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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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 0-18301
IROQUOIS BANCORP, INC.
(Exact name of Registrant as specified in its charter)
New York 16-1351101
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
115 Genesee Street, Auburn, New York 13021
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (315) 252-9521
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of 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 or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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The aggregate market value of the shares of Registrant's voting stock, its
Common Stock, held by non-affiliates of Registrant as of February 26, 1999 was
$38,522,317 based upon the closing sale price of $21.75 per share of Common
Stock on that date, as reported by the NASDAQ Stock Market.
The number of shares outstanding of Registrant's Common Stock as of February 26,
1999 was 2,426,880.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 are incorporated by reference into Part I and II.
Portions of the Registrant's Definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 29, 1999 are incorporated by reference
into Part III.
This annual report contains certain "forward-looking statements" covered by
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company is making this statement for the express purpose of availing
itself of the safe harbor protection with respect to any and all of such
forward-looking statements, including those contained in Management's Discussion
and Analysis which describe future plans or strategies and include the Company's
expectations of future financial results. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies is inherently uncertain. Factors that could
affect actual results include interest rate trends, the general economic climate
in the Company's market areas or in the country as a whole, loan delinquency
rates, and changes in federal and state regulation. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.
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PART I
Item 1. Description of Business
General
Iroquois Bancorp, Inc. (the "Company"), a New York corporation, is a bank
holding company that operates two wholly-owned financial institution
subsidiaries: Cayuga Bank , a New York state-chartered commercial bank and trust
company with its principal offices located in Auburn, New York and The Homestead
Savings FA ("Homestead Savings"), a federally chartered savings association with
its principal offices located in Utica, New York. Prior to January 1, 1997, the
Company was a thrift holding company and Cayuga Bank was a New York state
chartered savings bank. The Company became a bank holding company in connection
with the change in Cayuga Bank's charter from a savings bank to a commercial
bank under New York state law. Cayuga Bank and Homestead Savings are sometimes
referred to herein as the "member banks."
Description of business
The Company, through its member banks and their respective subsidiaries
(collectively, the "Subsidiaries"), is engaged solely in the business of
providing financial services to consumers and businesses. The Company caters to
the particular needs of its market areas through the Subsidiaries, offering a
broad range of financial products and services. Loan products offered by the
Company include mortgages, home equity loans and lines of credit, consumer
installment loans, credit cards, student loans, and commercial loans; deposit
products include savings, checking and time deposits, money market accounts, a
range of deposits for municipalities or other public corporations, and mortgage
escrow accounts. The Company also provides insurance agency services, investment
brokerage services, trust services and safe deposit facilities.
The business of the Company is more fully described in Management's
Discussion and Analysis at pages 5 through 22 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1998 (the "1998 Annual
Report to Shareholders"), incorporated herein by reference to Exhibit (13)
hereto.
Market Area
The Company's market area primarily covers the Central New York counties of
Cayuga, Oswego and Oneida. Cayuga and Oswego counties are part of the Syracuse
MSA, which also includes Onondaga and Madison counties. Oneida County is part of
the Utica MSA, which also includes Herkimer County. The Company's residential
mortgage lending extends to Monroe County, part of the Rochester MSA, and parts
of Seneca and Onondaga counties through a broker network, as well as to Old
Forge and Lake Placid, NY, through loan production offices.
A recent estimate by the U.S. Census Bureau shows the upstate New York
population decreasing by 24,965 people or .4% from July 1997 to July 1998.
Cayuga County population declined by .5%, slightly more than the upstate
average. Oneida County led the state in population decline from 1990 to 1997
with 7.0%, or 17,649 people leaving the county. The Syracuse area lost 4.5%, or
33,445 people during the same period.
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The percentage of population over age 60 increased by 3% for Cayuga County,
and 6% for both Oswego and Oneida counties from the period 1980 to 1990. Nearly
one-third of the total population in these counties exceeds 60 years of age.
These statistics seem to follow a national trend of people living longer. The
Company intends to focus on this market segment with products and services
designed to accommodate an older population. These include relationship
accounts, trust and investment services and products for meeting housing needs
of the elderly through innovative mortgage programs.
In 1998, the Central New York economy grew twice as fast as estimated and
faster than any time since 1990. Job growth for 1998 in the Syracuse MSA was
1.2%, compared to a national average of 2.6%. Service sector jobs grew the most,
adding 1,600 jobs. Manufacturing was second with job growth of 1,300 jobs. Every
major industry added jobs except for retailing which lost 700 jobs.
The unemployment rate for the Syracuse MSA was 3.6% for December 1998 down
from 4.5% a year earlier. The unemployment rate for New York State for December
1998 was 5.1% while the national rate was 4.3%. The December year over year
unemployment rate for Cayuga County improved from 5.6% in 1997 to 5.2% in 1998.
Oneida County improved from 4.7% to 3.7% while Oswego County improved from 6.8%
to 5.7% The unemployment rate for the Rochester MSA improved from 4.0% to 3.6%.
The Utica MSA improved from 5.2% to 4.1%.
The Central New York housing market improved during 1998. Sales in the
Syracuse MSA were 18% higher while the median sales price increased 1.4%.
Nationally, sales were up 16% with a comparable percentage increase in median
price. The backlog of unsold homes has declined but remains relatively high in
the Company's primary market areas. The Rochester area housing market remains
the strongest market in the Upstate NY area exhibiting continued growth in
housing sales and a less than 2.6 month supply of unsold homes.
Competition
Because the primary business of the Company is the ongoing business of its
Subsidiaries, the competitive conditions faced by the Company are primarily
those of the member banks as financial institutions in their respective
geographic markets. Within their respective market areas, the member banks
encounter intense competition from other financial institutions offering
comparable products. These competitors include commercial banks, savings banks,
savings and loan associations, and credit unions. Competition for the broader
range of financial services provided by the Subsidiaries also comes from
non-banking entities such as personal loan companies, sales finance companies,
leasing companies, securities brokers and dealers, insurance companies, mortgage
companies, and money market and mutual fund companies.
To differentiate itself from the competition in its market areas, the
Company places strong emphasis on providing customers with highly personalized
service and products tailored to the needs of its retail and commercial
customers. The Subsidiaries also utilize personal sales calls, convenient hours
and locations, and relationship-based products and services to enhance customer
retention and loyalty.
In addition to competition for financial services, the Company itself faces
competition for acquisition of other banking institutions or their branches.
Numerous banks and financial institutions in the Company's market areas are
pursuing acquisition strategies and have formed holding companies for the same
reasons as the Company.
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Statistical Disclosure by Bank Holding Companies
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
Information required by this section of Securities Act Industry Guide 3, or
Exchange Act Industry Guide 3 (Guide 3), is presented in the Registrant's
1998 Annual Report to Shareholders in Management's Discussion and Analysis
on page 7 in Table 1 - Net Interest Income Analysis, and on page 8 in Table
2 - Rate/Volume Analysis, which Tables 1 and 2 are incorporated herein by
reference.
II. Investment Portfolio
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders in Management's Discussion
and Analysis on page 15 in Table 6 - Securities and on page 16 in Table 7 -
Maturity Schedule of Securities, which Tables 6 and 7 are incorporated
herein by reference.
III. Loan Portfolio
A. Composition of Loan Portfolio
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders in Management's
Discussion and Analysis on page 10 in Table 3 - Summary of the Loan
Portfolio, which Table 3 is incorporated herein by reference.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
Information required by this section of Guide 3 is presented in
Registrant's 1998 Annual Report to Shareholders in Management's
Discussion and Analysis on page 10 in the table entitled Selected Loan
Maturity and Interest Rate Sensitivity, which Table is incorporated
herein by reference.
C. 1. Risk Elements
Information required by this section of Guide 3 is presented in
the Registrant's 1998 Annual Report to Shareholders in
Management's Discussion and Analysis on page 14 in Table 5 -
Summary of Non-Performing Assets, which Table 5 is incorporated
herein by reference.
2. Potential Problem Loans
Information required by this section of Guide 3 is presented in
the Registrant's 1998 Annual Report to Shareholders in
Management's Discussion and Analysis on pages 13 through 14, in
the discussion under the caption Non-Performing Assets, which
discussion is incorporated herein by reference.
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3. Foreign Outstandings
The Company does not make loans to foreign companies and, at
December 31, 1998, 1997 and 1996, there were no foreign loans
outstanding.
4. Loan Concentrations
Information required by this section of Guide 3 is presented in
the Registrant's 1998 Annual Report to Shareholders on page 43 in
note (16) of the Notes to Consolidated Financial Statements
relating to Commitments and Contingencies, which note (16) is
incorporated herein by reference.
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Loan Losses
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders in Management's
Discussion and Analysis on page 13 in Table 4 - Allowance for Loan
Losses, in the discussion on page 12 under the caption reference.
Allowance for Loan Losses and in the discussion on pages 13 through 14
under the caption Non-Performing Assets, which Table 4 and which
discussions are incorporated herein by reference.
B. Allocation of the Allowance for Loan Losses
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders in Management's
Discussion and Analysis on page 13 in that portion of Table 4 -
Allowance for Loan Losses under the separate table heading Allocation
of Allowance for Loan Losses at December 31, which portion of Table 4
is incorporated herein by reference.
V. Deposits
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders in Management's Discussion
and Analysis on page 7 in Table 1 - Net Interest Income Analysis, on page
17 in Table 8 - Deposits and on page 17 in Table 9 - Maturities of Time
Deposits - $100,000 and Over, which Tables 1, 8 and 9 are incorporated
herein by reference.
VI. Return on Equity and Assets
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders on page 4 in the table
entitled Selected Consolidated Financial Data, which Table is incorporated
herein by reference.
VII. Short-Term Borrowings
Information required by this section of Guide 3 is presented in the
Registrant's 1998 Annual Report to Shareholders on page 36 in note (7) of
the Notes to Consolidated Financial Statements
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relating to Borrowings, in that portion of the table therein on information
related to the Federal Home Loan Bank Line of Credit at December 31, 1998
and 1997 and in the discussion therein under the caption Line of Credit and
Term Advances, which tabular information and discussions are incorporated
herein by reference.
Employees
At December 31, 1998, the Company and its Subsidiaries had 176 full-time
and 36 part-time employees. The Company and its Subsidiaries provide a variety
of benefit programs including group life, health, accident and other insurance
benefits, and retirement and stock ownership plans.
Regulation and Supervision
The earnings of the member banks, and therefore the earnings of the
Company, are affected by policies of regulatory authorities, most significantly
the Board of Governors of the Federal Reserve System (the "FRB") which
implements policies to influence interest rates and the supply of money and
credit in the banking system. The FRB's monetary policies strongly influence the
behavior of interest rates and can have a significant effect on the operating
results of commercial banks, primarily through the FRB's policies that have a
direct impact on interest rates. The effects of various FRB policies on future
business and earnings of the Company cannot be predicted, nor can the nature or
extent of any effects of possible future governmental controls, legislative or
regulatory changes that may be implemented by the FRB or any of the other
regulatory agencies with jurisdiction over the Company or its Subsidiaries.
As sole shareholder of Cayuga Bank, under federal law the Company is a bank
holding company subject to the jurisdiction of the FRB. The Company also falls
within the definition of a thrift holding company as sole shareholder of
Homestead Savings, under the jurisdiction of the Office of Thrift Supervision
("OTS"). Under the provisions of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA"), the OTS adopted rules applicable to holding
companies that qualify as both a bank and thrift holding company, and the OTS no
longer supervises a holding company that controls both a bank and a savings
association if it is registered with the FRB. Accordingly, under federal law,
the Company files all reports with and is subject to regulation, examination,
and supervision solely by the FRB even though it continues to own a savings
association. OTS, however, continues to be the primary regulatory authority for
Homestead Savings, the Company's wholly-owned savings association subsidiary.
The Company also has been and continues to be a bank holding company for
purposes of state law and, as such, is subject to regulation, examination, and
supervision by the New York State Banking Department.
Cayuga Bank operates as a commercial bank, chartered as a New York State
trust company, and is subject to regulation, supervision and examination by the
New York State Banking Department as its primary regulatory authority and by the
Federal Deposit Insurance Corporation ("FDIC"). Homestead Savings is subject to
regulation, supervision and examination by the OTS as its primary regulatory
authority. Cayuga Bank's deposits are insured by the FDIC Bank Insurance Fund
("BIF") and Homestead Savings' deposits are insured by the FDIC Savings
Association Insurance Fund ("SAIF"). Each of the financial institutions is
subject to assessment of insurance premiums as the FDIC may require from time to
time to assure that the BIF and SAIF have adequate reserves. During the last
year, Cayuga Bank, as a well-capitalized institution insured by BIF, paid an
assessment of $0.012 per $100 of qualifying deposits and Homestead Savings, as a
well-capitalized SAIF-insured institution, paid $0.06 per $100 of qualifying
deposits. FDIC deposit insurance coverage under the respective BIF and SAIF is
generally in amounts up
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to $100,000 per depositor. The FDIC has the power to terminate insured status or
to suspend it temporarily under special conditions.
The FRB has adopted minimum capital ratios and guidelines for assessing the
adequacy of capital of bank holding companies. The minimum capital ratios
consist of a risk-based measure, a leverage ratio and a Tier 1 leverage ratio.
Under the risk-based measure, a bank holding company must have a minimum ratio
of qualifying total capital to risk-weighted assets equal to 8%, of which at
least 4% must be in the form of Tier 1 capital. Qualifying total capital is
calculated by adding Tier 1 capital and Tier 2 capital. The risk-based capital
ratio, calculated by dividing qualifying capital by risk-weighted assets, also
incorporates capital charges for certain market risks. The leverage measure of
capital is based on two components, a minimum level of primary capital to total
assets of 5.5% and a minimum level of total capital to total assets of 6.0%. The
Tier 1 leverage ratio requires the ratio of Tier 1 capital to total assets be at
least 3%, for strong bank holding companies and those that have implemented a
risk-based capital measurement that includes market risk factors. All other
holding companies must have a minimum 4% Tier 1 leverage ratio, and an even
higher ratio may be imposed on weaker organizations. At December 31, 1998, the
Company's capital ratios were in excess of the minimum requirements.
