 1995 1994 1993 ------------------------------------------------------ Statement of operations information Interest income $ 37,506 $ 32,245 $ 29,235 $ 23,012 $ 21,278 Interest expense 16,721 13,559 12,250 7,950 8,326 ------ ----- ------ ------ ------ Net interest income 20,785 18,686 16,985 15,062 12,952 Provision for loan losses (recovery) 55 -- -- (43) 74 Non- interest income 3,409 3,807 2,640 2,785 3,313 Non-interest expenses 17,494 16,650 15,577 16,236 15,296 ------ ----- ------ ------ ------ Income before income taxes 6,645 5,843 4,048 1,654 895 Income tax expense (benefit) 2,126 1,710 1,194 (283) 330 ------ ----- ------ ------ ------ Net income $ 4,519 $ 4,133 $ 2,854 $ 1,937 $ 565 ------ ===== ===== ===== ====== Period end balance sheet information Securities held-to-maturity $ 28,278 $ 29,532 $ 31,780 $ 52,997 $ 53,691 Securities available-for-sale at fair value 120,819 72,318 73,527 48,942 50,427 Total loans, net of deferred loan costs (fees) 331,520 303,660 254,003 202,437 170,513 Allowance for loan losses 5,580 5,696 5,776 6,452 6,823 Total assets 522,353 437,898 391,320 329,262 306,480 Deposits: Non-interest bearing demand 70,831 56,111 46,061 37,887 35,269 Savings, interest checking, and money market 157,076 144,720 144,326 146,464 162,925 Certificates of deposit 241,914 203,940 167,488 111,030 85,100 Total deposits 469,821 404,771 357,875 295,381 283,294 Short-term borrowing 14,236 786 4,986 9,875 - Long-term debt 210 210 - - 7,185 Total shareholders' equity 34,020 29,231 25,846 21,360 13,678 Per common share data * Net income: Basic $ 1.26 $ 1.16 $ 0.80 $ 0.58 $ 0.28 Diluted 1.21 1.13 0.79 0.58 0.28 Cash dividends 0.17 0.05 - - - Book value 9.48 8.19 7.24 5.99 6.83
*Earnings per share data has been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, Earnings Per Share, in 1997. (see Note 15 to Financial Statements)
Operating ratios: 1997 1996 1995 1994 1993 Net income as a percent of: Average total assets 0.93% 1.00% 0.78% .62% .19% Average common shareholders' equity 14.36 15.21 12.17 10.15 4.36 Net interest margin 4.53 4.79 4.92 5.10 4.57 Interest rate spread 3.85 4.19 4.34 4.69 4.23 Non-performing assets ratio (1) .81 .69 .67 1.77 5.60 Allowance for loan losses as a percent of period-end loans 1.68 1.88 2.27 3.19 4.00 Net (charge-offs) recoveries as a percent of average loans (0.05) (0.03) (0.29) (0.19) .11 Total equity as a percent of total assets at period end 6.51 6.68 6.60 6.49 4.46 Cash dividend on common stock payout ratio .17 .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.
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 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 1996 First quarter $ 7,587 $ 4,451 - $1,067 $ 768 $0.21 Second quarter 7,937 4,657 - 1,393 1,003 0.27 Third quarter 8,316 4,837 - 1,575 1,115 0.31 Fourth quarter $ 8,405 $ 4,741 - $1,808 $ 1,247 $0.34
Included in the fourth quarter of 1996 is a pretax gain of $621,000 from the sale of the Odessa Office. 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. Overview The Company has continued its growth in 1997, and much of the growth is the result of the four new banking offices that were opened in Monroe County 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. Online teller systems were installed in all other banking offices during 1996 as well. 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. Three additional new offices are planned for 1998 as well as a new core banking system. The new banking system is expected to significantly improve management information systems and operational efficiency, and the new offices should help the Company sustain its growth rate. Net income increased $386,000, or 9.3%, in 1997. The Company's deposits increased $65 million, or 16.1%, from December 31, 1996 to December 31, 1997 and a new sweep product added $13.4 million in securities sold under agreement to repurchase to the Company's short-term borrowings. Loans have continued to grow, although demand has been less than in 1996 and 1995, and with lower interest rates more businesses and consumers are asking for fixed rate rather than variable rate loans. At December 31, 1997, total loans were up $27.9 million, or 9.2%, as compared to an increase of $49.7 million from 1995 to 1996. $14 million of the 1997 increase was in commercial loans and $11.9 was in residential mortgages with the balance in home equity line of credit outstandings ("home equity") and consumer loans. Because of the reduced rate of growth in demand for loans as compared to deposit growth, the Company increased investments in securities available-for-sale by $48.5 million, or 67.1% from year end 1996 to year end 1997. Growth objectives are expected to be achieved in 1998 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 borrowings to provide liquidity or improve margins. In order to accomplish its growth objectives, the Company must continue to increase its market share. The addition of the four new banking offices in 1995 and 1996 has helped the Company attain its goals. The Company expects to open three new offices in 1998 and to move an existing office to a new location. As anticipated, much of the growth in deposits in 1997 has been in certificates of deposit. Demand deposits have also continued to experience significant growth in 1997, while savings, interest checking and money market accounts have only experienced minor growth. With a lower rate environment depositors are placing their funds in certificates of deposit or other investments rather than leaving them in interest bearing demand or money market accounts, which is making it increasingly difficult to maintain net interest margins. Increases in net income are expected to come through increased loan and investment volumes. Overhead expenses will be expected to increase as the Company adds new offices and a new core banking system. 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. CAPTION> Average Balance Sheet and Analysis of Net Interest Margin Years Ended December 31, (in thousands) 1997 1996 1995 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 $ 1,138 $ 59 5.18% $ 1,090 $ 59 5.41% $ 1,086 $ 60 5.52% Federal funds sold 8,072 446 5.53 4,773 254 5.32 8,820 515 5.84 Securities: (2) Taxable 129,414 8,678 6.71 97,835 6,420 6.56 103,753 6,751 6.51 Tax Exempt 2,302 104 4.52 2,730 122 4.47 2,104 99 4.71 Net loans (1) 318,254 28,219 8.87 283,958 25,390 8.94 229,331 21,810 9.51 Non-interest earning assets 25,554 23,930 18,992 ------ ------ ------ Total assets 484,734 414,316 364,086 Total earning-assets $ 459,180 $ 37,506 8.17% $ 390,386 $ 32,245 8.26% $ 345,094 $ 29,235 8.47% ======= ====== ==== ======= ====== ===== ======= ====== ===== Liabilities and shareholders' equity: Interest bearing liabilities Savings, interest checking and money market deposits $ 146,660 $ 3,231 2.20% $ 143,890 $ 3,093 2.15% $ 142,807 $ 3,379 2.37% Certificates of deposit 234,782 13,169 5.61 187,426 10,348 5.52 147,401 8,473 5.75 Short-term borrowings 5,901 301 5.10 1,790 99 5.53 6,476 398 6.15 Long-term debt 210 20 10.00 193 19 10.00 - - - Non-interest bearing liabilities and shareholders' equity 97,181 81,017 67,402 Total liabilities and shareholders' equity 484,734 414,316 364,086 Total interest bearing liabilities $ 387,553 $ 16,721 4.31% $333,299 $ 13,559 4.07% $ 296,684 $ 12,250 4.13% Interest rate spread 3.85% 4.19% 4.34% Total earning-assets/ Net interest margin $ 459,180 $ 20,785 4.53% $ 390,386 $ 18,686 4.79% $ 345,094 $ 16,985 4.92%
Notes:(1) Non-accrual loans have been included in the average balances. (2) Securities available-for-sale are included at fair value. Net interest income, the difference between interest income and interest expense increased $2,099,000, or 11.2%, from 1996 which had an increase of $1,701,000, or 10%, over 1995's net interest income. Average earning assets increased $68,794,000, or 17.6%, from 1996 to 1997 and increased $45,292,000, or 13.1%, from 1995 to 1996. The growth in assets was funded by growth in deposits and retained earnings. Loans represent the majority of the Company's interest-earning assets. The significant increases in interest income noted in 1997 were primarily due to both loan volume increases and investment securities 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 $34,296,000 from 1996 to 1997, while they increased $54,627,000 from 1995 to 1996. The loan volume increases in 1996 and 1997 are related to sales efforts and emphasis on making new loans. The average rate earned on loans in 1997 was 8.87% compared to 8.94% in 1996 and 9.51% in 1995. Average investment securities volumes increased $31,151,000 from 1996 to 1997 and declined $5,292,000 from 1995 to 1996. The average rate earned on taxable securities, which makes up most of the portfolio, increased from 6.56% in 1996 to 6.71% in 1997. Average Federal Funds Sold increased $3,299,000 primarily as a result of the moderation of loan growth. The increase in Federal Funds Sold, as well as the increased dependency on investment securities rather than loans, has contributed to the decline in net interest margin. Interest expense is a function of the volume of, and rates paid for, interest-bearing liabilities. Interest expense increased in 1997 primarily because of an increase in average interest bearing liabilities. Rates have increased slightly since 1996, however the deposit increases have been primarily in certificates of deposit. The interest spread is the difference between average rates earned on assets and paid on interest-bearing sources of funds. Interest spread declined in 1997 to 3.85% from 4.19% in 1996 and 4.34% in 1995. The interest margin, which is the difference between interest income and interest expense divided by average interest-earning assets was 4.53% in 1997, 4.79% in 1996, and 4.92% in 1995. The decline in both the spread and the margin from 1996 is primarily due to the deposit mix with its greater emphasis on higher interest rate certificates of deposit and the earning asset mix with its change from loans to investment securities. Should the loan demand not be sufficient to offset the increase in deposits from new and existing offices, it is expected the investment portfolio will continue to increase in volume. This may cause further declines in both the net interest spread and margin. 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 1997 Compared to 1996 1996 Compared to 1995 --------------------- --------------------- 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 $184 $8 $192 $(219) $(43) $(262) Taxable securities 2,108 150 2,258 (383) 52 (331) Tax-exempt securities (19) 1 (18) 28 (5) 23 Loans, net 3,025 (196) 2,829 4,783 (1,203) 3,580 ----- ---- ----- ----- ------ ----- Interest income 5,298 (37) 5,261 4,209 (1,199) 3,010 ----- --- ----- ----- ------ ----- Savings, interest checking and money market 63 75 138 26 (312) (286) Certificates of deposit 2,650 171 2,821 2,199 (324) 1,875 Other interest-bearing liabilities and long-term debt 390 (187) 203 (115) (165) (280) --- ---- ---- ---- ---- ---- Interest expense 3,103 (59) 3162 2,110 (801) 1,309 ----- --- ---- ---- ---- ------ Net interest income $2,195 $(96) $2,099 $2,099 $(398) $1,701 ====== ===== ====== ====== ====== ======