The FRB also places bank holding companies into various categories based
upon these measures of capital adequacy, of which the highest level is "well
capitalized." A bank holding company is considered well capitalized if it
maintains a risk-based capital ratio of 10% or greater and a Tier 1 risk-based
capital ratio of 6% or greater, and if the bank holding company is not subject
to any written agreement, order or similar directive issued by FRB for
maintaining capital levels. Under EGRPRA, a bank holding company that is deemed
to be well-capitalized may engage in permissible non-banking activities without
prior approval from the FRB. Based on the Company's calculation of its capital
ratios, the Company qualifies as a well capitalized bank holding company.
Both of the financial institution subsidiaries of the Company are also
subject to specific capital requirements of their respective regulators. Cayuga
Bank is subject to FDIC guidelines which require Tier 1 capital of at least 3%
of total assets, and 1% to 2% higher depending upon the bank's financial
condition and growth strategy. The FDIC risk-based capital guidelines require
that the ratio of total capital to risk-weighted assets must be at least 8%,
with a minimum of 4% in Tier 1 capital. Homestead Savings is subject to the
capital adequacy guidelines of the OTS, which require tangible capital of at
least 1.5% of total assets, core capital of at least 3% of total assets, and
minimum risk-based capital of 8% of risk-weighted assets. Both subsidiaries have
in excess of these capital requirements.
For supervisory purposes, each of the federal bank regulatory agencies have
promulgated regulations establishing five categories, ranging from
well-capitalized to critically under-capitalized, depending upon the
institution's capital and other factors. Capital adequacy provisions that apply
to both Cayuga Bank and Homestead Savings under guidelines adopted by all
federal banking regulatory agencies also require market risk measures to be
included in risk-based capital standards.
The Riegle-Neal Interstate Banking Efficiency Act of 1994 permits bank
holding companies and banks to engage in transactions involving interstate
acquisitions and mergers if the holding company and banking institution are
adequately capitalized and managed. The FRB imposes restrictions, however, on
the acquisition by the Company of more than 5% of the voting shares of any bank
or other bank holding company. The extent to and terms on which full interstate
branching and certain other actions authorized under the Riegle-Neal Act are
implemented will depend on the actions of entities other than the Company and
its member banks, including the legislatures of the various states. Further
developments by state and federal authorities, including legislation, with
respect to matters covered by the Riegle-Neal Act reasonably can be anticipated
to occur in the future.
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Under the Community Reinvestment Act of 1977 ("CRA"), the federal
regulatory agencies are required to assess whether the holding company or
institutions are meeting the credit needs of the communities served. All bank
regulatory agencies take CRA ratings into consideration in connection with any
application for mergers, consolidations, including applications for acquiring
branch offices of operating institutions. New York State Banking Department
regulations impose similar requirements with respect to the CRA.
Cayuga Bank and Homestead Savings are also subject to certain FRB
regulations for the maintenance of reserves in cash or in non-interest bearing
accounts, the effect of which is to increase their cost of funds. Cayuga Bank is
also subject to comprehensive New York state regulation, including limitations
on the amount of dividends that may be paid to Iroquois as its sole shareholder.
New banking legislation related to bank holding companies and their
subsidiaries has been under consideration by Congressional committees on a
regular basis in recent years. The likelihood of success of any such legislation
and the effect, if any, of such legislation on the Company and its Subsidiaries
cannot be predicted.
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Item 2. Properties
The Company's properties are all located in Central New York State. Six
banking office facilities are utilized by Cayuga Bank: three in Auburn, one in
Weedsport, one in Moravia, and one in Lacona, all of which are owned. The
Company has two offices in Utica, one office in Waterville, and one office in
Clinton, that are all owned and utilized as banking offices by Homestead
Savings. The Company also leases space in Freedom Mall, Rome, New York for use
by Homestead Savings. The lease was extended upon its expiration in June, 1998
on a month-to-month basis. Homestead Savings is currently looking for a new
location for this facility. All of these properties are in generally good
condition and appropriate for their intended use.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings, other than
routine legal proceedings undertaken in the ordinary course of business or legal
proceedings that, in the opinion of the management after consultation with
counsel, if determined adversely, would not have a material effect on the
consolidated financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Stockholders
NONE
* * * * * * * * * * *
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Richard D. Callahan 56 President and Chief Executive Officer
Marianne R. O'Connor 44 Treasurer and Chief Financial Officer
Richard J. Notebaert, Jr. 55 Vice President
W. Anthony Shay, Jr. 56 Vice President-Operations
</TABLE>
All of the foregoing executive officers were elected by the Company's board
of directors at its first board meeting in January for the fiscal year. Each
such executive officer was so elected to serve the Company, in addition to the
officer's primary duties as an executive officer of Cayuga Bank or Homestead
Savings, for a term of one year and until his or her successor is duly elected
and qualified at the first meeting of the board of directors held in January of
each fiscal year.
Richard D. Callahan, President and Chief Executive Officer, joined both the
Company and Cayuga Bank in 1994. Prior to that time, he was Regional Executive
Vice President, Regional President, and Senior Executive Vice President of
Operations and Marketing, in that order, for Marine Midland Bank from 1983 to
1993, after 18 years of prior banking experience.
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Marianne R. O'Connor, Treasurer and Chief Financial Officer, joined Cayuga
Bank as manager of the Loan Servicing Department in 1979, subsequently served as
Assistant Comptroller, and was promoted to Treasurer in 1985 and to Chief
Financial Officer in 1988.
Richard J. Notebaert, Jr., Vice President, joined Homestead Savings in
February 1990 as Executive Vice President, and was promoted to President and
Chief Executive Officer of Homestead in 1992. Prior to that time, he had been
Executive Vice President of Monroe Savings Bank for 14 years.
W. Anthony Shay, Jr., Vice President-Operations, joined Cayuga Bank in
February, 1995 as Vice President. Prior to that time, he was Senior Vice
President Operations Support, Senior Vice President Processing Services Group,
Senior Vice President and Regional Executive, and held other various positions
with Marine Midland Bank from 1964 to 1994.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Reference is made to the information on page 46 of the Company's 1998
Annual Report to Shareholders, incorporated herein by reference to Exhibit (13)
hereto.
Item 6. Selected Financial Data
Reference is made to Selected Consolidated Financial Data on page 4 of the
Company's 1998 Annual Report to Shareholders, incorporated herein by reference
to Exhibit (13) hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reference is made to Management's Discussion and Analysis in the Company's
1998 Annual Report to Shareholders on pages 5 through 22 thereof, incorporated
herein by reference to Exhibit (13) hereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to the discussion under the caption Market Risk and
Interest Rate Risk Management on pages 18 through 20 and to Table 10 - Net
Portfolio Value Analysis and Table 11 - Interest Rate Sensitivity Table on page
20 of Management's Discussion and Analysis in the Company's 1998 Annual Report
to Shareholders, which discussion and Tables 10 and 11 are incorporated herein
by reference to Exhibit (13) hereto.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company, together with the
report thereon of its independent auditors, included in the 1998 Annual Report
to Shareholders on pages 24 through 45 thereof, along with the Unaudited
Summarized Quarterly Financial Information on page 46 thereof, are incorporated
herein by reference to Exhibit (13) hereto. The financial statements of the
Iroquois Bancorp 401(k) Savings Plan, together with the report thereon of its
independent auditors, as required by Rule 15d-21 pursuant to Section 15(d) of
the Securities Exchange Act of 1934, as amended, are incorporated herein by
reference to Exhibit (99) hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of directors.
Reference is made to pages 4 and 5 under the caption ELECTION OF
DIRECTORS in the Company's Definitive Proxy Statement relating to its
Annual Meeting of Shareholders to be held on April 29, 1999 (the "Proxy
Statement"), incorporated herein by reference.
(b) Identification of executive officers.
The information pertaining to the Company's executive officers is
included in Part I of this Annual Report on Form 10-K following Item 4
hereof as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
(c) Family relationships.
There are no family relationships between any director, executive
officer, or any person nominated or chosen by the Company to become a
director or executive officer. Officers of the Company serve for a term of
office from the date of election to the next annual meeting of the board of
directors and until their respective successors are elected and qualified,
except in the case of death, resignation, or removal. There are no
arrangements or understandings with any other person pursuant to which any
director or executive officer was elected to such position.
(d) Compliance with Section 16(a) of the Exchange Act
Reference is made to the information under the caption COMPLIANCE WITH
SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 in the Company's Proxy
Statement on page 4 thereof, incorporated herein by reference.
Item 11. Executive Compensation
Reference is made to the information under the caption EXECUTIVE
COMPENSATION on pages 7 through 14 of the Company's Proxy Statement,
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information under the caption STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT on pages 2 and 3 of the Company's Proxy
Statement, incorporated herein by reference. There are no arrangements known to
the Company, including any pledge by any person of securities of the Company,
the operation of which may, at a subsequent date, result in a change of control
of the Company.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information under the caption CERTAIN TRANSACTIONS
on page 16 of the Company's Proxy Statement, incorporated herein by reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements and Report of Independent Auditors. The following
consolidated financial statements and reports of the Company are
incorporated in this Annual Report on Form 10-K by reference to the
1998 Annual Report to Shareholders annexed hereto as Exhibit (13):
Report of Independent Auditors.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1998.
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for each of the years in the three-year period ended
December 31, 1998.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules. All financial statement schedules have
been omitted as they are not applicable, not required, or the
information is included in the consolidated financial statements or
notes thereto.
(3) Exhibits. The following exhibits are filed herewith or have been
previously filed with the Securities and Exchange Commission, as
noted, and numbered in accordance with Item 601 of Regulation S-K:
Number Description
------ -----------
3(A)(I) Restated Certificate of Incorporation of Registrant,
incorporated by reference to the Registrant's Registration
Statement on Form 8-A (No. 0-18301), filed with the
Commission on November 12, 1991, wherein such exhibit is
designated Exhibit 2(I)(2)(a).
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3(A)(II) Certificate of Amendment of the Certificate of Incorporation
of Registrant, incorporated by references to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, filed with the Commission on
November 7, 1996, wherein such exhibit was designated
Exhibit 3.1.
3(B) Bylaws of Registrant, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, filed with the Commission on
November 13, 1995, wherein such exhibit is designated
Exhibit 3(ii).
***********
Compensatory Plans or Arrangements
10(A) Employment Agreement with Richard D. Callahan, incorporated
by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997, wherein such exhibit is
designated 10(A).
10(B) Employment Agreement with Marianne R. O'Connor, incorporated
by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997, wherein such exhibit is
designated 10(C).
10(C) Employment Agreement with Richard J. Notebaert, Jr.,
incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997, filed
with the Commission on May 14, 1997, wherein such exhibit is
designated 10(B).
10(D) Employment Agreement with Henry M. O'Reilly, incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, filed with the Commission
on May 14, 1997, wherein such exhibit is designated 10(D).
10(E) Employment Agreement with W. Anthony Shay, Jr., incorporated
by reference to Registrant's Quarterly Report on form 10-Q
for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997, wherein such exhibit is
designated Exhibit 10(D).
10(F) Amended and Restated 1988 Stock Option Plan, incorporated by
reference to Registrant's Registration Statement on Form S-8
(No. 33-94214), filed with the Commission on June 29, 1995,
wherein such exhibit is designated Exhibit 99.
15
<PAGE>
10(G) 1996 Stock Option Plan, incorporated by reference to
Registrant's Registration Statement on Form S-8
(No.333-10063), filed with the Commission on August 13,
1996, wherein such exhibit is designated Exhibit 99.
10(H) Stock Purchase Incentive Program, incorporated by reference
to Registrant's Annual Report on form 10-K for the fiscal
year ended December 31, 1996, filed with the Commission on
March 27, 1997, wherein such exhibit is designated Exhibit
10(I).
10(I) Description of Iroquois Bancorp, Inc. Annual Management
Incentive Plan.
10(J) Retirement Benefits Agreement with Richard D. Callahan,
incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, filed
with the Commission on March 29, 1995, wherein such exhibit
is designated 10(L).
10(K) Separation Agreement with James H. Paul, incorporated by
reference to Registrant's Quarterly Report on 10-Q for the
quarter ended March 31, 1997, filed with the Commission on
May 14, 1997, wherein such exhibit is designated Exhibit
10(F).
************
13 Annual Report to Shareholders for Fiscal Year Ended December
31, 1998.
21 List of Subsidiaries.
23(A) Consent of KPMG LLP with respect to the Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1998.
23(B) Consent of Fagliarone Group P.C. with respect to Exhibit 99
of the Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998.
24 Power of Attorney, included with the Signature Page of this
Annual Report on Form 10-K.
99 Iroquois Bancorp, Inc. 401(k) Savings Plan Financial
Statements and Schedules for the Fiscal Years Ended December
31, 1998 and 1997, together with Independent Auditors'
Report Thereon of Fagliarone Group P.C. for the year ended
December 31, 1998 and KPMG LLP for the year ended December
31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Auburn,
County of Cayuga, and State of New York on March 16, 1999.
IROQUOIS BANCORP, INC.
By: /s/Richard D. Callahan
-------------------------------------
Richard D. Callahan
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Richard D. Callahan and/or Marianne R. O'Connor
his true and lawful attorney-in-fact and agent with full power of substitution,
for him and his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K and Power of Attorney have been signed below by the
following persons in the capacities and on the dates indicated:
Name Title Date
- ---- ----- ----
/s/Richard D. Callahan President and Chief March 16, 1999
- ----------------------------- Executive Officer,
Richard D. Callahan Director
/s/Joseph P. Ganey Chairman of the Board March 16, 1999
- -----------------------------
Joseph P. Ganey
/s/Marianne R. O'Connor Treasurer and Chief March 16, 1999
- ----------------------------- Financial Officer
Marianne R. O'Connor
17
<PAGE>
Director March __, 1999
- -----------------------------
Brian D. Baird
/s/John Bisgrove, Jr. Director March 16, 1999
- -----------------------------
John Bisgrove, Jr.
/s/Peter J. Emerson Director March 16, 1999
- -----------------------------
Peter J. Emerson
/s/Arthur A. Karpinski Director March 16, 1999
- -----------------------------
Arthur A. Karpinski
/s/Henry D. Morehouse Director March 16, 1999
- -----------------------------
Henry D. Morehouse
/s/Edward D. Peterson Director March 16, 1999
- -----------------------------
Edward D. Peterson
/s/Lewis E. Springer, II Director March 16, 1999
- -----------------------------
Lewis E. Springer, II
18
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
3(A)(I) Restated Certificate of Incorporation of Registrant,
incorporated by reference to the Registrant's Registration
Statement on Form 8-A (No. 0-18301), filed with the
Commission on November 12, 1991, wherein such exhibit is
designated Exhibit 2(I)(2)(a).