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 December 31, -------------- 1997 1996 1995 ---- ---- ----- (in thousands) Service charges on deposit accounts $ 1,720 $ 1,547 $ 1,209 Credit card fees 715 740 648 Gain on sale of mortgages 73 65 40 Gain (loss) on sale of securities available-for-sale (8) (45) 33 Loan servicing fees 262 263 283 Gain on sale of banking office - 621 - Other operating income 647 616 427 --- --- --- Total non-interest income $ 3,409 $ 3,807 $ 2,640 ===== ===== =====
Non-interest income declined $398,000, or 10.5%, from 1996 to 1997, while 1996 non-interest income increased $1,167,000, or 44.2%, from 1995. 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 1997 with an increase of $173,000, or 11.2%, over 1996 resulting primarily from increased volumes. Loan servicing fees have declined slightly as a large portion of fifteen year mortgages originated since 1994 have been retained in the Bank's portfolio, resulting in a decline in loan servicing fees as loans in the Bank's servicing portfolio were prepaid and not replaced with new loans. The increase in other operating income 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 Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ----- (in thousands) Salaries and employee benefits $9,618 $9,227 $8,238 Occupancy 3,561 3,448 2,812 Marketing and public relations 610 489 624 Office supplies, postage and printing 624 637 576 Processing fees 1,075 1,018 979 FDIC assessments 52 2 350 Net cost of operation of other real estate 16 2 (14) Legal 192 190 267 Other 1,746 1,637 1,745 ----- ----- ----- Total non-interest expense $17,494 $16,650 $15,577 ====== ====== ======
Non-interest expense for 1997 increased $844,000, or 5.1%, from 1996 when it increased $1,073,000, or 6.9%, from 1995. The increases in 1996 and 1997 are primarily due to the growth of the Company. Much of the increase in both years has been attributable to the salaries, benefit and occupancy expenses associated with the new banking offices. Increased marketing expense contributed to the 1997 increase. Federal Deposit Insurance Corporation (FDIC) rates have declined significantly since 1996. 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 $391,000, or 4.2%, from 1996, and $989,000, or 12%, from 1995 to 1996. The increase in 1997 was in salaries while the 1996 increase was in both salaries and benefits. The 1997 increase was primarily caused by normal raises, promotions and the addition of marketing staff. The Company has grown to the size where management feels it warrants a full time marketing department to handle product development, advertising and promotion. The 1996 increase resulted primarily from the addition of personnel in both the trust and lending divisions, staff required for the new banking office opened in March 1996 and normal salary increases and promotions. 1996 benefits increased primarily because of additional pension, profit sharing and education costs. Occupancy expense, the other significant non-interest expense, increased $113,000, or 3.3%, in 1997 as compared to $636,000, or 22.6%, from 1995 to 1996, when the Company began to realize the full expense effect of the new offices. Occupancy expense is expected to continue to increase with the addition of additional leased space at its headquarters and as the Bank expands its service delivery network with three new community banking offices, a new facility to replace an existing office as well as a new core banking system. The four new facilities and the new core banking system are all expected to be up and running in 1998. The full annual expense effect of these new offices and systems will not be realized until 1999 and beyond. Marketing expense increased $121,000, or 24.7%, from 1996 to 1997. The Bank continued radio, television, and newspaper advertising in 1997. Marketing efforts were focused on the annual "Money Sale", home equity loans, 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. FDIC assessment fees increased slightly in 1997 after a significant decrease in 1996. FDIC assessment fees changed due to changes in the assessment rate. These fees are a function of the insurance rate and the deposit base. Income Taxes The Company and the Bank file a consolidated tax return. The provision for 1997 income taxes was $2,126,000, compared to $1,710,000 and $1,194,000 in 1996 and 1995, respectively. The Company's effective tax rates were 32%, 29% and 29% for 1997, 1996 and 1995, 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 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 $776,000 at December 31, 1997. Income tax expense was affected in 1997 and 1996 by reductions in the valuation allowance of $469,000 and $660,000 respectively due to the generation of sufficient taxable income to provide for the deduction of temporary differences. At December 31, 1997, the Company had a net deferred tax asset of $554,000 as compared to a net deferred tax asset of $423,000 at December 31, 1996. 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 $47,247,000, or 46.4%, from December 31, 1996 to December 31, 1997 and decreased $3,457,000, or 3.3% from December 31, 1995 to December 31, 1996. 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 1997, the Bank continued to classify most of its purchases of securities as available-for-sale. Unrealized gains on available-for-sale securities reported in equity at December 31, 1997 amounted to $896,000, net of taxes, as compared to unrealized gains of $268,000, net of taxes, at December 31, 1996. At December 31, 1997, 38.7% of the Bank's securities had maturities of five years or less, while 50.6% had maturities of five years or less at the end of 1996, and 66.3% had maturities of five years or less at the end of 1995. 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. The average life of the Bank's amortizing securities such as mortgage pools and SBA pools at December 31, 1997 is less than five 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, 1997, 1996, and 1995. Carrying Value of Securities Available-for-Sale December 31, 1997 1996 1995 (in thousands) U.S. Treasury $ 25,403 $ 23,576 $ 44,123 U.S. Government agency 34,346 9,967 5,698 Mortgage-backed securities 61,070 38,775 23,706 Total $ 120,819 $ 72,318 $ 73,527 Notes: (1) The above figures are stated at fair value. The available-for-sale portfolio had net unrealized gains of $1,491,000, $447,000, and $1,426,000 at December 31, 1997, 1996 and 1995, respectively. Totals exclude Federal Reserve Bank stock and Federal Home Loan Bank stock of $1,655,000, $1,516,000 and $1,299,000 at December 31, 1997, 1996 and 1995, respectively. CARRYING VALUE OF SECURITIES HELD-TO-MATURITY December 31, 1997 1996 1995 ---- ---- ---- (in thousands) U.S. Treasury $8,079 $8,108 $7,145 U.S. Government agency 5,252 5,293 6,359 Mortgage-backed securities 10,721 12,909 15,509 Obligations of state and municipal subdivisions 3,876 2,872 2,417 Other 350 350 350 --- ---- ----- Total $28,278 $29,532 $31,780 ====== ====== ======
MATURITIES AND WEIGHTED YIELD OF SECURITY 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 $9,082 7.12% $16,321 6.41% - -% - -% $25,403 U.S. Government agency - - 3,592 6.93 16,924 7.18 13,830 6.87 34,346 Mortgage-backed securities (1) - - 3,817 6.61 7,293 6.71 49,960 6.60 61,070 - - ----- ---- ----- ---- ------ ---- ------ Total $9,082 7.12% $23,730 6.52% $24,217 7.04% $63,790 6.66% $120,819 ===== ===== ====== ===== ====== ===== ====== ===== =======
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 $ - -% $8,079 5.80% $ - -% $ - -% $ 8,079 - - - U.S. Government agency 3,000 5.42 2,000 5.95 - - 252 6.63 5,252 Mortgage-backed securities (1) - - 7,950 6.28 1,606 7.89 1,165 7.36 10,721 Obligations of state and municipal subdivisions 2,399 4.03 843 4.83 454 5.95 180 5.80 3,876 Other 250 8.50 50 7.50 50 7.93 - - 350 --- --- Total $5,649 4.97% $18,922 5.98% $2,110 7.47% $1,597 7.07% $28,278 ===== ===== ====== ===== ===== ===== ===== ===== ======