3(A)(II) Certificate of Amendment of the Certificate of Incorporation
of Registrant, incorporated by references to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, filed with the Commission on
November 7, 1996, wherein such exhibit was designated
Exhibit 3.1.
3(B) Bylaws of Registrant, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, filed with the Commission on
November 13, 1995, wherein such exhibit is designated
Exhibit 3(ii).
***********
Compensatory Plans or Arrangements
10(A) Employment Agreement with Richard D. Callahan, incorporated
by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997, wherein such exhibit is
designated 10(A).
10(B) Employment Agreement with Marianne R. O'Connor, incorporated
by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997, wherein such exhibit is
designated 10(C).
10(C) Employment Agreement with Richard J. Notebaert, Jr.,
incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997, filed
with the Commission on May 14, 1997, wherein such exhibit is
designated 10(B).
10(D) Employment Agreement with Henry M. O'Reilly, incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, filed with the Commission
on May 14, 1997, wherein such exhibit is designated 10(D).
19
<PAGE>
10(E) Employment Agreement with W. Anthony Shay, Jr., incorporated
by reference to Registrant's Quarterly Report on form 10-Q
for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997, wherein such exhibit is
designated Exhibit 10(D).
10(F) Amended and Restated 1988 Stock Option Plan, incorporated by
reference to Registrant's Registration Statement on Form S-8
(No. 33-94214), filed with the Commission on June 29, 1995,
wherein such exhibit is designated Exhibit 99.
10(G) 1996 Stock Option Plan, incorporated by reference to
Registrant's Registration Statement on Form S-8
(No.333-10063), filed with the Commission on August 13,
1996, wherein such exhibit is designated Exhibit 99.
10(H) Stock Purchase Incentive Program, incorporated by reference
to Registrant's Annual Report on form 10-K for the fiscal
year ended December 31, 1996, filed with the Commission on
March 27, 1997, wherein such exhibit is designated Exhibit
10(I).
10(I) Description of Iroquois Bancorp, Inc. Annual Management
Incentive Plan.
10(J) Retirement Benefits Agreement with Richard D. Callahan,
incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, filed
with the Commission on March 29, 1995, wherein such exhibit
is designated 10(L).
10(K) Separation Agreement with James H. Paul, incorporated by
reference to Registrant's Quarterly Report on 10-Q for the
quarter ended March 31, 1997, filed with the Commission on
May 14, 1997, wherein such exhibit is designated Exhibit
10(F).
************
13 Annual Report to Shareholders for Fiscal Year Ended December
31, 1998.
21 List of Subsidiaries.
23(A) Consent of KPMG LLP with respect to the Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1998.
20
<PAGE>
23(B) Consent of Fagliarone Group P.C. with respect to Exhibit 99
of the Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1998.
24 Power of Attorney, included with the Signature Page of this
Annual Report on Form 10-K.
99 Iroquois Bancorp, Inc. 401(k) Savings Plan Financial
Statements and Schedules for the Fiscal Years Ended December
31, 1998 and 1997, together with Independent Auditors'
Report Thereon of Fagliarone Group P.C. for the year ended
December 31, 1998 and KPMG LLP for the year ended December
31, 1997.
21
<PAGE>
Exhibit 10(I)
-------------
IROQUOIS BANCORP
ANNUAL MANAGEMENT INCENTIVE PLAN
OBJECTIVES
o Reward Iroquois and Member Bank Managers for the achievement of key
business objectives.
o Provide Managers with an incentive to exceed budgeted pre-tax income
performance.
o Supports Total Compensation Strategy of targeting slightly below market for
planned results and paying above market for the achievement of above plan
results.
PLAN DESIGN FEATURES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Incentive Weighting
- ---------------------------------------------------------------------------------------------------------------
Threshold Target Superior Ind./
Award Award Award Bank Dept.
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 President/ CEO - Iroquois 20% 45% 70% 75% 25%
Tier II CFO and COO-Iroquois 15% 35% 55% 75% 25%
and Homestead CEO
Tier III Senior Management 10% 25% 40% 50% 50%
Tier IV Mid Management 5% 15% 25% 25% 75%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
o The Bank-wide goal will be measured by the member bank's planned net income
and Return on Equity and payout will be interpolated between threshold
(90%), target (100%), and superior (120%) performance.
o Individual/Department goals will be assigned a weighting, and achievement
will be determined on a pass/fail basis.
o There will be no payment if Bank performance is below threshold level or
below 90% of the average four year median Return on Equity of the Iroquois
Bancorp regional bank peer group. The award will be capped at the superior
level.
o It is the intent of the Plan that no adjustment be made for the effect of
extraordinary items on net income. Any adjustment or exception would be
based on a recommendation by the member bank's management or Board of
Directors and require approval of the Iroquois Nominating/Personnel
Committee.
<PAGE>
[LOGO OF IROQUOIS BANCORP]
Meeting Challenges of a Changing Market
1998 Iroquois Bancorp, Inc. Annual Report
<PAGE>
Contents
Financial Highlights
A Message to Our
Shareholders
1
Cayuga Bank
2
The Homestead
Savings (FA)
3
Selected Consolidated
Financial Data
4
Management's
Discussion and Analysis
5
Report of Management
24
Consolidated Financial
Statements
23
Report of Independent
Auditors
24
Quarterly Information
46
Directors and Officers
47
Corporate Data
47
<PAGE>
We are certain the key to success continues to be achieving profitable revenue
growth, improving credit quality, and striking a balance between operating
efficiency and the delivery of exceptional personal service.
<PAGE>
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------
(dollars in thousands,
except share data) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year:
Net interest income $ 20,185 20,305 19,411
Provision for loan losses 1,470 1,520 1,334
Non-interest income 3,717 3,227 1,735
Non-interest expense 14,879 14,121 13,586
Net income applicable to common shares 4,655 4,456 3,328
Per Common Share:
Net income -- basic $ 1.96 1.89 1.43
Net income -- diluted 1.92 1.85 1.41
Cash dividends declared .40 .36 .32
Book value at year end 16.11 14.42 12.71
Closing price 21.00 25.75 17.00
Ratios:
Net interest margin 4.01% 4.37 4.42
Return on average assets .92 1.00 .82
Return on average total equity 12.82 13.54 11.51
Return on average common equity 13.05 14.24 11.96
Equity as a percent of average assets 7.14 7.39 7.12
Dividend payout ratio 20.41 19.05 22.38
At Year-End:
Assets $ 547,420 509,778 472,908
Loans, net 400,277 369,984 345,074
Borrowings 61,591 50,164 25,536
Deposits 443,239 417,011 410,222
Shareholders' equity 38,342 39,029 34,802
Number of:
Common shares outstanding 2,409,980 2,388,936 2,367,940
Common shareholders of record 1,302 1,365 1,206
Employees (full time equivalent) 195 200 191
Banking offices (full service) 11 11 12
</TABLE>
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
A MESSAGE TO OUR SHAREHOLDERS
[PICTURE OF RICHARD D. CALLAHAN APPEARS HERE]
Throughout 1998 we aggressively pursued our focused strategy for community
banking. This approach has permitted Iroquois to improve shareholder value in
the face of a rapidly changing marketplace.
Our mission of strengthening member banks' competitive niche, while
simultaneously improving their operating efficiency, contributed to this year's
results.
We took several important steps in 1998 to improve the Company's
performance and prepare for the Year 2000. These included:
. Enhancing revenue growth by using technology combined with customer
knowledge to provide high-quality personal service and customized
products.
. Improving efficiency by centralizing and standardizing deposit and loan
operations, finance, human resources, and marketing services.
. Introducing a proactive service culture by implementing standards and
comprehensive training for our staff to assure the delivery of superior
service. Our research confirms the importance of professional, caring
employees who know their customers.
. Strengthening underwriting criteria for commercial and retail loans
through the introduction of new management and a more rigorous,
disciplined process for tracking problem loans. Taking these steps will
minimize future nonperforming assets.
. Preparing our member banks to ensure a smooth transition for the Year
2000 date change by adopting the FFIEC Five Step Program and diligently
working to complete the assessment, remediation, and testing of our
technical systems. Management is satisfied with progress toward the
objective of assuring our banking customers of no critical service
interruptions.
The following financial highlights of 1998 demonstrate the value of these
efforts.
. Earnings available to common shareholders increased 4.5% to $4,655,000
and earnings per share reached new highs of $1.96 basic and $1.92
diluted.
. Book value per common share increased 11.7%, to $16.11.
. Return on common equity was 13.1%, marking six consecutive years of
double digit returns to our shareholders.
. All $4.9 million of the Company's outstanding preferred stock was
redeemed.
As we move forward into the new millennium, we are prepared to address the
growing challenges facing this industry: net interest margins continue to
narrow; growth in fee income is more challenging; noninterest expense reductions
are more difficult to find; and loan provisions may increase with the
possibility of a more adverse credit climate.
We are certain the key to success continues to be achieving profitable
revenue growth, improving credit quality, and striking a balance between
operating efficiency and the delivery of exceptional personal service. The
business strategy we have in place supports our belief in community banking and
its value to customers and communities.
We thank our shareholders, customers, staff, and our communities for their
ongoing support.
Very truly yours,
/s/ Richard D. Callahan
Richard D. Callahan
President and Chief Executive Officer
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
REPORT OF CAYUGA BANK
"... dedicated to the vital roles we play as community banks in our local
markets through involvement, economic development, and our assurance to provide
superior personal service."
Cayuga Bank reinforced our competitive position in 1998 by combining
technology with greater understanding of our customers, making us more
responsive to the financial service needs of our community.
Our expanded database marketing program has allowed us to develop one-on-
one relationships with a large number of established, multiservice customers,
adding value through direct, personal contact.
We continued to offer our customers tailored products and services. With
the introduction of the VISA Check Card, we now provide the ultimate convenience
of a debit card that can replace checks, cash, and credit cards. We also
enhanced service delivery by launching 24-hour telephone banking. In addition,
plans for initiating Cash Management Services will result in the flexibility and
access our commercial customers need.
Cayuga achieved a new record for mortgage loan production this year with
closings totaling $62 million. A combination of low interest rates and an
increase in the direct sales origination team resulted in a dramatic rise in our
new construction home lending as well as mortgages on existing properties. In
addition, we addressed our market's specific lending needs through the
introduction of Biweekly Mortgages, the marketing of Land Loans and Summer Home
Loans, and the continuation of our 24-hour mortgage approval program.
We established processes to protect and improve the quality of our assets
including the Quarterly Classified Asset Review system designed to formalize and
rigorously manage all criticized and classified assets. Improvements made to our
commercial underwriting process allow us to better meet our customers' needs.
Cayuga Bank recognizes our responsibility to reinvest in the communities we
serve. Renovations completed at our Main Office lead the way for the
rejuvenation of downtown Auburn. By establishing the Auburn Housing Partnership
with the City of Auburn and local businesses, we play a significant role in
renovating low income areas of Auburn and providing financing for qualified
families.
We remain dedicated to the vital roles we play as community banks in our
local markets through involvement, economic development, and our assurance to
provide superior personal service.
1998 HIGHLIGHTS FOR CAYUGA BANK
--------------------------------------------------------------------------
Introduced Saturday Banking at the Lacona Office.
Installed a new phone system and voice mail at the Main Office.
Active member in the local United Way Campaign.
Major sponsor of the "Made In Auburn and Nearby" Tradeshow, providing the
opportunity for over 70 local businesses to educate the community on the
diversity of businesses that thrive in Cayuga County.
Pledged a 3-year contribution to the Cayuga/Seneca Community Action Agency's
"Growing with the Community for a Better Future" campaign.
Continued support of capital campaigns at the Auburn YMCA-WEIU and The Cayuga
Museum with significant 3-year contributions.
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Report of The Homestead Savings (FA)
Homestead Savings continued to answer the needs of our customers in 1998
through the introduction of relevant, creative products and enhanced service
delivery.
We recognize the importance of knowing our customers and adding value to
these relationships through highly personal service. Instituting the database
marketing program has facilitated proactive, personal contact with our best
customers.
Homestead's introduction of the Reverse Mortgage products, Home Keeper
Fannie Mae and HECM FHA, addresses the lending needs of our senior customer
base by using the equity they have established in their homes. By initiating the
125% Home Equity Loan Program, we are the only bank in our market offering a
product that helps newer homeowners, without established equity, to borrow
against their home's value. In addition, we established credit card services for
our customers in 1998.
We have also realigned our business products and services this year by
introducing Small Business Checking, maintaining competitive pricing, and
establishing night depository units at our Clinton and Main offices.
We realized record mortgage and home equity loan volume in 1998. With
closings in excess of $28 million, Homestead is one of the leading lenders in
our market. In addition, our loan production office in Old Forge and our newly
established office in Lake Placid has allowed us to create a niche in the higher
yielding vacation home loan market. Deposits also increased this year by 7%, due
primarily to our continued success with the high-yield Investors Money Market
Account.
Forging partnerships for economic development remains a top priority. We
provided mortgage financing to low-income individuals as part of the Rural
Housing Development Partnership. We also played active roles in the Downtown
Utica Development Association, the Utica Industrial Development Corporation, and
on the board of our regional economic development agency, the Mohawk Valley
EDGE.
The Homestead Savings continues our commitment to provide exceptional
personal service and maintain our competitive position through efficient
delivery of the financial products and services our customers need.
"... committed to provide exceptional personal service and maintain our
competitive position through efficient delivery of the financial products and
services our customers need."
& THE HOMESTEAD SAVINGS
- -------------------------------------------------------------------------
1998 Recipient of the Business and Professional Women's (BPW) Outstanding
Employer of the Year award.
Added a business development manager to cultivate new opportunities within our
core market.
Instituted Saturday Banking at the Waterville Office.
Participated in: the United Way campaign, as a "Pacesetter" organization; the
"Adopt A Family" program through Headstart; the American Heart Association's Run
and Walk; and Special Olympics sponsorships.
Provided continued support for an inner city tutoring program with the Utica
City School District.
Assisted in the 18th Annual "Spirit Of The Season" gift drive for the Mohawk
Valley Psychiatric Center.
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
At, or for the year ended, December 31,
- --------------------------------------------------------------------------------------
(dollars in thousands, except
share data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $547,420 509,778 472,908 437,803 423,977
Securities 108,487 103,620 98,287 84,105 81,991
Total loans, net 400,277 369,984 345,074 325,707 316,432
Deposits 443,239 417,011 410,222 369,101 358,876
Borrowings 61,591 50,164 25,536 35,250 34,778
Shareholders' equity 38,342 39,029 34,802 31,846 28,110
- --------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Interest income $ 39,404 37,522 35,763 33,713 30,639
Interest expense 19,219 17,217 16,352 15,752 12,521
- --------------------------------------------------------------------------------------
Net interest income 20,185 20,305 19,411 17,961 18,118
Provision for loan losses 1,470 1,520 1,334 917 830
Noninterest income 3,717 3,227 1,735 2,461 1,556
Noninterest expense 14,879 14,121 13,586 12,650 13,138
Income tax expense 2,711 2,994 2,447 2,704 2,283
- --------------------------------------------------------------------------------------
Net income 4,842 4,897 3,779 4,151 3,423
Dividends on preferred stock 187 441 451 469 415
- --------------------------------------------------------------------------------------
Net income applicable to
common shares $ 4,655 4,456 3,328 3,682 3,008
- --------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income per common share:
Basic $ 1.96 1.89 1.43 1.60 1.32
Diluted 1.92 1.85 1.41 1.59 1.31
Cash dividends declared .40 .36 .32 .30 .28
Book value 16.11 14.42 12.71 11.60 10.02
- --------------------------------------------------------------------------------------
RATIOS
Yield on interest-earning assets 7.83% 8.08 8.15 8.18 7.73
Cost of interest-bearing liabilities 4.19 4.07 4.03 4.11 3.37
Interest rate spread 3.64 4.01 4.12 4.07 4.36
Net interest margin 4.01 4.37 4.42 4.36 4.57
Return on average assets .92 1.00 .82 .97 .83
Return on average total equity 12.82 13.54 11.51 14.05 12.80
Return on average common equity 13.05 14.24 11.96 15.04 13.91
Equity as a percent of average assets 7.14 7.39 7.12 6.89 6.49
Dividend payout ratio 20.41 19.05 22.38 18.75 21.21
- --------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
INTRODUCTION
Iroquois Bancorp, Inc. ("Iroquois" or the "Company") is a New York
corporation and the bank holding company of two financial institutions: Cayuga
Bank ("Cayuga") of Auburn, New York, a New York state-chartered commercial bank
and trust company, and The Homestead Savings (FA) ("Homestead") of Utica, New
York, a federally chartered savings association. Iroquois, through its member
banks, Cayuga and Homestead ("the Banks"), provides banking services to
individuals and businesses in upstate New York, primarily in Cayuga, Oswego,
Oneida and Madison counties and surrounding areas. The Banks, reflective of
their market area, provide a range of financial services, including residential
mortgage loans, consumer and commercial loans, credit cards, insurance
brokerage, investment brokerage, trust services and safe deposit facilities.
The following discussion and analysis reviews the Company's consolidated
results of operations for the years 1996 through 1998 and its consolidated
financial position at December 31, 1998 and 1997. This section should be
reviewed in conjunction with the consolidated financial statements and
accompanying notes and with other statistical information included elsewhere in
this 1998 Annual Report.
In addition to historical information, this discussion and analysis
includes certain forward-looking statements based on current management
expectations. These statements relate to, among other things, sources of loan
and deposit growth, loan loss reserve adequacy, simulation changes in interest
rates, and Year 2000 activities. The Company's actual results could differ
materially from these management expectations. Factors that could cause future
results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal, state, and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental, and
technological factors affecting the Company's operations, markets, products,
services, and prices.
PERFORMANCE OVERVIEW
Iroquois reported 1998 diluted earnings per common share of $1.92 compared
with $1.85 per share in 1997. Net income available to common shareholders was
$4,655,000 in 1998, an increase of 4.5%, compared with $4,456,000 in 1997.
Return on common shareholders' equity and return on assets were 13.1% and .92%,
respectively, in 1998, compared with 14.2% and 1.0%, respectively, in 1997.
Net interest income for 1998 totaled $20.2 million, compared with $20.3
million in 1997. Noninterest income, excluding net gains on sales of loans and
securities, increased $366,000, or 11.7%, for 1998. The Company recorded
$223,000 in gains on the sale of loans and securities for 1998, compared with
$99,000 for 1997. Noninterest expense increased from $14.1 million in 1997 to
$14.9 million in 1998.
Total assets grew 7.4% in 1998 to end the year at $547.4 million. Net loans
increased 8.2% to $400.3 million, compared to $370.0 million at December 31,
1997. Total deposits were $443.2 million at December 31, 1998, compared to
$417.0 million at year end 1997, an increase of 6.3%. Total shareholders' equity
at December 31, 1998 was $38.3 million, down 1.8% from year end 1997, reflecting
net income for the year less dividend payments and the redemption in 1998 of all
$4.9 million of the Company's outstanding preferred stock.
5
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
RESULTS OF OPERATIONS
REVIEW OF 1998 COMPARED TO 1997
NET INTEREST INCOME
Net interest income, the principal source of earnings for the Company,
represents the difference between income from interest-earning assets, primarily
loans and securities, and expense of interest-bearing liabilities, primarily
deposits and borrowings. Net interest income is significantly affected by the
mix and volume of interest-earning assets and liabilities, as well as related
interest rates and cost of funds. While Iroquois has the ability to control the
effect of some of these factors through its asset and liability management and
planning strategies, external factors, such as competitive pressures, economic
conditions, and U.S. monetary policy, can also influence changes in net interest
income from one period to another.
Two key ratios are used to measure relative profitability of net interest
income. Net interest spread measures the difference between the yield on earning
assets and the rate paid on interest-bearing liabilities. Net interest margin
measures net interest income as a percentage of average total earning assets.
Net interest margin, unlike net interest spread, takes into account the level of
earning assets funded by interest-free sources such as noninterest-bearing
demand deposits and equity capital.
Net interest income totaled $20.2 million for 1998, a slight decrease
compared to $20.3 million in net interest income for 1997. Net interest income
was maintained through increased volumes despite declines in the Company's net
interest spread and net interest margin. Declines in longer term market interest
rates combined with changes in the mix of interest earning assets caused the
yield on earning assets to decline from 8.08% for 1997 to 7.83% for 1998. In
contrast, the cost of interest-bearing liabilities increased from 4.07% for 1997
to 4.19% for 1998, reflecting the flatter interest rate yield curve and a
continued reliance on higher costing time deposits and borrowings as a funding
source. The decline in yield and increase in cost of funds, resulted in a
contraction of 37 basis points in net interest spread from 4.01% for 1997 to
3.64% for 1998. Net interest margin decreased a similar amount from 4.37% for
1997 to 4.01% for 1998.
Average securities, which continue to represent approximately 21% of
interest-earning assets, increased from $103.2 million for 1997 to $105.6
million for 1998. Securities yielded an average of 6.08% for 1998, compared to
6.40% for 1997.
Average loans increased $32.7 million, or 9.2%, in 1998 and continue to
represent approximately 77% of interest-earning assets. Within the loan
portfolio, however, average mortgage loans increased 14.4% while other loans
declined 1.8%. Mortgage loans, which yielded 7.94%, represented 54.9% of average
interest-earning assets in 1998, compared to 1997 when average mortgage loans,
which yielded 8.17%, represented 51.9% of earning assets. Interest income earned
on mortgage loans increased $2.2 million primarily as a result of increased
residential mortgage lending volumes. The lower yield on the mortgage portfolio,
which contributed significantly to the overall decline in the yield on earning
assets for 1998, reflects the continued decline in market interest rates for
residential mortgages. Reflecting the average change in the prime rate from 1997
to 1998, the yield on other loans decreased from 9.44% in 1997 to 9.26% in 1998.
Average interest-bearing liabilities increased 8.3% to $458.5 million in
1998 from $423.3 million in1997. Average savings deposits, which include
savings, money market and interest checking accounts, remained flat at $193.5
million with an average cost of 2.5%. However, as a percentage of interest-
bearing liabilities, savings deposits declined from 45.7% in 1997 to 42.2% in
1998. Average borrowings increased from $29.9 million, or 7.1% of average
interest-bearing liabilities, in 1997 to $52.0 million, or 11.3%, in 1998. The
average cost of borrowings remained at 5.9%, reflecting fairly constant short-
term rates and an increase in the use of term advances. Average time deposits
increased 6.5% from $200.0 million in 1997 to $213.0 million in 1998 and
continued to represent approximately 47% of interest-bearing liabilities. The
average cost of time deposits increased from 5.30% in 1997 to 5.36% in 1998,
primarily reflecting the continued growth in public fund (municipal) time
deposits, which carry a higher interest cost than retail time deposits.
6
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Average noninterest bearing liabilities, consisting primarily of commercial
and retail demand deposits, increased 8.7% from $29.9 million in 1997 to $32.5
million in 1998. Combined with the increase in average shareholders' equity,
noninterest-bearing funding sources contributed 37 basis points to net interest
margin in 1998, compared to 36 basis points in 1997.
A summary of net interest income as well as average balances for interest-
earning assets and interest-bearing liabilities for the years 1996 through 1998
is presented in Table 1. Table 2 provides the detail of changes in interest
income, interest expense, and net interest income due to changes in volumes and
rates. A discussion of interest rate sensitivity is included in the Market Risk
and Interest Rate Risk Management section.
Table 1 -- NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Mortgage loans1 $276,140 21,934 7.94% 241,355 19,713 8.17 232,907 19,378 8.32
Other loans1 113,035 10,467 9.26 115,135 10,866 9.44 109,286 10,225 9.36
Securities 105,606 6,421 6.08 103,218 6,606 6.40 91,924 5,838 6.35
Federal funds sold and
other investments 8,577 582 6.79 4,883 337 6.90 4,933 322 6.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 503,358 39,404 7.83 464,591 37,522 8.08 439,050 35,763 8.15
Noninterest-earning
assets 25,424 24,803 22,185
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $528,782 489,394 461,235
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Savings deposits $193,483 4,735 2.45% 193,451 4,866 2.52 194,097 4,907 2.53
Time deposits 213,016 11,417 5.36 200,010 10,591 5.30 184,401 9,852 5.34
Borrowings 52,024 3,067 5.90 29,869 1,760 5.89 27,757 1,593 5.74
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 458,523 19,219 4.19 423,330 17,217 4.07 406,255 16,352 4.03
Noninterest-bearing
liabilities 32,479 29,879 22,130
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 491,002 453,209 428,385
Shareholders' Equity 37,780 36,185 32,850
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $528,782 489,394 461,235
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
interest rate spread $ 20,185 3.64% 20,305 4.01 19,411 4.12
Net interest margin
on earning assets 4.01 4.37 4.42
Ratio of interest-earning
assets to interest-bearing
liabilities 109.78 109.75 108.07
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonaccrual loans are included in the average asset totals presented above.
7
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
[BAR CHART OF NONINTEREST INCOME APPEARS HERE]
<TABLE>
<CAPTION>
Table 2 -- RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------------------------------
Comparison of the Comparison of the
Years Ended Years Ended
December 31, 1998 and 1997 December 31, 1997 and 1996
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In:
Total Total
Average Average Increase Average Average Increase
(dollars in thousands) Balance Rate (Decrease) Balance Rate (Decrease)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $2,358 (536) 1,822 1,210 (234) 976
Securities (89) (96) (185) 722 46 768
Federal funds sold and
other investments 235 10 245 (3) 18 15
- --------------------------------------------------------------------------------------------------------
Interest income 2,504 (622) 1,882 1,929 (170) 1,759
- --------------------------------------------------------------------------------------------------------
Savings deposits 87 (218) (131) (292) 251 (41)
Time deposits 684 142 826 846 (107) 739
Borrowings 1,418 (111) 1,307 124 43 167
- --------------------------------------------------------------------------------------------------------
Interest expense 2,189 (187) 2,002 678 187 865
- --------------------------------------------------------------------------------------------------------
Net interest income $ 315 (435) (120) 1,251 (357) 894
- --------------------------------------------------------------------------------------------------------
</TABLE>
Note: The changes that are not due solely to volume or rate are allocated to
volume and rate based on the proportion of the change in each category.
NONINTEREST INCOME
Noninterest income, excluding net gains on sales of loans and securities,
totaled $3.5 million for 1998, up 11.7%, compared to $3.1 million for 1997.
Service charges, the Company's primary source of noninterest income, represent
revenue from such sources as service charges on deposits and loans and
processing fees relating to electronic banking and credit card services. Revenue
from service charges for 1998 increased $399,000, or 15.7%, compared to 1997,
primarily due to increased loan and deposit related service fees, ATM
surcharges, and increased credit card processing income.
[BAR CHART OF OVERHEAD RATIO APPEARS HERE]
NONINTEREST EXPENSE
Noninterest expense increased 5.4% from $14.1 million in 1997 to $14.9
million in 1998, primarily reflecting increases in computer and product service
fees and salaries and benefits. The Company's overhead ratio, noninterest
expense as a percentage of average assets, improved from 2.89% for 1997 to 2.81%
for 1998.
Salaries and benefits for 1998 increased $236,000, or 3.2%, compared to
1997, and was primarily attributable to overall merit increases. Salaries and
benefits represented 50.8% of total noninterest expense for 1998, compared to
51.9% for 1997.
Computer and product service fees increased 26.2%, from $1.3 million in
1997 to $1.7 million in 1998. Computer service fees increased $259,000 in 1998,
reflecting a full year of services with Fiserv, Inc., the Company's primary data
processing and item processing provider. Computer service fees include the cost
of item processing services that were outsourced to Fiserv, Inc. in mid-1997 and
that have provided savings to the Company through reduced internal staffing and
equipment costs. Increases in 1998 for third party processing costs relating to
the Company's credit card services also contributed to the overall increase in
computer and product service fees.
Occupancy and equipment expense declined $70,000, or 4.1%, in 1998,
compared to 1997. This decline was a result of savings in property taxes,
utilities and equipment costs, offset by increased depreciation expense relating
to Cayuga's main office renovation completed in 1998.
8
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Promotion and marketing expense increased 29.5% from $356,000 in 1997 to
$461,000 in 1998. The increase was principally attributable to promotional costs
relating to retail loan and deposit products, as well as primary market research
costs.