Notes: (1) See note (1) above. Loan Portfolio The loan portfolio increased $27,860,000, or 9.2%, from 1996 to 1997. This compares to an increase from 1995 to 1996 of $49,657,000, or 19.5%. Loans totaling $1.1 million were sold with the Odessa Banking Office in November 1996. The growth of the loan portfolio in both 1997 and 1996 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 1997 year-end loan portfolio, $238,688,000, or 67.9%, is secured by either commercial or residential real estate. The majority of the Company's loans continue to be commercial. Commercial loans increased $14,001,000, or 7.5%, from 1996, as compared to an increase of $22,076,000, or 13.3%, from 1995 to 1996. The slowing of the increase in commercial loans during 1997 was primarily attributable to decreased loan demand. The largest portion of the increase in commercial loans in 1997 was in commercial real estate loans. At year-end 1997, 57.5% of commercial loans were secured by commercial real estate. Of the commercial real estate securing those loans, 53.5% 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 Monroe County, 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 $11,850,000, or 16.6%, from 1996 to 1997, as compared to an increase of $21,374,000, or 42.8%, from 1995 to 1996. The difference between the increases in residential loans in 1996 and 1997 is primarily attributable to the Bank's decision to hold a portion of mortgages of 15-years or less in its portfolio, rather than to sell them to the Federal Home Loan Mortgage Corp (FHLMC). With lower interest rates in the early part of 1996 and in the latter portion of 1997, the Bank experienced increased refinancing activity, and much of that was directed into 15-year or less fixed rate mortgages. A greater portion of these mortgages were held in portfolio in 1996 than in 1997. 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 $2,219,000 from 1996 to 1997. The 1995 to 1996 increase was $2,524,000. While home equity loans are attractive to borrowers who have equity in their homes, demand for them 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. Consumer loans declined in 1997 by $267,000 after increasing 17.5% from $19,711,000 in 1995 to $23,153,000 in 1996. Much of the 1996 growth in consumer loans is attributable to an annual "money sale" which was held late in the first quarter and early second quarter. A similar program was held in 1997, however, increased payoffs in 1997 have caused a decline in the portfolio.
TYPES OF LOANS December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Commercial $201,722 $187,721 $165,645 $134,529 $111,444 Residential mortgage 83,113 71,263 49,889 31,080 26,769 Home equity 23,516 21,297 18,773 20,586 21,559 Other consumer 22,886 23,153 19,711 16,443 10,695 Total 331,237 303,434 254,018 202,638 170,467 Net deferred loan costs (fees) 283 226 (15) (201) 46 Allowance for loan losses (5,580) (5,696) (5,776) (6,452) (6,823) Loans, net $325,940 $297,964 $248,227 $195,985 $163,690 ======= ======= ======= ======= =======
MATURITY DISTRIBUTION OF LOANS AT DECEMBER 31, 1997 Maturity One Year One to Five Years or Less Five Years or more Total -------- ---------- ---------- ------- (in thousands) Commercial $25,251 $72,369 $103,969 $201,589 Residential mortgage 2,331 15,382 65,368 83,081 Home equity 945 3,253 19,220 23,418 Consumer, net 1,437 17,413 4,582 23,432 ------ Total loans $29,964 $108,417 $193,139 $331,520 ====== ======= ======= ======= Floating/adjustable Interest rate 57,742 101,307 Fixed or predetermined Interest rates 50,675 91,832 ------ $108,417 $193,139 ======= ======= 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, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Loans in non-accrual status $2,100 $1,419 $1,665 $3,290 $7,929 Loans past due 90 days or more and still accruing 540 645 45 196 1,295 --- ----- ----- ----- ----- Total non-performing loans 2,640 2,064 1,710 3,486 9,224 Real estate acquired by foreclosure 38 45 - 100 345 ----- ----- ----- ----- ----- Total non-performing assets $2,678 $2,109 $1,710 $3,586 $9,569 ===== ===== ===== ===== ===== Non-performing assets as a % of total loans and real estate acquired by foreclosure 0.81% 0.69% 0.67% 1.77% 5.60% ===== ==== ===== ===== =====
Total non-performing assets increased $569,000, or 27%, in 1997 from 1996 and total non-performing assets increased $399,000, or 23.3% in 1996 from 1995, after decreasing each year since their peak in September 1992. The 1997 increase is primarily in commercial mortgages secured by real estate. Loans in non-accrual status increased $681,000 from 1996 to 1997 and decreased $246,000 from 1995 to 1996. Of the $2,100,000 in non-accrual loans, $1,687,000 are secured by real estate. Non-performing assets represent .81% of total loans and real estate acquired by foreclosure at the end of 1997 compared to .69% in 1996 and .67% in 1995. 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, 1997 to absorb anticipated losses, however some additional provisions to the allowance are expected to be made in 1998 as the portfolios increase. The following table summarizes the changes in the allowance for loan losses for 1993 through 1997:
SUMMARY OF LOAN LOSS ALLOWANCE December 31 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Total Loans outstanding at year-end, net of costs (fees) and unearned discounts $331,520 $303,660 $254,003 $202,437 $168,619 ======= ======= ======= ======= ======= Daily average amount of net loans outstanding 318,254 283,958 229,331 186,229 167,234 ======= ======= ======= ======= ======= Balance at beginning of year 5,696 5,776 6,452 6,823 6,560 Provisions charged to operating expense (recovery) 55 - - (43) 74 Reclassification of impairment reserves - - - 210 - Allowance of subsidiary sold - - - (177) - - - - ----- - 5,751 5,776 6,452 6,813 6,634 ----- ----- ----- ----- ----- Loans charged off: Commercial, financial and agricultural (179) (407) (840) (990) (346) Real estate mortgage (72) (14) (46) (124) (40) Installment (158) (137) (147) (244) (309) ----- ----- ----- ----- ----- Total charge-offs (409) (558) (1,033) (1,358) (695) ----- ----- ----- ------ ---- Recoveries of loans previously charged off: Commercial, financial and agricultural 166 407 267 867 610 Real estate mortgage 12 - - - 85 Installment 60 71 90 130 189 ----- ----- ------ --- --- 238 478 357 997 884 --- ----- ------ --- --- Net (charge-offs) recoveries (171) (80) (676) (361) 189 ----- ----- ------ ---- --- Balance at end of year $5,580 $5,696 $5,776 $6,452 $6,823 ===== ===== ===== ===== ===== Net (charge-offs) recoveries as a percent of average loans outstanding during the year (0.05)% (0.03)% (0.29)% (0.19)% .11% Allowance for loan losses as a percent of year-end loans 1.68% 1.88% 2.27% 3.19% 4.05%
The increases in the loan portfolios and nonperforming loans, primarily residential mortgage loans, required that some provision be made in 1997. Most of the nonperforming residential mortgage loans are secured by residences in low to moderate income neighborhoods and were originated by the Bank during the last two years under special underwriting guidelines that permitted loan to value ratios in excess of those usually used by the Bank. The lack of provision in 1996 and 1995 as well as the decrease in provision in 1994 and 1993 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, 1997, the Bank's internally criticized loans were $15,194,000 as compared to $14,084,000 at December 31, 1996 and $19,055,000 at December 31, 1995. Internally criticized loans increased $1,110,000, or 7.9%, from 1996 to 1997 and declined $4,971,000, or 26.1% from 1995 to 1996. As a percent of total loans internally criticized loans remained unchanged. Internally criticized loans as a percent of total loans were 4.6%, 4.6%, and 7.5% for the years ended 1997, 1996 and 1995, 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, 1997 1996 1995 ---- ---- ---- Allowance % (1) Allowance %(1) Allowance % (1) --------- ----- --------- ----- --------- ------ (in thousands) Commercial, financial, & agricultural $3,650 60.9% $3,925 61.9% $4,275 65.2% Real estate, residential mortgage 1,418 25.1 998 23.5 706 19.6 Home equity 88 7.1 79 7.0 208 7.4 Installment, net 424 6.9 694 7.6 587 7.8 --- ----- ---- ----- --- ----- Total $5,580 100.0% $5,696 100.0% $5,776 100.0 ===== ====== ===== ====== ===== ===== %
1994 1993 Allowance % (1) Allowance % (1) --------- ----- --------- ----- (in thousands) Commercial, financial & agricultural $5,384 66.4% $5,957 65.4 Real estate, residential mortgage 294 15.3 153 15.7 Home equity 220 10.2 180 12.6 Installment, net 554 8.1 533 6.3 --- --- ---- ------ Total $6,452 100.0% $6,823 100.0% ===== ====== ===== ===== 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 1997 increased $65,050,000, or 16.1%, from 1996, while average deposits per banking office have increased from $23,609,000 for the month of December 1995 to $26,574,000 for December 1996 and to $30,033,000 for December 1997. The December 1996 and 1997 monthly averages include the four new Banking Offices that were opened in 1995 and 1996. Total deposits increased $46,896,000, or 13.1%, from 1995 to 1996. These increases occurred in spite of a generally declining deposit base in the Monroe County area. The Odessa Banking Office which was sold in November 1996 had a deposit base of $9.6 million at time of sale. Most of the deposit growth continues to occur in certificates of deposit, which increased $37,974,000 from $203,940,000 in 1996 to $241,914,000 in 1997. From 1996 to 1997, certificates of deposit over $100,000 increased $30,041,000, or 48.1%, as compared to an increase of $877,000, or 1.4%, from 1995 to 1996. From 1996 to 1997, certificates under $100,000 increased $7,933,000, or 5.6%, as compared to an increase of $35,575,000, or 33.6% from 1995 to 1996. In 1997 management sought to increase certificates of deposit over $100,000 as a short-term leverage strategy to increase interest income. $14 million of the increase in certificates over $100,000 was the result of an increase in one municipal relationship. 1996 showed greater increases in certificates of deposit under $100,000, than in 1997, primarily as a result of deposit promotions and the new banking offices. In both 1996 and 1997, 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. In 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. 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 and the fourth in 1996 and 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 Company will continue to expand its retail outlets in 1998 with the addition of three new offices and the replacement of an existing office. Furthermore, the replacement of the Company's core banking system in 1998 will help to improve service delivery and management information systems. The sale of the Odessa banking office in 1996 has helped the Company to better allocate its resources in its primary marketing areas. The following tables summarize the daily average deposits of the Company for the years 1997, 1996, and 1995, categories in which those deposits were held in 1997 and 1996, and the maturity distribution of certificates of deposit and public funds of $100,000 or more for the year-end December 31, 1997.
DAILY AVERAGE DEPOSITS For Years 1997 1996 1995 ---- ---- ---- Amount Rate Amount Rate Amount Rate (in thousands) Non-interest bearing demand $61,411 - % $50,114 - % $40,647 - % Interest-bearing demand 62,894 1.08 62,820 1.14 64,452 1.50 Savings, and money market 83,766 3.05 81,070 2.93 78,863 3.06 Certificates of deposit 234,782 5.61 187,426 5.52 147,401 5.75 ------- ------- ---- Total deposits $442,853 3.70% $381,430 3.52% $330,855 3.58% ======= ===== ======= ===== ======= =====
PERIOD END DEPOSITS For Years 1997 1996 ---- ---- (in thousands) Deposit category: Non-interest-bearing demand $70,831 $56,111 Interest-bearing demand 67,852 63,702 Savings 42,266 37,900 Money market 46,958 43,118 CDs less than $100,000 148,613 140,105 CDs greater than $100,000 40,836 33,152 Public funds less than $100,000 824 1,399 Public funds greater than $100,000 51,641 29,284 ------- ------- Total $469,821 $404,771 ======= ======= MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSITS AND PUBLIC FUNDS GREATER THAN $100,000 December 31, 1997 Maturity range (in thousands) less than 3 months $46,649 3 to 6 months 14,561 6 to 12 months 26,856 12 months or more 4,411 ------ Total $92,477 ======= Securities with an amortized cost of $105,341,000 at December 31, 1997 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, 1997 1996 1995 ---- ---- ---- (In thousands) Securities sold under agreements to repurchase $13,436 - $4,538 Other short-term borrowing 800 786 448 --- --- ----- Total $14,236 $786 $4,986 ====== === ===== 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 $13,436,000 and $5,173,000, respectively for 1997 and $4,348,000 and $704,000, respectively for 1996 and $9,075,000 and $5,817,000, respectively for 1995. The increase in 1997 was primarily the result of the introduction of a sweep account for business customers. Interest expense averaged 5.08% for 1997, 5.82% for 1996 and 6.17% for 1995. 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 $1,970,000 at December 31, 1997 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 $4,789,000 from 1996. This increase is primarily due to the net income for 1997 of $4,519,000 and an increase in the fair value of securities available-for-sale of $628,000 less dividends paid on common stock of $610,000. Under SFAS 115, which was adopted in 1993, the net unrealized gain or loss on securities held in the available-for-sale portfolio is recorded in equity, net of taxes. In 1996, this resulted in a decrease in shareholder's equity of $582,000 from the period ended December 31, 1995. 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, 1997, 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. 6.5% 10.3% 11.5% First National Bank of Rochester 6.3% 10.1% 11.4% 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. Common stock cash dividends were also declared in June and December of 1997. 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 borrowings. In the first quarter of 1995, it became a member of the Federal Home Loan Bank which provides additional source of funding if needed. At December 31, 1997, the Bank had an available line of $43.1 million 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, 1997.
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 $107,500 $2,665 $5,139 $59,140 $27,419 $201,863 Residential mortgage 2,513 3,603 4,335 26,284 50,642 87,377 Home equity 23,781 - - - - 23,781 Consumer 1,971 1,847 3,302 11,120 260 18,500 ----- ----- ----- ------ ----- ------- Total loans 135,765 8,115 12,776 96,544 78,321 331,521 ------- ----- ------ ------ ------ ------- Investment securities 29,738 9,462 34,978 57,939 18,635 150,752 Interest bearing deposits in banks and federal funds sold 13,284 - - 50 - 13,334 ------ ------ ------ ------- ------ ------- Total interest-earning assets $178,787 $17,577 $47,754 $154,533 $96,956 $495,607 ======= ====== ====== ======= ====== ======= Interest-bearing liabilities: Savings deposits $157,077 $ $ $ $ $157,077 - - - - Time deposits $100M & over 45,619 13,609 25,492 2,694 - 87,414 Other time deposits 20,999 21,006 78,560 33,833 101 154,499 Short-term borrowings and long-term debt 14,236 - - 210 - 14,446 ------ ------ ----- ------ ----- ------- Total interest-bearing liabilities $237,931 $34,615 $104,052 $36,737 $101 $413,436 ======= ====== ======= ====== === ======= Net interest rate sensitivity gap $(59,144) $(17,038) $(56,298) $117,796 $96,855 $82,171 ======== ======== ======== ======= ====== ====== Cumulative gap $(59,144) $(76,182) $(132,480) $(14,684) $82,171 ======== ======== ========= ======= ====== Cumulative gap ratio (1) 0.75 0.72 0.65 0.96 1.20 ==== ======== ========= ======== ===== Cumulative gap as a % of Total assets (11.32)% (14.58)% (25.36)% (2.81)% 15.73% ======== ======= ======== ======= ======
Notes: (1) Cumulative total interest-earning assets divided by cumulative total interest-bearing liabilities. As measured by the cumulative sensitivity gap at December 31, 1997, 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 to 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 1998. These simulations are based on numerous assumptions regarding the timing and extent of repricing characteristics. Actual results may differ significantly. The following table shows the Company's estimated earnings sensitivity profile as of December 31, 1997. Changes in Interest Rates Percentage Change in Net Income (basis points) ------------------------- ------------------------------- 12 Months 24 Months --------- --------- + 200 over one year 1.0 .1 +100 over one year .8 .2 - - 100 over one year -1.4 -1.2 - - 200 over one year -2.5 -2.2 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 The Company is aware that many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Company has been aware of the complexity and magnitude of the Year 2000 (Y2K) issue and since October 1996 has been developing its strategy to address the data processing and business impacts that are expected to be encountered. Based on the results of an 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 95% of all possible Year 2000 situations have been identified. First National does not write programs or create its own software, therefore, it must rely on vendors and software suppliers to provide appropriate enhancements in a timely manner. As First National continues to monitor the progress of vendors, it has also begun the process of creating contingency plans for all applications that do not meet First National's deadline for compliance. The validation phase is the most labor intensive and critical phase and requires a written test plan for each system that will be in use at the turn of the century. First National has opted not to rely on vendor or third party certification as acceptable validation. As vendors provide upgraded software or enhancements, the Bank will conduct tests to determine if the software or enhancements meet First National's requirements for Y2K readiness. Testing has begun, as has the process of writing Y2K test plans. This validation phase is targeted for completion by December 31, 1998. Prior to January 1, 2000, First National expects to have tested each mission critical application. In addition, First National will have contingency plans in place for any application that does not meet Y2K 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. Expenditures in 1997 for the Year 2000 Project have not been material. Management has not yet fully quantified 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. New Accounting Pronouncements In June 1997, FASB issued Statement No. 130 entitled Reporting Comprehensive Income. Comprehensive Income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". The Statement is effective for fiscal years beginning after December 15, 1997 and requires that items that meet the definition of components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. While this Statement will increase the Company's financial disclosures, it will have no impact on operating results. FASB Statement No. 131 entitled Disclosures about Segments of an Enterprise and Related Information was also issued in June 1997. This Statement is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products, services geographic areas, and major customers. This Statement may increase the Company's financial disclosures but will have no impact on operating results. 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 subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. 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 subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. s\ KPMG Peat Marwick LLP January 20, 1998 Rochester, New York FNB ROCHESTER CORP. AND SUBSIDIARIES Consolidated Statements of Financial Condition December 31, 1997 and 1996 (in thousands, except share data) 1997 1996 Assets: Cash and due from banks $17,968 $20,060 Interest bearing deposits with other banks 1,134 1,121 Federal funds sold 12,200 1,500 Securities available-for-sale, at fair value 120,819 72,318 Securities held-to-maturity (fair value of $28,323 in 1997 and $29,305 in 1996) 28,278 29,532 Loans, net of allowance of $5,580 in 1997 and $5,696 in 1996 325,940 297,964 Premises and equipment 8,813 9,152 Accrued interest receivable 3,761 3,242 FHLB and FRB stock 1,655 1,516 Other assets 1,785 1,493 Total assets $522,353 $437,898 Liabilities and shareholders' equity Deposits: Demand: Non interest bearing $70,831 $56,111 Interest bearing 67,852 63,702 Savings and money market 89,224 81,018 Certificates of deposit 241,914 203,940 Total deposits 469,821 404,771 Securities sold under agreement to repurchase 13,436 - Other short-term borrowing 800 786 Accrued interest payable and other liabilities 4,066 2,900 Long-term debt 210 210 Total liabilities 488,333 408,667 Shareholders' equity: Common Stock, $1 par value; authorized 5,000,000 shares; issued and outstanding 3,589,253 in 1997 and 3,571,063 in 1996. 3,589 3,571 Additional paid in capital 13,269 13,035 Undivided profits 16,266 12,357 Net unrealized gain on securities available-for-sale, net of taxes 896 268 34,020 29,231 Total liabilities and shareholders' equity $522,353 $437,898 See accompanying notes to Consolidated Financial Statements.