PROVISION FOR INCOME TAXES
For 1998, the provision for income taxes was $2.7 million with an effective
tax rate of 35.9%. The provision for income taxes for 1997 was $3.0 million with
an effective tax rate of 37.9%. The decline in the Company's effective tax rate
is primarily attributable to the increased investment in tax exempt municipal
securities. A more comprehensive analysis of income tax expense is included in
Note 8 to the consolidated financial statements included in this Annual Report.
REVIEW OF 1997 COMPARED TO 1996
Iroquois reported net income applicable to common shareholders of $4.5
million in 1997, or $1.85 per common share, compared to $3.3 million, or $1.41
per share, reported in 1996. Return on assets improved from .82% in 1996 to
1.00% in 1997. Return on average equity improved from 11.51% in 1996 to 13.54%
in 1997, while the return on common shareholders' equity improved from 11.96% in
1996 to 14.24% in 1997. Growth in net income and earnings per share in 1997
reflected increases in net interest income and noninterest income compared to
1996, when earnings were unfavorably affected by a $1.1 million loss on the sale
of certain classified commercial mortgage loans and a $556,000 assessment for
the recapitalization of the Federal Deposit Insurance Corporation's Saving
Association Insurance Fund (SAIF).
Net interest income totaled $20.3 million for the year ended December 31,
1997, compared to $19.4 million for 1996. The $894,000, or 4.6%, increase was
principally the result of a 5.8% increase in average interest-earning assets in
1997 and a 20.2% increase in noninterest bearing funding sources including
demand deposits, other liabilities, and shareholders' equity. Net interest
margin for 1997 decreased to 4.37% from 4.42% in 1996. The decrease in net
interest margin was primarily attributable to the decrease in net interest
spread from 4.12% in 1996 to 4.01% in 1997. The average yield on interest-
earning assets declined 7 basis points in 1997, to 8.08%, while the average cost
of interest-bearing liabilities increased 4 basis points, to 4.07%, for 1997.
Noninterest income totaled $3.2 million for 1997, up 86.0% compared to $1.7
million for 1996. The increase of $1.5 million over the prior year was due
primarily to the net loss of $1.0 million on the sale of loans and securities in
1996, compared to a net gain of $99,000 in 1997. In addition, revenue from
service charges increased $336,000, or 15.2%, for 1997 compared to the prior
year, principally due to an increase in the service fees earned by Cayuga
through the Business Manager accounts receivable management program as well as
increases in retail loan and deposit fees.
The 1997 provision for loan losses increased $186,000, to $1.5 million,
compared to $1.3 million in 1996. The increase in the provision reflects
additions to the allowance for loan losses to maintain a sufficient coverage
level given increases in net charge-offs and nonperforming loans.
Noninterest expense totaled $14.1 million for 1997, compared to $13.6
million for 1996. Increases in 1997 for salaries and benefits, computer and
product service fee expenses, and other expenses were offset by a $645,000
decrease in deposit insurance expense. The decrease in deposit insurance was
attributable to the 1996 assessment that recapitalized SAIF and lowered premiums
for federally insured savings and loans, such as Homestead. Noninterest expense,
as a percentage of average assets, was 2.89% for 1997, compared to 2.95% for
1996.
Salaries and benefits increased $631,000, to $7.3 million for 1997,
compared to $6.7 million for 1996, due to increased staffing, general merit
increases, and the full implementation of a Company-wide incentive compensation
plan. Computer and product service fees increased $283,000, or 27.1%, due
principally to expenses relating to the Company's data processing conversion in
1997, the outsourcing of the Company's item processing services,
9
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
and an increase in service fees relating to the Business Manager product. Other
real estate expenses decreased $55,000 to $333,000 for 1997, compared to
$388,000 for 1996. Other noninterest expenses increased $290,000 to $3.0 million
for 1997, compared to $2.7 million for 1996. Other expenses included a $154,000
increase for a full year of amortization of the intangible asset recognized in
the acquisition of branches and related deposits from OnBank & Trust Co. in May
1996. In addition, legal and consulting fees increased $148,000 due to Cayuga's
costs in defending a civil suit along with consulting services incurred in 1997
for corporate and employee benefit plan analyses.
For 1997, the provision for income taxes was $3.0 million for an effective
tax rate of 37.9%. The provision for income taxes for 1996 was $2.4 million with
an effective tax rate of 39.3%.
FINANCIAL CONDITION
LOANS
Total loans at December 31, 1998 were $404.1 million, up $30.8 million or
8.3%, compared to $373.3 million in total loans at December 31, 1997. The
increase in total loans came exclusively from the growth in residential mortgage
loans. Table 3 provides a five-year summary of the loan portfolio.
Loans, the largest component of the Company's earning assets, continue to
represent approximately 73% of total assets. Mortgage loans represent the
largest portion of the loan portfolio, increasing from 68.8% of total loans at
year end 1997, to 72.8% of total loans at December 31, 1998. The mortgage
portfolio consists of loans secured by first or second liens on residential or
commercial properties located principally in upstate New York. Residential
mortgage loans are underwritten and documented in accordance with secondary
market standards. Commercial mortgage loans have generally been originated on
properties in and around Cayuga's market area.
<TABLE>
<CAPTION>
Table 3 -- SUMMARY OF THE LOAN PORTFOLIO
- ----------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loans
Residential $254,755 215,255 188,187 171,883 169,518
Commercial 39,497 41,678 46,022 53,363 54,321
- ----------------------------------------------------------------------------
Total mortgage loans 294,252 256,933 234,209 225,246 223,839
- ----------------------------------------------------------------------------
Other loans
Home equity lines of credit 26,473 27,110 25,486 24,200 24,589
Consumer 45,358 45,401 46,551 40,974 32,499
Commercial 37,573 41,920 40,009 35,904 35,118
Education 436 1,905 2,208 2,763 3,651
- ----------------------------------------------------------------------------
Total other loans 109,840 116,336 114,254 103,841 95,857
- ----------------------------------------------------------------------------
Total loans 404,092 373,269 348,463 329,087 319,696
Allowance for loan losses 3,815 3,285 3,389 3,380 3,264
- ----------------------------------------------------------------------------
Loans, net $400,277 369,984 345,074 325,707 316,432
- ----------------------------------------------------------------------------
</TABLE>
10
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
The following table shows maturities of certain loan classifications at December
31, 1998 and an analysis of the rate structure for such loans due in over one
year.
<TABLE>
<CAPTION>
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------------------------------------
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
- --------------------------------------------------------------------------------------------------------------
ONE OVER ONE YEAR OVER PREDETERMINED FLOATING OR
YEAR OR THROUGH FIVE FIVE INTEREST ADJUSTABLE
(DOLLARS IN THOUSANDS) LESS YEARS YEARS TOTAL RATE RATE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans $33,739 2,366 1,468 37,573 3,834 --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Residential mortgage loans increased 18.5% from $215.3 million at December
31, 1997, to $254.8 million at December 31, 1998. Cayuga originated $62 million
in residential mortgage loans, including $31 million originated through mortgage
brokers for properties located in the greater Rochester and Syracuse markets,
outside Cayuga's primary market area. Homestead generated $28 million in local
mortgage loans during 1998, including loans originated through loan production
offices located in Old Forge and Lake Placid, NY.
Commercial mortgage loans, which represent 9.8% of total loans at December
31, 1998, declined $2.2 million, or 5.2%, from year end 1997 to year end 1998.
Continued high rates of amortization and prepayment, stricter underwriting
standards, along with slower demand and increased competition have caused the
commercial mortgage portfolio to decline over the past five years.
Consumer loans, which include auto loans, fixed-rate home equity and home
improvement loans, overdraft protection, credit cards, and other personal
installment loans, declined less than 1% at December 31, 1998, compared to year
end 1997. Consumer loans represent 11.2% of total loans at year end 1998,
compared to 12.2% at year end 1997. Competition from large credit card
companies, auto leasing, and dealer financing programs have kept consumer loan
balances relatively constant over the past three years.
Home equity lines of credit, which provide customers with check writing
privileges against an accessible line of credit secured by a lien on residential
real estate, continue to be a very competitive product in the Banks' market
areas. Outstanding balances against home equity lines of credit declined 2.3%
from $27.1 million at December 31, 1997 to $26.5 million at year end 1998. With
the decline in mortgage rates in 1998, many customers refinanced and
consolidated their outstanding home equity lines into first mortgages. Home
equity lines of credit represented 6.6% and 7.3% of total loans at December 31,
1998 and 1997, respectively.
Educational loans, which consist of loans originated through federal and
state sponsored student lending programs, declined $1.5 million in 1998 because
of the Company's decision to sell all of its education loans that had reached a
full disbursement status. Previously, education loans were held in portfolio and
sold when the loan reached repayment status, which typically consisted of two to
four annual disbursement cycles, depending on the student's graduation date.
Commercial loans declined $4.3 million, or 10.3%, from $41.9 million at
December 31, 1997 to $37.6 million at year end 1998. Declines were primarily a
result of increases in corporate liquidity leading to lower borrowing demands.
Commercial loans represented 9.3% of total loans at December 31, 1998, compared
to 11.2% at December 31, 1997. Cayuga continues to be the only subsidiary to
offer commercial lending, offering a variety of loan products to its business
customers, including notes, lines of credit, installment loans, and an accounts
receivable management program. Commercial lending is generally considered to
involve a higher degree of risk than the Banks' other forms of lending. These
loans tend to
11
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
have larger balances, and repayment is typically dependent on the successful
operations and income stream of the borrower. Underlying collateral for these
loans typically consists of business assets, which can be subject to market
obsolescence. Such risks can be significantly affected by economic and
competitive factors. To control this risk, the Company generally limits its
lending to any one borrower, or group of related borrowers, to a maximum of 10%
of its capital.
At December 31, 1998, Iroquois had no significant concentration of loans in any
single industry, nor did the loan portfolio contain any loans to finance highly
speculative transactions. Management expects new lending volume in 1999 to be
generated primarily through residential mortgage and home equity loans along
with targeted growth in commercial loans and mortgages.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents amounts available for future loan
losses and is based on management's ongoing evaluation of the loan portfolio
taking into consideration such factors as historical loan loss experience, the
detailed review of specific loans identified under the Company's internal review
processes, estimated losses on impaired loans, current economic conditions, and
other pertinent factors. Management monitors the entire loan portfolio in an
attempt to identify problem loans or risks in the portfolio in a timely manner
and to maintain an appropriate allowance for loan losses.
The primary responsibility and accountability for daily lending activities
rests with the Banks. Loan personnel at each Bank have the authority to extend
credit under board approved lending policies. Each Bank maintains a continuous
and comprehensive loan review program developed in conjunction with the type,
level, and risk of its particular loan portfolio. The loan review program is
designed to evaluate credit quality, loan documentation, and the adequacy of the
allowance for loan losses. Loan review procedures, including a grading system
and independent loan review of large loan relationships, are utilized to ensure
that potential problem loans are identified early in order to lessen any
potentially negative impact on earnings.
At December 31, 1998, the allowance for loan losses was $3.8 million,
compared to $3.3 million at year end 1997, an increase of 16.1%. The provision
for loan losses remained flat at approximately $1.5 million for both 1998 and
1997. This provision expense represents additions to the allowance for loan
losses to maintain sufficient coverage levels given portfolio composition and
levels of net charge-offs and nonperforming loans.
Net charge-offs for 1998 declined $684,000, or 42.1%, compared to 1997. The
decline was attributable to the inclusion in 1997 of a $667,000 charge-off of
one significant commercial mortgage loan. Excluding that particular loan, net
charge-offs of commercial mortgages declined for 1998, compared to 1997, while
net charge-offs of residential mortgages, consumer and commercial loans
increased year over year. Consumer loan charge-offs exhibited the largest
percentage increase from 1997 to 1998, primarily related to an increase in
bankruptcy filings.
The allowance for loan losses as a percent of total loans increased to .94%
at December 31, 1998, compared to .88% at the prior year end. The allowance for
loan losses continues to reflect the risk diversification of the loan portfolio.
Residential mortgage loans, which generally carry a lower risk of loss or net
charge-off, have increased as a percentage of total loans. Management believes
that the allowance for loan losses at December 31, 1998 is adequate based on all
currently available information.
Table 4 summarizes changes in the allowance for loan losses for the years
1994 through 1998 and shows an allocation of the year end balances, along with
related statistics for the allowance and net charge-offs. The allowance for loan
losses has been allocated according to the amount considered to be necessary to
provide for the possibility of losses within the various loan categories. The
allocation is based primarily on actual net charge-off experience, adjusted for
changes in the risk profile of each category, plus additional amounts based on
potential losses identified through the loan review process. The anticipated
effect of
12
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
economic conditions on both individual loans and loan categories is also
considered in quantifying amounts allocated to each loan category. Because the
allocation is based on management's judgement and estimates, it is not
necessarily indicative of the charge-offs that may ultimately occur.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and real estate acquired
by foreclosure. Nonperforming loans include loans that have been placed in
nonaccrual status and loans past due ninety days or more and still accruing
interest. Table 5 provides a five year summary of nonperforming assets.