FNB ROCHESTER CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31, 1997, 1996, 1995 (in thousands, except per share data) 1997 1996 1995 ---- ---- ---- Interest income: Interest and fees on loans $28,219 $25,390 $21,810 Securities: Taxable 8,678 6,420 6,751 Tax-exempt 104 122 99 ----- ----- ----- 8,782 6,542 6,850 Interest on federal funds sold and deposits with banks 505 313 575 ----- ----- ----- Total interest income 37,506 32,245 29,235 ------ ------ ------ Interest expense: Savings, interest checking and money market accounts 3,231 3,093 3,379 Certificates of deposit 13,169 10,348 8,473 Short-term borrowings 301 99 398 Long-term debt 20 19 - -- -- -- Total interest expense 16,721 13,559 12,250 ------ ------ ------ Net interest income 20,785 18,686 16,985 ------ ------ ------ Provision for loan losses 55 - - -- - - Net interest income after provision for loan losses 20,730 18,686 16,985 ------ ------ ------ Non-interest income: Service charges on deposit accounts 1,720 1,547 1,209 Credit card fees 715 740 648 Gain on sale of mortgages 73 65 40 Gain (loss) on sale of securities available-for-sale (8) (45) 33 Loan servicing fees 262 263 283 Gain on sale of banking office - 621 - Other operating income 647 616 427 --- --- --- Total non-interest income $3,409 $3,807 $2,640 ----- ----- ----- Non-interest expense: Salaries and employee benefits $9,618 $9,227 $8,238 Occupancy 3,561 3,448 2,812 Marketing and public relations 610 489 624 Office supplies, printing and postage 624 637 576 Processing fees 1,075 1,018 979 F.D.I.C. assessments 52 2 350 Net cost of operation of other real estate 16 2 (14) Legal 192 190 267 Other 1,746 1,637 1,745 ------ ----- ----- Total non-interest expense 17,494 16,650 15,577 ------ ------ ------ Income before income taxes 6,645 5,843 4,048 Income tax expense 2,126 1,710 1,194 ----- ----- ----- Net income $4,519 $4,133 $2,854 ===== ===== ===== Net income per common share - basic $ 1.26 $ 1.16 $ .80 ===== ==== ===== Net income per common share - diluted $ 1.21 $ 1.13 $ .79 ===== ==== ===== See accompanying notes to Consolidated Financial Statements.
FNB ROCHESTER CORP. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995 (in thousands except per share data) Net Unrealized Gain (Loss) Additional Securities Common Paid in Undivided Available- Stock Capital Profits For -Sale Total Balance at December 31, 1994 $3,569 $13,023 $5,549 $(781) $21,360 Net income - - 2,854 - $2,854 Option shares issued - 1 - - 1 Change in fair value of securities available-for-sale, net of taxes of $576 - - - 1,631 1,631 Balance at December 31, 1995 $3,569 $13,024 $8,403 $850 $25,846 Net income - - 4,133 - 4,133 Common stock cash dividend - $.05 per share - - (179) - (179) Option shares issued 2 11 - - 13 Change in fair value of securities available-for-sale, net of taxes of $397 - - - (582) (582) Balance at December 31, 1996 $3,571 $13,035 $12,357 $268 $29,231 Net income - - 4,519 - 4,519 Common stock cash dividend - $.17 per share - - (610) - (610) Option and employee purchase shares issued 18 234 - - 252 Change in fair value of securities available-for-sale, net of taxes of $417 - - - 628 628 Balance at December 31, 1997 $3,589 $13,269 $16,266 $896 $34,020
See accompanying notes to Consolidated Financial Statements.
FNB ROCHESTER CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 (in thousands) 1997 1996 1995 Cash flows from operating activities: Net income $4,519 $4,133 $2,854 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 55 - - Depreciation and amortization 1,464 1,449 1,208 Amortization of goodwill - 79 238 Deferred income taxes (548) (78) 301 (Gain) loss on sales of securities available-for-sale 8 45 (33) Gain on sale of subsidiary and banking offices - (621) - (Increase) decrease in mortgage loans held for sale, net (2,700) 550 (880) (Increase) decrease in accrued interest receivable (519) 331 (420) (Increase) decrease in other assets (199) (465) 127 Increase in accrued interest payable and other liabilities 986 175 555 --- --- ---- Net cash provided by operating activities 3,066 5,598 3,950 ----- ----- ------ Cash flow from investing activities: Decrease in interest bearing deposits - - 77 Securities available-for-sale: Purchase of securities (71,502) (29,987) (17,272) Proceeds from maturities 23,275 19,857 17,483 Proceeds from sales 762 10,097 11,027 Securities held-to-maturity: Purchase of securities (3,249) (2,891) (15,545) Proceeds from maturities 4,503 5,139 2,223 Loan origination and principal collection, net (25,293) (51,375) (51,362) Payment made for sale of banking office - (7,855) - Capital expenditures, net (1,125) (3,377) (3,545) Increase in other assets (139) - - --- - - Net cash used by investing activities $(72,768) $(60,392) $(56,914) ------- -------- --------
FNB ROCHESTER CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued Years ended December 31, 1997, 1996 and 1995 (in thousands) 1997 1996 1995 Cash flows from financing activities: Net increase in demand, savings, interest checking, and money market accounts $27,076 $16,125 $6,036 Certificates of deposit accepted and repaid, net 37,974 40,404 56,458 Increase (decrease) in short-term borrowings 13,450 (4,200) (4,889) Increase in long-term debt - 210 - Employee common stock purchase and exercise of options to purchase common stock 252 13 1 Dividends paid - common stock (429) - - Net cash provided by financing activities 78,323 52,552 57,606 Increase (decrease) in cash and cash equivalents 8,621 (2,242) 4,642 Cash and cash equivalents at beginning of year 21,681 23,923 19,281 Cash and cash equivalents at end of year $30,302 $21,681 $23,923 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 writedowns $38 $45 - Transfer of securities from held-to- maturity to securities available-for-sale - - $34,539 The Company paid cash during 1997, 1996, and 1995 for income taxes and interest as follows (in thousands): 1997 1996 1995 Interest $16,399 $13,553 $11,949 Income taxes 2,637 1,335 910
See accompanying notes to Consolidated Financial Statements FNB Rochester Corp. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997, 1996, and 1995 (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. Basis of Presentation The Company operates as a bank holding company. In 1997 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 shareholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. 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 accredited 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 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 Prior to January 1, 1996, the Company accounted 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. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. 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, 1997 the market value of the assets under management was $69,995,000. 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 and equivalents (stock options) outstanding during each year. Earnings per share data has been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, Earnings Per Share, in 1997. (see Note 15 to Financial Statements) 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. (2) Securities On November 15, 1995, the Financial Accounting Standards Board (FASB) published a special report A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities. This guidance included a provision that allowed institutions a one-time opportunity to reclassify (at fair value) held-to- maturity securities without calling into question their intent to hold other debt securities to maturity in the future. Under this provision the Company transferred securities with an amortized cost of $34,539,000 (fair value $35,312,000) from held-to-maturity to available-for-sale in December 1995. The aggregate amortized cost and fair value of securities available-for-sale and securities held-to-maturity at December 31, 1997 and 1996 follows (in thousands):
1997 1996 Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ------ Securities available-for-sale: U.S. Treasury $25,152 $25,403 $23,286 $23,576 U.S. Government agency 34,213 34,346 10,003 9,967 Mortgage-backed securities 59,963 61,070 38,582 38,775 ------- ------ ------ ------ Total 119,328 120,819 71,871 72,318 ======= ======= ====== ====== Securities held-to-maturity: U.S. Treasury 8,079 8,091 8,108 8,024 U.S. Government agency 5,252 5,229 5,293 5,222 Mortgage-backed securities 10,721 10,769 12,909 12,834 Obligations of state and municipal subdivisions 3,876 3,884 2,872 2,875 Other securities 350 350 350 350 ---- ----- ---- ----- Total $28,278 $28,323 $29,532 $29,305 ====== ====== ====== ======
Securities with an amortized cost of $105,341,000 and $52,427,000 at December 31, 1997 and 1996, 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, 1997 and 1996 follows (in thousands):
1997 1996 Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ---------- ---------- ---------- --------- Securities available-for-sale: U.S. Treasury $251 - $290 $ - U.S. Government agency 172 39 53 89 Mortgage-backed securities 1,157 50 426 233 Total $1,580 $89 $769 $322 Securities held-to-maturity: U.S. Treasury $39 $27 $31 $115 U.S. Government agency - 23 - 71 Mortgage-backed securities 77 29 76 151 Obligations of state and municipal subdivisions 18 10 11 8 Total $134 $89 $118 $345
The amortized cost of securities by contractual years to maturity as of December 31, 1997 are as follows (in thousands):
Under 1 Year 1 to 5 Years 5 to 10 Years 10 Years and Total Over Securities available-for-sale U.S. Treasury $9,018 $16,134 $ - $ - $ 25,152 U.S. Government agency - 3,598 16,825 13,790 34,213 Mortgage-backed securities - 3,824 7,031 49,108 59,963 Total $9,018 $23,556 $ 23,856 $ 62,898 $119,328 Securities held-to-maturity U.S. Treasury $ - $ 8,079 $ - $ - $ 8,079 U.S. Government agency 3,000 2,000 - 252 5,252 Mortgage backed securities - 7,950 1,606 1,165 10,721 Obligations of state and municipal subdivisions 2,399 843 454 180 3,876 Other securities 250 50 50 - 350 Total $5,649 $18,922 $ 2,110 $ 1,597 $ 28,278
The fair value of securities by contractual years to maturity as of December 31, 1997 are as follows (in thousands):
Under 1 Year 1 to 5 Years 5 to 10 Years 10 Years and Total Over Securities available-for-sale U.S. Treasury $9,082 $16,321 $ - $ - $25,403 U.S. Government agency - 3,592 16,924 13,830 34,346 Mortgage-backed securities - 3,817 7,293 49,960 61,070 - ----- ----- ------ ------ Total $9,082 $23,730 $24,217 $63,790 $120,819 ===== ===== ===== ===== ====== Securities held-to-maturity U.S. Treasury $ - $8,091 $ - $ - $8,091 U.S. Government agency 2,989 1,987 - 253 5,229 Mortgage backed securities - 7,939 1,637 1,193 10,769 Obligations of state and municipal subdivisions 2,398 844 454 188 3,884 Other securities 250 50 50 - 350 ----- --- -- - --- Total $5,637 $18,911 $2,141 $1,634 $28,323 ===== ===== ===== ===== ======
The following table presents the total proceeds from sales of securities available-for-sale for 1997, 1996 and 1995 and the gross realized gains and losses (in thousands): 1997 1996 1995 Proceeds from sales $762 $10,097 $11,027 --- ------ ------ Gains - 2 72 Losses (8) (47) (39) --- ----- ---- Net $(8) $(45) $33 === === === (3) Loans The major classifications of loans at December 31, 1997 and 1996 follow (in thousands): 1997 1996 Commercial $201,722 $187,721 Residential mortgage 80,083 70,933 Residential mortgage loans held for sale 3,030 330 Home equity 23,516 21,297 Other consumer 22,886 23,153 ------- ------ Total 331,237 303,434 Net deferred loan costs 283 226 Allowance for loan losses (5,580) (5,696) ------- ------ Loans, net $325,940 $297,964 ======= ======= The Company considers its primary service and marketing area to be the New York State city of Rochester and its surrounding towns. 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 $102,757,000 and $104,494,000 at December 31, 1997 and 1996, respectively are not included in the consolidated financial statements. Custodial accounts held by First National for these loans amounted to $2,193,000 and $2,182,000 at December 31, 1997 and 1996, respectively. The Company has an available line of credit with the FHLB of New York, which at December 31, 1997 amounted to approximately $43,107,000. 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, the Company's total assets, and the net worth of the FHLB of New York. At December 31, 1997, the Company pledged residential mortgages with a carrying value of $64,695,000 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, 1997 1996 1995 ---- ---- ---- Balance at beginning of year $5,696 $5,776 $6,452 Provision charged to operating expense 55 - - 5,751 5,776 6,452 Loans charged off Commercial (179) (407) (840) Residential mortgage (72) (14) (46) Home equity (13) (5) - Other consumer (145) (132) (147) Total loans charged off (409) (558) (1,033) Recoveries of loans charged off Commercial 166 407 267 Residential mortgage 12 - - Home equity - 3 6 Other consumer 60 68 84 Total recoveries of loans charged off 238 478 357 Balance at end of year $5,580 $5,696 $5,776
The principal balance of loans not accruing interest totaled $2,100,000 and $1,419,000 at December 31, 1997 and 1996 respectively. The effect of non-accrual loans on interest income for the years ended December 31, 1997, 1996, and 1995 was $22,000, $48,000 and $67,000 respectively. Other real estate owned amounted to $38,000 and $45,000 at December 31, 1997 and 1996 respectively. At December 31, 1997, and 1996, the recorded investment in loans that are considered to be impaired totaled $1,160,000, and $2,337,000, respectively, and the impairment allowance associated with these loans is $125,000 for 1997 and $38,000 for 1996. There was no impairment allowance associated with the 1995 recorded investment. The average recorded investments in impaired loans during the twelve months ended December 31, 1997, 1996 and 1995 was approximately $2,882,000, $913,000 and $1,150,000, respectively. For the twelve months ended December 31, 1997, 1996 and 1995 the Company recognized interest income on impaired loans of $234,000, $77,000 and $35,000, respectively. (5) Premises and Equipment A summary of premises and equipment follows (in thousands): December 31, 1997 1996 ---- ---- Land $710 $587 Building and improvements 2,091 2,098 Furniture, fixtures, equipment and vehicles 9,472 8,739 Leasehold improvements 5,444 5,199 ------ ----- 17,717 16,623 Less accumulated depreciation and amortization 8,904 7,471 ----- ----- Premises and equipment, net $8,813 $9,152 ===== ===== (6) Certificates of Deposit Certificates of deposit of $100,000 or more amounted to $92,477,000 at December 31, 1997 and $62,436,000 at December 31, 1996. Interest expense on certificates of deposit of $100,000 or more was $4,629,000 in 1997, $3,225,000 in 1996 and $2,457,000 in 1995. At December 31, 1997, the scheduled maturities of all certificates of deposits are as follows (in thousands): Year Amount 1998 $192,574 1999 35,965 2000 8,115 2001 3,189 2002 and thereafter 2,071 ------- Total $241,914 ======= (7) Securities Sold Under Agreements to Repurchase The Company had short term borrowings of $14,236,000 and $786,000 at December 31, 1997 and 1996 respectively. 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%. There were no securities sold under agreement 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 $13,436,000 and $5,173,000 respectively for 1997 and $4,348,000 and $704,000 respectively for 1996. Interest expense averaged 5.08% for 1997, 5.82% for 1996 and 6.17% for 1995. (8) Income Taxes Total income taxes for the years ended December 31, 1997, 1996 and 1995 were allocated as follows (in thousands):
1997 1996 1995 Income from operations $2,126 $1,710 $1,194 Shareholders' equity, change in unrealized gain (loss) on securities available-for-sale 417 (397) 576 ----- ----- ----- $2,543 $1,313 $1,770 ===== ===== =====
For the years ended December 31, 1997, 1996 and 1995, income tax expense (benefit) attributable to income from operations consists of (in thousands): 1997 1996 1995 Current: Federal $2,113 $1,648 $892 State 561 140 1 ----- ----- --- 2,674 1,788 893 ----- ----- --- Deferred: Federal (466) (335) 301 State (82) 257 - ----- ---- --- (548) (78) 301 ----- ---- --- $2,126 $1,710 $1,194 ===== ===== ===== The reconciliation of the statutory federal income tax rate with the actual effective tax rate follows: 1997 1996 1995 ---- ---- ---- 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 (7.0)% (11.0) (10.0) State taxes, net of federal benefit 4.7% 5.0 1.0 Other items, net 0.3% 1.0 4.0 --- --- --- 32.0% 29.0% 29.0% ==== ==== ==== The significant components of deferred tax expense (benefit) attributable to income from continuing operations at December 31, 1997, 1996 and 1995 are as follows: 1997 1996 1995 ---- ---- ---- Deferred tax expense (benefit) $(79) $582 $713 Increase (decrease) in valuation allowance for deferred tax assets (469) (660) (412) Net deferred tax expense (benefit) $(548) $(78) $301 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997, and 1996 are presented below (in thousands):