<TABLE>
<CAPTION>
TABLE 4 -- ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,285 3,389 3,380 3,264 2,824
Provision for loan losses 1,470 1,520 1,334 917 830
Charge-offs
Residential mortgages (204) (216) (247) (225) (103)
Commercial mortgages (163) (1,065) (634) (205) --
Commercial loans (183) (140) (180) (157) (92)
Consumer loans (511) (387) (345) (353) (318)
- ------------------------------------------------------------------------------------------------------
Total charge-offs (1,061) (1,808) (1,406) (940) (513)
Recoveries
Residential mortgages -- 57 2 7 7
Commercial mortgages -- 25 -- -- --
Commercial loans 46 22 11 33 35
Consumer loans 75 80 68 99 81
- ------------------------------------------------------------------------------------------------------
Total recoveries 121 184 81 139 123
- ------------------------------------------------------------------------------------------------------
Net charge-offs (940) (1,624) (1,325) (801) (390)
- ------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,815 3,285 3,389 3,380 3,264
- ------------------------------------------------------------------------------------------------------
Ratio of charge-offs net of
recoveries to loans outstanding .23% .44 .38 .24 .13
Allowance for loan losses as a
percent of:
Total loans .94 .88 .97 1.03 1.02
Nonperforming loans 63.18 53.21 93.28 63.67 75.75
- ------------------------------------------------------------------------------------------------------
Allocation of Allowance for Loan Losses at December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
LOANS LOANS LOANS LOANS LOANS
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMT LOANS AMT LOANS AMT LOANS AMT LOANS AMT LOANS
- ------------------------------------------------------------------------------------------------------
Residential mortgages $ 533 63.04% 585 57.67 471 54.00 402 52.23 201 53.02
Commercial mortgages 1,484 9.77 1,246 11.16 1,677 13.21 1,452 16.22 1,201 16.99
Commercial loans 1,159 9.30 826 11.23 617 11.48 807 10.91 1,297 10.99
Consumer loans 639 17.89 628 19.94 624 21.31 719 20.64 565 19.00
- ------------------------------------------------------------------------------------------------------
Total $3,815 100.00% 3,285 100.00 3,389 100.00 3,380 100.00 3,264 100.00
- ------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
<TABLE>
<CAPTION>
TABLE 5 -- SUMMARY OF NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans in nonaccrual $5,255 5,902 3,288 4,299 3,383
Loans past due 90 days or
more and still accruing 783 272 345 1,010 813
- --------------------------------------------------------------------------------
Total nonperforming loans 6,038 6,174 3,633 5,309 4,196
Other real estate 665 565 618 427 193
- --------------------------------------------------------------------------------
Total nonperforming assets $6,703 6,739 4,251 5,736 4,389
- --------------------------------------------------------------------------------
Percent of:
Total loans and real estate
acquired by foreclosure 1.66% 1.80 1.22 1.74 1.37
Total assets 1.22 1.32 .90 1.31 1.04
Nonperforming loans as a
percent of total loans 1.49 1.65 1.04 1.61 1.31
- --------------------------------------------------------------------------------
</TABLE>
Nonperforming assets totaled $6.7 million at December 31, 1998, down
slightly compared to year end 1997. As a percent of total assets, nonperforming
assets declined from 1.3% at December 31, 1997 to 1.2% at year end 1998.
At December 31, 1998, nonperforming loans, which declined $136,000, or
2.2%, from the prior year end, consisted of $4.8 million in mortgages, $529,000
in commercial loans, and $704,000 in consumer loans. Residential mortgage loans
represented $2.5 million, or 41.0%, of total nonperforming loans at year end
1998, compared to $3.0 million, or 48.4%, at December 31, 1997. The decline in
nonperforming residential mortgage loans primarily reflects increased collection
efforts directed toward this portfolio in 1998. Commercial mortgages represented
$2.3 million, or 38.6%, of nonperforming loans at December 31, 1998, an amount
and level comparable to year end 1997. All nonperforming commercial mortgage
loans at December 31, 1998 were either in the process of foreclosure or
operating under an agreed upon workout plan. Similar to year end 1997, one loan
continued to represent approximately 50% of the nonperforming commercial
mortgage balance at December 31, 1998. Adherence to the established repayment
plan has significantly reduced the delinquent status of this loan at year end
1998 compared to year end 1997. Management believes there to be adequate
collateral supporting the loan and that continuation of the current repayment
plan would return this loan to a performing status in 1999.
Management believes that, through its loan review program, it has taken a
conservative approach in evaluating nonperforming loans and the loan portfolio
in general, both in acknowledging the general condition of the portfolio and in
establishing the allowance for loan loss. Nonperforming and past due loans are
monitored on a continual basis in order to guard against further deterioration
in their condition. Management has identified, through normal internal credit
review procedures, $4.0 million in "potential problem loans" at December 31,
1998. These problem loans are defined as loans not included as nonperforming
loans above, but about which management has developed information regarding
possible credit problems, which may cause the borrowers future difficulties in
complying with loan repayments. There were no loans classified for regulatory
purposes as loss, doubtful, substandard, or special mention that have not been
identified as impaired or nonperforming or that cause management to have serious
doubts as to the ability of the borrower to comply with the loan repayment
terms. In addition, there were no material commitments at December 31, 1998 to
lend additional funds to borrowers whose loans were classified as nonperforming.
Iroquois will continue to focus on improving asset quality through
proactive management of problem assets, early detection of potential problem
assets, consistent and adequate collection procedures, and timely charge-offs.
14
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
SECURITIES
At December 31, 1998, the securities portfolio totaled $108.5 million,
consisting of $61.4 million of securities available for sale and $47.1 million
of securities held to maturity. This compares with a total portfolio of $103.6
million, comprised of $51.9 million of securities available for sale and $51.7
million of securities held to maturity, at December 31, 1997. At December 31,
1998, securities represented 19.8% of total assets, compared to 20.3% at year
end 1997. The composition of the two securities portfolios by type of security
is presented in Table 6. Certain information pertaining to the composition,
yields, and maturities of the two portfolios is presented in Table 7.
Securities available for sale, which are carried at fair value, increased
18.3% in 1998, and represented 56.6% of the total securities portfolio, compared
to 50.1% at December 31, 1997. The portfolio consists primarily of US Government
and agencies obligations. Holdings of state and municipal obligations increased
in 1998, to 11.5% of the portfolio, to provide diversity and tax-advantaged
yield to the portfolio. Securities held to maturity, which are carried at
amortized cost, declined to 43.4% of the total portfolio at December 31, 1998,
compared to 49.9% at December 31, 1997. The held to maturity portfolio consists
primarily of corporate bonds and mortgage-backed securities.
The Company's investment strategy is for its Banks to maintain securities
portfolios that provide a source of liquidity through maturities and selling
opportunities, contribute to overall profitability, support pledging
requirements, and provide a balance to interest rate and credit risk in other
categories of the balance sheet. The Company does not engage in securities
trading or derivatives activities in carrying out its investment strategies.
<TABLE>
<CAPTION>
Table 6 -- SECURITIES
- ---------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government &
agencies obligations $ 40,172 40,734 42,187 42,537 33,654 33,784
State and municipal
obligations 6,959 7,090 231 232 -- --
Corporate 3,362 3,471 1,507 1,517 500 501
Other 3,000 2,957 3,000 2,983 3,000 2,976
Mortgage-backed securities 7,120 7,179 4,664 4,675 6,648 6,634
- ---------------------------------------------------------------------------------------------------
60,613 61,431 51,589 51,944 43,802 43,895
- ---------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government &
agencies obligations -- -- 25 25 60 60
State and municipal
obligations 5,818 5,903 3,729 3,795 1,489 1,519
Corporate 25,893 26,190 27,717 27,887 27,638 27,723
Mortgage-backed securities 15,345 15,624 20,205 20,475 25,205 25,316
- ---------------------------------------------------------------------------------------------------
47,056 47,717 51,676 52,182 54,392 54,618
- ---------------------------------------------------------------------------------------------------
Total $107,669 109,148 103,265 04,126 98,194 98,513
- ---------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
[Bar Chart]
<TABLE>
<CAPTION>
Table 7 -- MATURITY SCHEDULE OF SECURITIES
- ---------------------------------------------------------------------------------------------------
at December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
MATURING
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
(dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government &
agencies obligations $ 7,025 6.22% 29,313 5.97 -- -- 3,834 6.05
State and municipal
obligations -- -- -- -- 5,993 4.32 966 4.41
Corporate -- -- 1,954 6.44 965 6.41 443 6.59
Other 3,000 5.55 -- -- -- -- -- --
Mortgage-backed securities -- -- -- -- -- -- 7,120 5.90
- --------------------------------------------------------------------------------------------------------------
10,025 6.02 31,267 6.00 6,958 4.61 12,363 5.86
- --------------------------------------------------------------------------------------------------------------
Securities held to maturity:
State and municipal
obligations 2,858 4.19 1,036 4.80 1,559 4.67 365 4.77
Corporate 8,013 6.36 17,880 6.26 -- -- -- --
Mortgage-backed securities 925 7.39 2,584 6.41 3,298 6.98 8,538 6.79
- --------------------------------------------------------------------------------------------------------------
11,796 5.92 21,500 6.21 4,857 6.24 8,903 6.71
- --------------------------------------------------------------------------------------------------------------
Total $21,821 5.97% 52,767 6.09 11,815 5.28 21,266 6.22
- --------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS AND OTHER SOURCES OF FUNDS
Customer deposits, consisting of interest-bearing time deposits, savings,
money market and NOW accounts, and noninterest bearing checking accounts
represent the primary source of asset funding for the Banks. Other sources of
funds include overnight borrowings from other financial institutions and short-
term borrowings or term advances under agreements with the Federal Home Loan
Bank (FHLB). Table 8 provides a three year summary of deposits.
Total deposits increased $26.2 million, or 6.3%, from $417.0 million at
December 31, 1997, to $443.2 million at December 31, 1998. During 1998, total
deposits averaged $434.7 million and represented 88.5% of total liabilities,
compared with $419.9 million and 92.7%, respectively, in 1997. Continued growth
in public fund (municipal) deposits held at Cayuga contributed $12.1 million in
additional deposits at year end 1998 compared to 1997. The net growth of $14.1
million in personal and commercial deposits at December 31, 1998, compared to
December 31, 1997, came primarily from increases in checking, money market, and
time deposits. Savings deposits, reflecting a five year downward trend,
decreased $2.9 million in 1998 and declined from 26.0% of total deposits at
December 31, 1997, to 23.9% at year end 1998. Time deposits of $100,000 or
greater, derived entirely from within the Banks' local market areas, increased
$15.4 million in 1998, with 75% representing municipal time deposits. Table 9
presents a maturity schedule of time deposits of $100,000 and over.
Total borrowings at December 31, 1998 were $61.6 million, or 12.1% of total
liabilities, compared to $50.2 million, or 10.7%, at December 31, 1997.
Borrowings averaged 10.6% and 6.6% of total liabilities during 1998 and 1997,
respectively. During 1998, the Company continued to extend the maturity of its
borrowings as part of its interest rate risk management program. A maturity
schedule of outstanding borrowings can be found in Note 7 of the accompanying
consolidated financial statements.
Iroquois believes that deposit growth will continue to be adversely
affected by investment alternatives pursued by customers in response to
perceived opportunities for strong returns in the mutual fund and equity
markets. The Banks will continue to focus on building upon existing
relationships with their customers through targeted marketing and personal
16
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
<TABLE>
<CAPTION>
Table 8 -- DEPOSITS
- -------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest bearing deposits $ 30,905 27,563 24,934
- -------------------------------------------------------------------------------------
Interest-bearing deposits:
NOW accounts 41,454 38,781 35,805
Money market accounts 46,066 41,033 37,255
Savings accounts 105,717 108,578 124,868
Time deposits 219,097 201,056 187,360
- -------------------------------------------------------------------------------------
Total interest-bearing deposits 412,334 389,448 385,288
- -------------------------------------------------------------------------------------
Total deposits $443,239 417,011 410,222
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Table 9 -- MATURITIES OF TIME DEPOSITS - $100,000 AND OVER
- -------------------------------------------------------------------
(dollars in thousands) December 31, 1998
- -------------------------------------------------------------------
MATURITY AMOUNT
- -------------------------------------------------------------------
<S> <C>
Three months or less $ 36,590
Over three through six months 6,834
Over six through twelve months 7,891
Over twelve months 5,070
- -------------------------------------------------------------------
$ 56,385
- -------------------------------------------------------------------
</TABLE>
sales efforts designed to attract additional accounts and deposits. In addition,
enhanced cash management and commercial deposit products will be introduced at
Cayuga in 1999, and Homestead will pursue plans to relocate two of its branches
to take advantage of demographic changes in the Utica market. Management
believes that both of these initiatives could enhance the Company's ability to
increase deposits as a funding source of continued asset growth.
CAPITAL AND DIVIDENDS
Total shareholders' equity at December 31, 1998 was $38.3 million, down
$687,000, or 1.8%, from the balance at the end of 1997. The decrease was due
primarily to the redemption in 1998 of the Company's outstanding preferred
stock. Common shareholders' equity increased $4.2 million, or 12.2%, from $34.2
million at December 31, 1997, to $38.3 million, or 100% of total equity, at
December 31, 1998. Equity per common share, referred to as book value, increased
11.7%, from $14.42 at year end 1997 to $16.11 at year end 1998. Other factors
contributing to the change in shareholders' equity during 1998 are shown in the
Consolidated Statement of Shareholders' Equity and Comprehensive Income
presented on page 28.
Capital adequacy in the banking industry is evaluated primarily by the use
of ratios which measure capital against total assets as well as against total
assets that are weighted based on risk characteristics. At December 31, 1998,
Iroquois and each of the Banks exceeded all regulatory required minimum capital
ratios and met the definition of "well capitalized" as defined by applicable
regulation. On a consolidated basis at December 31, 1998, Iroquois had a total
capital to assets ratio of 7.00%, a tangible common equity to assets ratio of
6.67%, and a total capital to risk-weighted assets ratio of 11.7%. A more
comprehensive analysis of regulatory capital requirements is included in Note 9
of the accompanying consolidated financial statements.
Iroquois paid total cash dividends of $1.2 million in 1998, of which
$187,000 was paid to preferred shareholders. Common shareholders received total
dividends of $.40 per share,
17
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Management's Discussion and Analysis
representing a payout ratio to earnings per share of 20.4%, compared to 19.1% in
1997. Cash dividends have been paid on the Company's common stock for twelve
consecutive years. The Company intends to continue the practice of regular
payment of common stock dividends as long as its subsidiary Banks remain
profitable and in compliance with regulatory capital requirements.
The Company emphasizes the capital adequacy of its Banks as an important
foundation for their individual growth plans, liquidity and projected capital
needs, as well as for meeting regulatory requirements. Internally generated
capital is the Company's primary strategy for capital growth for the Banks and
for the Company. Iroquois serves as the vehicle for access to capital markets
for its own needs, such as for the acquisition of new subsidiaries, and as a
source of funds, if necessary, to strengthen the capital position of its
subsidiaries.
The Company strives to maintain optimal capital levels that are
commensurate with the risk profiles of its subsidiary Banks. The Company
regularly reviews its capital position and monitors adherence to regulatory
requirements.
LIQUIDITY
Liquidity represents the Company's ability to generate cash or otherwise
obtain funds at reasonable rates to meet the demands of depositors, satisfy
commitments to borrowers, and support key business initiatives. Proper liquidity
management provides the necessary access to funds to satisfy cash flow
requirements. Liquidity risk represents the possibility that the Company would
be unable to generate cash or otherwise obtain funds at reasonable rates to meet
its obligations.
In the ordinary course of business, Iroquois cash flows are generated from
net operating income, loan repayments, and the maturity or sale of other earning
assets. Liquidity management at the Banks is based on maintaining a strong base
of core customer deposits, an adequate level of short-term and available for
sale securities, and the availability of dependable borrowing sources.
Funding is available to each Bank through their membership in the Federal
Home Loan Bank of New York ("FHLB"). Through the FHLB, the Banks can borrow up
to 25% of total assets at various terms and interest rates. At December 31,
1998, securities maturing in one year or less, excluding estimated payments from
amortizing securities, totaled $21.8 million, or 20.1% of the total securities
portfolio. Securities available for sale at December 31, 1998 totaled $61.4
million, or 11.2% of total assets.
The consolidated statements of cash flows included in the consolidated
financial statements contained in this Annual Report identify Iroquois' cash
flows from operating, investing, and financing activities. During 1998 operating
activities generated cash flows of $8.1 million, while financing activities
provided $31.6 million. Investing activities, primarily net investments in loans
and securities, used $37.3 million, resulting in a net increase in cash and cash
equivalents of $2.5 million in 1998.
While many factors, such as economic and competitive factors, customer
demand for loans and deposits, bank reputation and market share, affect the
Company's overall ability to effectively manage its liquidity, management
believes the Company has sufficient liquidity to meet its current obligations
and is not aware of any trends, events, or uncertainties that will have, or that
are reasonably likely to have, a material effect on the Company's liquidity,
capital resources, or operations.
MARKET RISK AND INTEREST RATE RISK MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit activities. Other types of market risk, such
as foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of the Company's business activities.
Managing interest rate risk is of primary importance to Iroquois. The
Company's asset and liability management program includes a process for
identifying and measuring potential risks to earnings and to the market value of
equity due to changes in interest rates.
18
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Management's Discussion and Analysis
<TABLE>
<CAPTION>
TABLE 10 -- NET PORTFOLIO VALUE ANALYSIS
- --------------------------------------------------------------------------------
(dollars in thousands) At December 31, 1998
- --------------------------------------------------------------------------------
CHANGE IN INTEREST RATE ESTIMATED CHANGE IN NPV
(BASIS POINTS) NPV AMOUNT %
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
+200 $45,271 $(12,663) (21.9)%
+100 51,650 (6,304) (10.9)
0 57,954 -- --
-100 63,642 5,688 9.8
-200 67,784 9,830 17.0
- --------------------------------------------------------------------------------
</TABLE>
Interest rate risk is measured and managed for each Bank and monitored from a
holding company perspective. The goal of interest rate risk analysis is to
minimize the potential loss in net interest income and net portfolio value that
could arise from changes in interest rates. Iroquois asset/liability management
strategies emphasize balancing the mix and repricing characteristics of its
loans, securities, deposits, and borrowings to ensure that exposure to interest
rate risk is limited within acceptable levels. Iroquois determines sensitivity
of earnings and capital to changes in interest rates by utilizing various tools.
A simulation model is the primary tool used to assess the impact of changes
in interest rates on net interest income. Key assumptions used in the model
include prepayment speeds on loans and mortgage-backed securities, loan volumes
and pricing, customer preferences and sensitivity to changing rates, and
management's projected financial plans. These assumptions are compared to actual
results and revised as necessary. The Company's guidelines provide that net
interest income should not decrease by more than 5% when simulated against a
twelve-month rising or declining rate scenario reflecting a gradual change in
rates of up to 200 basis points. At December 31, 1998, based on simulation model
results, the Company was within these guidelines. Actual results may differ from
simulated results due to the inherent uncertainty of the assumptions, including
the timing, magnitude and frequency of rate changes, customer buying patterns,
economic conditions, and management strategies.
The Company uses a net portfolio value ("NPV") analysis as another means of
measuring and monitoring its interest rate risk. NPV represents the difference
between the present value of the Company's liabilities and the present value of
the expected cash flows from its assets. Table 10 sets forth, at December 31,
1998, an analysis of the Company's interest rate risk as measured by the
estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the interest rate yield curve. The NPV analysis incorporates
assumptions regarding the projected prepayment speeds on loans and mortgage-
backed securities and estimated cash flows on deposits without a stated maturity
date. The assumptions are primarily based on the Company's historical prepayment
and/or runoff speeds of assets and liabilities when interest rates increase or
decrease by 200 basis points or greater. The Company's guidelines provide that a
Bank's NPV should not decrease more than 25% as a result of a sudden rate change
of plus or minus 200 basis points.
Another tool used to measure interest rate sensitivity is the cumulative
gap analysis which is presented in Table 11. The cumulative gap represents the
net position of assets and liabilities subject to repricing in specified time
periods. Deposit accounts without specified maturity dates are modeled based on
historical run-off characteristics of these products in periods of rising rates.
At December 31, 1998, the one year cumulative gap position was $19.9 million
liability sensitive, or 3.6% of total assets, compared to a virtually neutral
one year position at year end 1997. While the one year gap position remains
within Company established risk guidelines, the Company has become slightly more
liability sensitive, principally due to the decrease in adjustable rate lending
given the current interest rate environment.
Because the cumulative gap analysis is merely a snapshot at a particular
date and does not fully reflect that certain assets and liabilities may have
similar repricing periods but may in fact reprice at different times within that
period and at differing rate levels, management uses the interest rate
sensitivity gap only as a general indicator of the potential effects of interest
rate changes on net interest income. Management believes that the gap analysis
is a useful
19
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Management's Discussion and Analysis
<TABLE>
<CAPTION>
TABLE 11 -- INTEREST RATE SENSITIVITY TABLE
- ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
(DOLLARS IN THOUSANDS) MONTHS MONTHS YEARS YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Mortgage loans:
Residential $ 23,061 54,703 112,135 64,856 254,755
Commercial 10,156 8,339 19,532 1,470 39,497
Consumer and commercial loans 59,077 12,878 28,623 9,262 109,840
Securities 7,570 19,005 49,734 9,654 85,963
Mortgage-backed securities 2,398 9,804 7,227 3,095 22,524
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets $ 102,262 104,729 217,251 88,337 512,579
- ---------------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
Deposits:
Savings and NOW accounts 9,100 17,719 53,489 66,863 147,171
Money market accounts 2,189 6,564 16,583 20,730 46,066
Time deposits 68,060 105,157 45,824 56 219,097
Borrowings 3,129 15,000 43,000 462 61,591
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities $ 82,478 144,440 158,896 88,111 473,925
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 19,784 (39,711) 58,355 226 38,654
Cumulative interest rate
sensitive gap $ 19,784 (19,927) 38,428 38,654
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative gap to total assets:
at December 31, 1998 3.6% (3.6) 7.0 7.0
at December 31, 1997 4.2% 0 12.2 8.0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
tool only when used in conjunction with its simulation model, NPV analysis, and
other tools for analyzing and managing interest rate risk.
The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
IMPACT OF INFLATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, which requires the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent, as the price of goods and services.
YEAR 2000
The Company's Year 2000 (or "Y2K") activities are continuing on schedule
under the framework of the FFIEC's Five Step program. Senior management and the
Company's Board of Directors are actively involved in managing efforts in
support of these activities, monitoring the Company's progress, and evaluating
risks of the process to the Company's strategic plan. The primary software
applications which support the Banks' checking, savings, and loan products have
already been updated and tested for Year 2000 compliance. Y2K-compliant versions
of these front-end software products are currently in use at the Banks.
STEP 1 AWARENESS PHASE
The Company's Y2K Committee has been following a comprehensive reporting
and communication plan designed to increase awareness of the issues surrounding
the century
20
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Management's Discussion and Analysis
date change and report on the Company's progress in preparing for the Year 2000.
The communication plan includes ongoing progress reports to Senior Management,
the Company's Board of Directors, and Audit Committee. In addition, the Company
is presently taking steps to build awareness and increase the understanding of
its employees as well as its banking customers on the Company's readiness for
the Year 2000.
STEP 2 ASSESSMENT PHASE
The Company has completed an inventory and assessment of its software,
hardware, and other systems applications (e.g. communications systems;
environmental systems; credit card; and ATM processing systems). As part of the
assessment phase, critical applications were identified. Critical applications
are those believed by the Company to be key to the accuracy of recording
customer banking transactions, to have a risk involving the safety of
individuals, or to affect the Company's revenues and/or liquidity.
During the assessment phase, the Company also identified and prioritized
for further evaluation and testing, as appropriate, its exposure to third party
risks of noncompliance. Electronic data exchange service bureaus and business
customers with relationships in excess of $150,000 were identified. As part of
this assessment, the Company is collecting and analyzing information from third
parties regarding their Year 2000 readiness.
STEP 3 RENOVATION PHASE
The renovation phase includes the installation of all necessary software
upgrades, the removal of non-compliant applications, the development of
application-specific contingency plans as necessary, and the testing of
currently compliant systems. The Company estimates that it has completed
approximately 80% of the renovation phase. Close monitoring of the progress of
its third party vendors, in particular, Fiserv Inc., the Company's data services
and item processing provider, is ongoing. Fiserv has advised the Company that it
anticipates its systems will be completely upgraded to Year 2000 compliance,
tested, and implemented no later than June 30, 1999.
As of December 31, 1998, the Company had completed the identification of
systems requiring upgrades, had installed Y2K compliant versions as received,
and continues close monitoring of vendor progress to ensure timely delivery of
upgrades. A general contingency plan has been outlined. System-specific
contingency plans will be implemented for critical systems which fail their Y2K
test within 30 days of test, but no later than June 30, 1999. To date, the
Company has no reason to believe that its critical applications will not be Year
2000 compliant in all material respects.
STEP 4 VALIDATION PHASE
During the validation phase, critical data flows both internally and with
third parties will be tested with both the sender and receiver simulating Year
2000 conditions. Testing is presently underway, both internally and with third
parties, including Fiserv, Inc. The validation phase is expected to be completed
by June 30, 1999.
STEP 5 IMPLEMENTATION PHASE
The implementation phase will primarily occur during 1999. This phase will
focus on monitoring the progress of service providers and vendors as they
install fully renovated and tested Y2K compliant systems into the normal daily
operating environment. In addition, the Company has begun the process of
developing business resumption contingency plans for each of its key business
processes, and plans to complete and test them in 1999.
COSTS
The Company presently expects to meet its Year 2000 compliance commitment
using existing resources and without incurring significant incremental expenses.
The Company has provided for the additional costs of the Year 2000 project,
primarily additional hardware, software, and service fees, in its operational
budget for information technology.
21
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Management's Discussion and Analysis
RISK FACTORS
Significant Year 2000 failures in the Company's systems or in the systems
of third parties (or third parties upon whom they depend) would have a material
adverse effect on the Company's financial condition and results of operation.
Although the Company believes that it has taken adequate measures to assure its
systems will be Year 2000 compliant, the Company does not have control of
external systems and conditions with which its systems interact, or by which its
systems are affected. In the event of external conditions relating to Year 2000,
it is possible that the Company could experience (i) a material increase in the
Company's credit losses due to Year 2000 problems for the Company's borrowers
and obligors and (ii) liquidity stress caused by disruption in financial
markets. The magnitude of such potential credit losses or disruption cannot be
determined at this time.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the remaining provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which relates to the accounting for securities lending, repurchase agreements,
and other secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, did not have a material impact on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes comprehensive accounting and reporting requirements for derivative
instruments and hedging activities and requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for gains and losses resulting from changes in fair
value of the derivative instrument, depends on the intended use of the
derivative and the type of risk being hedged. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of this statement should be as of the beginning of a company's
fiscal year, January 1, 2000 for Iroquois. Iroquois does not invest in
derivative instruments, therefore, the provisions of SFAS No. 133 are not
expected to have any effect on either the financial disclosures or the financial
condition of the Company. SFAS No. 133 also permits certain reclassifications of
securities among the trading, available for sale and held to maturity
classifications. The Company has no current intention to reclassify any
securities pursuant to SFAS No. 133.
22
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Financial Statements
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Report of Management/Independent Auditors' Report
REPORT OF MANAGEMENT
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
annual report, including the determination of amounts that must necessarily be
based on judgments and estimates. It is the belief of management that the
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and
that the financial information appearing throughout this annual report is
consistent with the consolidated financial statements.
Management establishes and monitors the Company's system of internal
accounting controls in meeting its responsibility for reliable financial
statements. This system is designed to provide reasonable assurance that assets
are safeguarded and that transactions are executed in accordance with
management's authorization and are properly recorded.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the Company's management, internal auditors
and independent auditors, KPMG LLP, to review matters relating to the quality of
financial reporting, internal accounting control, and the nature, extent and
results of audit efforts. The internal auditors and independent auditors have
unlimited access to the Audit Committee to discuss all such matters.