1997 1996 ---- ---- Deferred tax assets: Allowance for loan losses - financial statements $2,229 $2,284 Interest on non accrual loans 140 111 Premises and equipment - principally due to depreciation 163 88 Reserve for abandoned lease 91 121 Accrued salaries and benefits 121 109 Other 97 44 -- -- Gross deferred assets 2,841 2,757 Less valuation allowance (776) (1,245) ----- ------ Net deferred tax assets 2,065 1,512 Deferred tax liabilities: Allowance for loan losses - tax (650) (722) Net unrealized gain on securities available-for-sale (596) (179) Bond discount (152) (97) Net deferred loan origination costs (113) (91) --- -- Total gross deferred liabilities (1,511) (1,089) ----- ----- Net deferred tax asset $554 $423 === ===
The net change in the total valuation allowance for the years ended December 31, 1997, 1996 and 1995 were decreases of $469,000, $660,000 and $730,000 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, net of the existing valuation allowance of $776,000 at December 31, 1997. (9) Shareholders' Equity On December 16, 1997, the Company declared a dividend of $.10 per share for payment January 30, 1998 to shareholders' of record January 15, 1998. Dividends of $.07 per share were declared in June 1997 for payment in July 1997. Dividends of $.05 per share were declared in December 1996 for payment in January 1997. No dividends were declared or paid in 1995 by the Company. 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 $10,894,000 are available from First National at December 31, 1997 without the approval of the OCC. (10) Stock Option Plans The Company has two stock option plans. A plan adopted in 1992 (amended May 28, 1996) for employees, authorizes grants of options to purchase up to 325,000 shares of its authorized but unissued common stock. The second plan is a 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 have ten year terms and, with the exception of a 1992 grant of options for 75,000 shares, all stock options vest at 50% per year and become fully vested after two years. The 1992 grant vests at 20% per year and was fully vested after five years. 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 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. For accounting purposes there were no option grants in 1995 as the Company's 1995 option grants were subject to shareholder approval in 1996 and were therefore required to be included with the 1996 option grants. 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) 1997 1996 ---- ---- Net income As reported $ 4,519 $ 4,133 Pro forma 4,385 4,003 Basic earnings Per share As reported 1.26 1.16 Pro forma $ 1.22 $ 1.12 Pro forma net income and earnings per share reflect only options granted in 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, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below
1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ --------- ------ -------- Outstanding at beginning of year 318,850 $ 7.28 223,100 $ 6.59 225,000 $ 6.59 Granted 7,500 16.13 98,750 8.88 - - Exercised 3,000 7.64 2,100 6.01 250 5.69 Forfeited 1,500 11.27 900 7.15 1,650 5.96 ----- ----- ----- ---- ----- ---- Outstanding at end of year 321,850 $ 7.48 318,850 $ 7.30 223,100 $ 6.59 ======= ===== ======= ==== ======= ==== Options exercisable at year end 304,475 244,350 167,150 ======= ======= ======= Weighted-average fair value of options granted during the year $ 8.44 $ 5.11 - ======= =======
The following table summarizes information about fixed stock options outstanding at December 31, 1997
Options Outstanding Options Exercisable Number Weighted-Avg Number Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price --------------- ----------- ------------------- -------------- ----------- -------------- $5.63 - 8.32 294,850 5.8 $ 6.94 294,850 $ 6.94 9.75 - 12.75 19,500 8.9 12.37 9,625 12.36 16.13 7,500 9.7 16.13 - - $5.63 - 16.13 321,850 6.1 $ 7.48 304,475 $ 7.11
(11) Leases The Company leases certain buildings and office space under operating lease arrangements. Rent expense under these arrangements amounted to $1,122,601 in 1997, $1,110,000 in 1996 and $776,000 in 1995. 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, 1997 follows (in thousands): Year Ending December 31, ------------------------ Year Amount ---- ------ 1998 $965 1999 1,006 2000 1,017 2001 1,047 2002 1,049 After 2002 9,484 Total $14,568 Several new leases have been signed for additional banking offices and office space. Three 20-year ground leases were signed for new banking offices in the Village of Brockport, Town of Victor and a new Pittsford office to replace the existing office on Monroe Avenue. 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 annual lease expense for all of the new leases is expected to be approximately $1,142,000 for the first five years and $3,061,000 for years beyond five. The new lease amounts are excluded from 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, 1997 and 1996 are set forth in the table below (in thousands):
1997 1996 Fixed Rate Variable Rate Fixed Rate Variable Rate ---------- ------------- ---------- ------------- Commercial letters of credit - 2,749 - 3,189 Commercial lines of credit 2,362 59,040 12,535 64,346 Other loan commitments 17,184 18,917 7,546 9,313
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, 1997, the Company had funded $322,000 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, 1997 and 1996 was approximately $365,000 and $557,000. 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 following table sets forth (in thousands) the defined benefit plan's actuarially determined funded status and amounts recognized in the Company's consolidated financial statements:
December 31 1997 1996 Actuarial present value of accumulated benefit obligation, including vested benefits of $792 and $416 $915 $558 Actuarial present value of projected benefit obligation for service rendered to date 1,691 1,022 Less plan assets at fair value - primarily listed common stock, U.S. Government and agency securities, and collective funds 1,307 757 Projected benefit obligation in excess of plan assets 384 265 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions (142) (19) Unrecognized prior service cost 4 5 Accrued pension cost included in other liabilities $246 $251
Net pension cost included the following components (in thousands): Years Ended December 31 1997 1996 1995 ---- ---- ---- Service cost-benefits earned during the period $385 $368 $250 Interest cost on projected benefit obligation 82 54 24 Actual return on plan assets (178) (21) (9) Net amortization and deferral 94 (16) (20) ---- --- --- Net periodic pension cost $383 $385 $245 === === === Assumptions used in determining pension data for 1997, 1996, and 1995 are as follows: 1997 1996 1995 ----- ----- ----- Discount rate for benefit obligations 7.50% 8.00% 7.50% Rate of increase in compensation levels 5.00% 5.00% 5.00% Expected long-term rate of return on assets 8.50% 8.50% 8.50% 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 $77,000 in 1997, $66,000 in 1996, and $54,000 in 1995. (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, 1997 1996 ------ ------ Balance of loans outstanding at beginning of year $4,827 $5,591 New loans and increases in existing loans 1,496 80 Loan principal repayments (382) (844) ------ ----- Balance at end of year $5,941 $4,827 ===== ===== 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):
Average Per Share Income Shares Amount ------ ------- --------- For year ended December 31, 1997 Basic EPS Net income applicable to common shareholders $ 4,519 3,580,713 $ 1.26 Effect of asssumed 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 ===== ========= ==== For year ended December 31, 1995 Basic EPS Net income applicable to common shareholders $ 2,854 3,568,759 $ 0.80 Effect of assumed exercise of stock options - 27,114 ==== - -------- Diluted EPS Income available to common shareholders and assumed exercise of stock options $ 2,854 3,595,873 $ 0.79 ===== ========= ====
(16) Condensed Financial Information - Parent Company Only The following presents the financial condition of the Parent Company (FNB Rochester Corp.) as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the years ended December 31, 1997, 1996, and 1995: Condensed Statements of Financial Condition (in thousands) Assets 1997 1996 ---- ---- Cash and cash equivalents $996 $644 Investment (at equity) in subsidiary 33,411 28,802 Other assets 3 1 Total assets $34,410 $29,447 Liabilities and shareholders' equity Accrued interest payable and other liabilities $390 $216 Total liabilities 390 216 Shareholders' equity 34,020 29,231 Total liabilities and shareholders' equity $34,410 $29,447 Statement of Income (in thousands) Years ended December 31, 1997 1996 1995 ---- ---- ---- Income: Dividends from subsidiary $600 $200 $ - Interest and other 27 19 20 --- --- --- Total income 627 219 20 --- --- --- Expense: Other 118 109 122 --- --- --- Total expense 118 109 122 --- --- --- (Income) loss before taxes and equity in undistributed income of subsidiary 509 110 (102) Income tax benefit (29) (26) (40) --- --- --- Income (loss) before undistributed income of subsidiary 538 136 (62) Equity in undistributed income of subsidiary 3,981 3,997 2,916 ----- ----- ----- Net income $4,519 $4,133 $2,854 ===== ===== ===== Statement of Cash Flows (in thousands)
Years ended December 31, 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $4,519 $4,133 $2,854 Adjustment to reconcile net income to cash (used) provided by operating activities: Equity in undistributed income of subsidiary 3,981) (3,997) (2,916) (Increase) decrease in other assets (2) 3 1 Increase (decrease) in accrued interest payable and other liabilities (7) (2) 4 --- --- --- Net cash (used) provided by operating activities 529 137 (57) --- --- --- 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 252 13 1 Dividends paid - common stock (429) - - Net cash provided by financing activities (177) 13 1 --- --- --- Increase (decrease) in cash and cash equivalents 352 150 (56) Cash and cash equivalents at beginning of year 644 494 550 --- --- --- Cash and cash equivalents at end of year $996 $644 $494 === === ===
The Parent Company paid cash during 1997, 1996, and 1995 for income taxes and interest as follows (in thousands) : 1997 1996 1995 ---- ---- ---- Interest - - - Income taxes 2,637 1,335 910 (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, 1997, 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, 1997, that First National meets all capital adequacy requirements to which it is subject. As of December 31, 1997, 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.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 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% As of December 31, 1996 Total Capital (to Risk Weighted Assets) $ 32,135 11.0% $ 23,296 8.0% $ 29,120 10.0% Tier I Capital (to Risk Weighted Assets) $ 28,469 9.8% $ 11,648 4.0% $ 11,648 6.0% Tier I Capital (to average assets) $ 28,469 6.6% $ 17,400 4.0% $ 21,750 5.0%
The Company's capital amounts and ratios as of December 31, 1997 and 1996 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. 1997 1996 (in thousands) Estimated Estimated Carrying Fair Carrying Fair Financial Assets: Amount Value(1) Amount Value(1) - ----------------- -------- -------- ------- ------- Cash $17,968 $17,968 $20,060 $20,060 Interest bearing deposits with banks 1,134 1,134 1,121 1,121 Federal funds sold 12,200 12,200 1,500 1,500 Securities, including FHLB and FRB 149,261 150,797 103,366 103,139 Net loans and loan commitments 325,940 337,123 297,964 304,634 Financial Liabilities: Total deposits 469,821 470,254 404,771 406,114 Short-term borrowings and long-term debt $14,446 $14,446 $996 $996 (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 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. CORPORATE DIRECTORY DIRECTORS OF FNB ROCHESTER CORP. AND FIRST NATIONAL BANK OF ROCHESTER R. Carlos Carballada President and Chief Executive Officer Michael J. Falcone, Chairman Real Estate Developer, Pioneer Group Gayle C. Johnston Vice President and General Manager Sunglass Hut Business Bausch & Lomb Joseph M. Lobozzo II President & Chief Executive Officer JML Optical Industries, Inc. Francis T. Lombardi Vice President, Syracuse Tank & Mfg. Co. Carl R. Reynolds Attorney H. Bruce Russell Retired James D. Ryan President and Owner RYCO Management, Inc. Property Management and Development Linda Cornell Weinstein Executive Director, Cornell/Weinstein Family Foundation OFFICERS OF FNB ROCHESTER CORP. R. Carlos Carballada President and Chief Executive Officer Stacy C. Campbell Sr. Vice President and Chief Financial Officer Mariann Joyal Corporate Secretary Timothy P. Johnson Assistant Corporate Secretary SENIOR OFFICERS OF FIRST NATIONAL BANK OF ROCHESTER R. Carlos Carballada President and Chief Executive Officer Donald R. Aldred Sr. Vice President, Business & Professional Banking Robert B. Bantle Sr. Vice President, Community Banking Peter M. Biggs Sr. Vice President, Marketing Director Stacy C. Campbell Sr. Vice President and Chief Financial Officer Barbara W. Fuge Vice President, Corporate Operations Project Manager/Loan Servicing Manager Robert E. Gilbert Sr. Vice President, Operations Timothy P. Johnson Vice President and Counsel Richard J. Long Vice President, Human Resources Theresa B. Mazzullo Sr. Vice President, Trust & Investment VICE PRESIDENTS OF FIRST NATIONAL BANK OF ROCHESTER
Richard L. Aldrich William C. Lyons Vice President, Brockport Office Manager Vice President, Business & Professional Lending - Buffalo Bruce G. Austin Vice President, Treasury & Planning Carl J. Martel Vice President, Henrietta Office Manager Jeffrey W. Barker Vice President, Business & Professional Richard F. Medyn Real Estate Lending Vice President ,Business & Professional Lending Dorian C. Chapman Robert S. Moore Vice President, Business & Professional Vice President, Business & Professional Lending Investor Real Estate Lending Thomas M. Pauly Roger L. Cormier Vice President, Loan Review Vice President, East Rochester Office Manager Nancy E. Posick Anthony M. Costanza Vice President, Victor Office Manager Vice President, Business & Professional Lending David T. Reaske Michael J. Drexler Vice President, Business & Professional Vice President, Business & Professional Lending Lending - Syracuse Gary L. Gayton Kathleen J. Russell Vice President, Chili Office Manager Vice President, Greece Office Manager John C. Glerum Edward A. Slank Vice President, Controller-Finance Vice President, Business & Professional Lending - Syracuse Dennis A. Heuser Vice President, Business & Professional Richard H. Steffen Specialized Lending Vice President, Honeoye Falls Office Manager James F. Jackson Peter Y. Sunderland Vice President, Vice President, Business & Professional Consumer Lending Lending - Buffalo Sandra A. Lancer Richard A. Szabat Vice President, Trust & Investments Vice President, Business & Professional Lending James F. Lynd Robert Varrenti Vice President, Penfield Office Manager Vice President, Information Services Robert J. Lynough II Judith L. Willis Vice President, Southport Office Manager Vice President, Perinton Office Manager Paul P. Ziegler Vice President, Pittsford Office Manager
EX-21 6 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. (Exhibit 21) EX-23 7 EXHIBIT 23 Independent Auditors' Consent The Board of Directors: FNB Rochester Corp.: We consent to incorporation by reference in registration statements Nos. 33-65194 and 333-15325 on Form S-8 of FNB Rochester Corp. of our report dated January 20, 1998, relating to the consolidated statements of financial condition of FNB Rochester Corp. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report has been incorporated by reference in the December 31, 1997 annual report on Form 10-K of FNB Rochester Corp. s/ KPMG Peat Marwick LLP Rochester, New York March 23, 1998 (Exhibit 23) EX-27 8 ARTICLE 9 FDS FOR 10-K
9 1,000 YEAR YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 17,968 20,060 18,662 1,134 1,121 1,061 12,200 1,500 5,200 0 0 0 120,819 72,318 73,527 28,278 29,532 31,780 28,323 29,305 31,952 331,520 303,660 254,003 5,580 5,696 5,776 522,353 437,898 391,320 469,821 404,771 357,875 14,236 786 4,986 4,066 2,900 2,613 210 210 0 0 0 0 0 0 0 3,589 3,571 3,569 30,431 25,660 22,277 522,353 437,898 391,320 28,219 25,390 21,810 8,782 6,542 6,850 505 313 575 37,506 32,245 29,235 16,400 13,441 11,852 16,721 13,559 12,250 20,785 18,686 16,985 55 0 0 (8) (45) 33 17,494 16,650 15,577 6,645 5,843 4,048 4,519 4,133 2,854 0 0 0 0 0 0 4,519 4,133 2,854 1.26 1.16 0.80 1.21 1.13 0.79 4.53 4.79 4.92 2,100 1,419 1,665 540 645 45 0 0 0 0 0 0 5,696 5,776 6,452 409 558 1,033 238 478 357 5,580 5,696 5,776 5,580 5,696 5,776 0 0 0 0 0 0
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