/s/ Richard D. Callahan /s/ Marianne R. O'Connor
Richard D. Callahan Marianne R. O'Connor
President and Treasurer and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS IROQUOIS BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of Iroquois
Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and comprehensive income
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Iroquois
Bancorp, Inc. and subsidiaries at December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Syracuse, New York
January 22, 1999
24
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------
(dollars in thousands,
except share data) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,571 12,778
Federal funds sold and
interest-bearing deposits with
other financial institutions 6,393 705
Securities available for sale, at fair value 61,431 51,944
Securities held to maturity (fair value of
$47,717 in 1998 and $52,182 in 1997) 47,056 51,676
Loans 404,092 373,269
Less allowance for loan losses 3,815 3,285
- ------------------------------------------------------------------------------------------
Loans, net 400,277 369,984
Premises and equipment, net 8,070 8,170
Federal Home Loan Bank Stock, at cost 4,079 3,629
Accrued interest receivable 3,822 3,855
Other assets 6,721 7,037
- ------------------------------------------------------------------------------------------
Total Assets $547,420 509,778
- ------------------------------------------------------------------------------------------
LIABILITIES
Savings and time deposits $412,334 389,448
Demand deposits 30,905 27,563
Borrowings 61,591 50,164
Accrued expenses and other liabilities 4,248 3,574
- ------------------------------------------------------------------------------------------
Total Liabilities $509,078 470,749
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, 3,000,000 shares authorized:
Series A-issued and outstanding:
1998-none; 1997-29,999 -- 30
Series B-issued and outstanding:
1998-none; 1997-18,632 -- 19
Common Stock, $1.00 par value; 6,000,000
shares authorized; 2,409,980 and 2,388,936
shares issued and outstanding in 1998 and
1997, respectively 2,410 2,389
Additional paid-in capital 9,303 13,793
Retained earnings 26,557 22,868
Accumulated other comprehensive income 490 213
Unallocated shares of Stock Ownership Plan (418) (283)
- ------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 38,342 39,029
- ------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $547,420 509,778
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year ended December 31,
- --------------------------------------------------------------------------------------------
(dollars in thousands,
except share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $32,401 30,579 29,603
Securities 6,421 6,606 5,838
Other 582 337 322
- --------------------------------------------------------------------------------------------
39,404 37,522 35,763
- --------------------------------------------------------------------------------------------
Interest Expense:
Deposits 16,152 15,457 14,759
Borrowings 3,067 1,760 1,593
- --------------------------------------------------------------------------------------------
19,219 17,217 16,352
- --------------------------------------------------------------------------------------------
Net Interest Income 20,185 20,305 19,411
Provision for loan losses 1,470 1,520 1,334
- --------------------------------------------------------------------------------------------
Net Interest Income after Provision
for Loan Losses 18,715 18,785 18,077
- --------------------------------------------------------------------------------------------
Non-Interest Income:
Service charges 2,940 2,541 2,205
Net gain(loss) on sales of
securities and loans 223 99 (1,021)
Other 554 587 551
- --------------------------------------------------------------------------------------------
Total Non-Interest Income 3,717 3,227 1,735
- --------------------------------------------------------------------------------------------
Non-Interest Expense:
Salaries and employee benefits 7,564 7,328 6,697
Occupancy and equipment 1,655 1,725 1,671
Computer and product service fees 1,676 1,328 1,045
Promotion and marketing 461 356 379
Other real estate expenses 345 333 388
Deposit insurance 91 97 742
Other 3,087 2,954 2,664
- --------------------------------------------------------------------------------------------
Total Non-Interest Expenses 14,879 14,121 13,586
- --------------------------------------------------------------------------------------------
Income Before Income Taxes 7,553 7,891 6,226
Income taxes 2,711 2,994 2,447
- --------------------------------------------------------------------------------------------
Net Income 4,842 4,897 3,779
- --------------------------------------------------------------------------------------------
Preferred stock dividend 187 441 451
- --------------------------------------------------------------------------------------------
Net income applicable to common shares $ 4,655 4,456 3,328
- --------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 1.96 1.89 1.43
Diluted 1.92 1.85 1.41
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year ended December 31,
- -----------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 4,842 4,897 3,779
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense,
provision for loan losses,
deferred taxes and other 2,353 2,195 2,225
Net (gain)loss on sales of
securities and loans (223) (99) 1,021
Increase in accrued interest
receivable and other assets (40) (394) (135)
Increase in accrued expenses
and other liabilities 1,201 716 620
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,133 7,315 7,510
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 11,668 10,637 10,038
Proceeds from maturities and redemptions of
securities available for sale 9,977 6,121 7,439
Proceeds from maturities and redemptions of
securities held to maturity 15,925 12,732 11,704
Purchases of securities available for sale (30,437) (23,669) (23,240)
Purchases of securities held to maturity (11,459) (10,896) (20,470)
Loans made to customers net of principal
payments received (34,892) (27,636) (18,610)
Loans of acquired branches -- -- (10,270)
Proceeds from sales of loans 4,090 2,835 8,461
Capital expenditures (571) (1,250) (1,090)
Purchase of FHLB stock (450) (1,350) (85)
Premium paid for deposits -- -- (3,138)
Other - net (1,138) (2,385) (462)
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (37,287) (34,861) (39,723)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase(decrease) in savings
accounts and demand deposits 8,187 (6,907) (2,120)
Net increase(decrease) in time deposits 18,041 13,696 (3,410)
Deposits of acquired branches -- -- 46,652
Net increase(decrease) in borrowings 11,427 24,628 (9,714)
Proceeds from issuance of common stock 285 366 338
Dividends paid (1,153) (1,289) (1,198)
Redemption of preferred stock (4,863) (140) (50)
Stock purchased for ESOP (289) -- --
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 31,635 30,354 30,498
- -----------------------------------------------------------------------------------------------
Net increase(decrease) in cash and
cash equivalents 2,481 2,808 (1,715)
Cash and cash equivalents at beginning of year 13,483 10,675 12,390
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15,964 13,483 10,675
- -----------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 19,036 17,071 16,280
Income taxes 2,145 2,082 2,134
Supplemental schedule of noncash
investing activities:
Loans to facilitate the sale of other real estate 405 422 530
Additions to other real estate 1,013 842 1,675
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity and Comprehensive Income
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Unallocated
Accumulated Shares of
Additional Other Stock
(dollars in thousands, Preferred Common Paid-In Retained Comprehensive Ownership
except share data) Stock Stock Capital Earnings Income Plans Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 50 2,339 13,230 16,679 170 (622) 31,846
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income -- -- -- 3,779 -- -- 3,779
Change in net unrealized gain on
securities available for sale, net of taxes -- -- -- -- (114) -- (114)
-------
Total Comprehensive Income 3,665
-------
Allocation of Common stock
under Stock Ownership Plans -- -- 31 -- -- 170 201
Preferred Stock Redemption
(499 shares) -- -- (50) -- -- -- (50)
Stock Options Exercised -- 10 45 -- -- -- 55
Stock Issued - Dividend
Reinvestment Plan -- 19 264 -- -- -- 283
Cash dividends declared:
Common stock -- -- -- (747) -- -- (747)
Preferred stock -- -- -- (451) -- -- (451)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 50 2,368 13,520 19,260 56 (452) 34,802
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income -- -- -- 4,897 -- -- 4,897
Change in net unrealized gain
on securities available for sale,
net of taxes -- -- -- -- 157 -- 157
-------
Total Comprehensive Income 5,054
-------
Allocation of Common stock
under Stock Ownership Plans -- -- 67 -- -- 169 236
Preferred Stock Redemption
(1,408 shares) (1) -- (139) -- -- -- (140)
Stock Options Exercised -- 9 93 -- -- -- 102
Stock Issued - Dividend
Reinvestment Plan -- 12 252 -- -- -- 264
Cash dividends declared:
Common stock -- -- -- (848) -- -- (848)
Preferred stock -- -- -- (441) -- -- (441)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 49 2,389 13,793 22,868 213 (283) 39,029
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income -- -- -- 4,842 -- -- 4,842
Change in net unrealized gain
on securities available for sale,
net of taxes -- -- -- -- 277 -- 277
-------
Total Comprehensive Income 5,119
-------
Allocation of Common stock
under Stock Ownership Plan -- -- 60 -- -- 154 214
Preferred Stock Redemption
(48,631 shares) (49) -- (4,814) -- -- -- (4,863)
Stock Options Exercised -- 21 264 -- -- -- 285
Stock purchased for ESOP -- -- -- -- (289) (289)
Cash dividends declared:
Common stock -- -- -- (966) -- -- (966)
Preferred stock -- -- -- (187) -- -- (187)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ -- 2,410 9,303 26,557 490 (418) 38,342
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
IROQUOIS BANCORP. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(1) Business
Iroquois Bancorp, Inc. ("Iroquois"), a corporation organized under the laws
of New York, commenced operations in 1990. Iroquois, through its principal
banking subsidiaries, provides financial services primarily to individuals and
small- to medium- sized businesses in a six county area of upstate New York.
Iroquois and its subsidiary financial institutions are subject to the
regulations of certain Federal and state agencies and undergo periodic
examinations by those regulatory agencies. Effective January 1, 1997 Iroquois
became a bank holding company in connection with the change in charter of its
largest subsidiary, Cayuga Bank, to a state-chartered commercial bank.
Previously, Iroquois was a thrift holding company and that subsidiary a state-
chartered savings bank operating under the name Cayuga Savings Bank.
(2) Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of Iroquois and its wholly-owned subsidiaries, Cayuga Bank and
subsidiaries ("Cayuga") and The Homestead Savings(FA) and subsidiary
("Homestead") collectively referred to herein as the "Company." All significant
intercompany accounts and transactions are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain prior year amounts have been
reclassified to conform to current year classifications. A description of the
significant accounting policies is presented below. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses for the period. 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. All other securities not included as
held to maturity are classified as available for sale.
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 the related tax effect, on available for sale securities are excluded
from earnings and are reported as a component of accumulated other comprehensive
income in 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 available for sale or held to maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method. Dividend
and interest income are recognized when earned. Purchases and sales are recorded
on a trade date basis with settlement occurring shortly thereafter. Realized
gains and losses on securities sold are derived using the specific
identification method for determining the cost of securities sold.
LOANS -- Loans are carried at current unpaid principal balance less applicable
unearned discounts and net deferred costs. The Company has the ability and
intent to hold its loans to maturity except for education loans which are sold
to a third party from time to time upon reaching fully funded status. Also, the
Company originates some residential fixed rate mortgages with terms exceeding 20
years with the intent to sell. At the date of origination, the loans so
designated and meeting secondary market guidelines are identified as held for
sale and carried at the lower of net cost or fair value on an aggregate basis.
The Company typically retains the servicing rights to mortgages sold.
29
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Interest on loans is accrued and included in income at contractual rates
applied to principal outstanding. Accrual of interest on loans, including
impaired loans, is generally discontinued when loan payments are 90 days or more
past due or when, by judgment of management, collectibility becomes uncertain.
When a loan is placed on nonaccrual status, previously accrued and uncollected
interest is reversed against current period interest income. Subsequent
recognition of income occurs only to the extent payment is received. Nonaccrual
loans generally are restored to an accrual basis when principal and interest
payments become current or when the loan becomes well secured and is in the
process of collection.
Loan origination fees and certain direct loan costs are deferred and
amortized generally over the contractual life of the related loans as an
adjustment of yield using the interest method. Amortization of loan fees is
discontinued when a loan is placed on nonaccrual status.
ALLOWANCE FOR LOAN LOSSES -- The allowance for loan losses is increased by the
provision for loan losses charged against income and is decreased by the charge-
off of loans, net of recoveries. Loans are charged off (including impaired
loans) once the probability of loss has been determined giving consideration to
the customer's financial condition, underlying collateral, and guarantees.
The allowance for loan losses is based on management's evaluation of the
loan portfolio considering such factors as historical loan loss experience,
review of specific loans, estimated losses on impaired loans, current economic
conditions, and such other factors as management considers appropriate to
estimate losses inherent in the portfolio.
The Company estimates losses on impaired loans based on the present value
of expected future cash flows (discounted at the loan's effective interest rate)
or the fair value of the underlying collateral if the loan is collateral
dependent. An impairment loss exists if the recorded investment in a loan
exceeds the value of the loan as measured by the aforementioned methods. A loan
is considered impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. All commercial mortgage loans and commercial loans in a nonaccrual
status are considered impaired. Residential mortgage loans, consumer loans, home
equity lines of credit, and education loans are evaluated collectively since
they are homogeneous and generally carry smaller individual balances. Impairment
losses are included as a component of the allowance for loan losses. The Company
recognizes interest income on impaired loans using the cash basis of income
recognition. Cash receipts on impaired loans are generally applied according to
the terms of the loan agreement, or as a reduction of principal, based upon
management judgment and the related factors discussed above.
The allowance is maintained at a level believed by management to be
sufficient to absorb probable future losses related to loans outstanding as of
the balance sheet date. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the loan portfolio and other
relevant factors and requires material estimates including the amounts and
timing of expected future cash flows on impaired loans. While management uses
available information to estimate loan losses, future additions to the allowance
may be necessary based on changes in estimates, assumptions or economic
conditions. In addition, various regulatory agencies, as part of their
examination process, review the Company's allowance for loan losses and may
require the Company to recognize additions to the allowance at the time of their
examination.
PREMISES AND EQUIPMENT -- Land is carried at cost; buildings, furniture and
equipment are carried at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets (15 to 50 years for buildings and 3 to 10 years for furniture, fixtures,
and equipment). Amortization of leasehold improvements is computed on the
straight-line method over the shorter of the lease term or the estimated useful
life of the improvements.
30
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
OTHER REAL ESTATE -- Real estate acquired through foreclosure or deed in lieu of
foreclosure is recorded at the lower of the unpaid loan balance on the property
at the date of transfer, or fair value less estimated costs to sell. Adjustments
to the carrying values of such properties that result from subsequent declines
in value are charged to operations in the period in which the declines occur.
Operating costs associated with the properties are charged to expense as
incurred.
INTANGIBLE ASSET -- Intangible asset represents the premium paid in connection
with the May 1996 acquisition of three branches from an unrelated bank. The
premium of $3,138,000, less accumulated amortization of $1,193,000, is being
amortized over the expected useful life of seven years on a straight-line basis.
The amortization period is monitored to determine if events and circumstances
require the estimated useful life to be reduced. Periodically, the Company
reviews the intangible asset for events or changes in circumstances that may
indicate the carrying amount of the asset is impaired.
TRUST DEPARTMENT -- Assets held in a fiduciary or agency capacity for customers
are not included in the accompanying consolidated balance sheets, since such
assets are not assets of the Company. Fee income is recognized on the accrual
method based on the fair value of assets administered.
RETIREMENT PLANS -- The Company sponsors various defined contribution retirement
plans under which the Company accrues contributions due under the terms of these
plans.
POSTRETIREMENT BENEFITS -- The Company provides health care and life insurance
benefits to retired employees. The estimated costs of providing benefits are
accrued over the years the employees render services necessary to earn those
benefits. The Company is amortizing the discounted present value of the
accumulated post-retirement benefit obligation at January 1, 1993 over a 20 year
transition period.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
accounting for these plans.
STOCK-BASED COMPENSATION -- The Company continues to apply the intrinsic value-
based method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" in accounting for its stock-based compensation plans
and discloses in the footnotes to the financial statements pro forma net income
and earnings per share information as if the fair value based method had been
adopted.
INCOME TAXES -- The Company and its subsidiaries file a consolidated tax return.
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
bases and operating loss and tax credit carryforwards. 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.
COMPREHENSIVE INCOME -- On January 1, 1998, the Company adopted the provisions
of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components.
At the Company, comprehensive income represents net income and the net change in
unrealized gains or losses on securities available for sale, net of taxes, and
is presented in the Consolidated Statements of Shareholders' Equity and
Comprehensive Income. Prior year consolidated financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
31
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The following summarizes the components of other comprehensive income for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Other comprehensive income, before tax:
Net unrealized holding gain on securities $ 665 353 (168)
Reclassification adjustment for gains
included in net income (202) (93) (22)
- --------------------------------------------------------------------------------
Other comprehensive income, before tax 463 260 (190)
Income tax expense related to items of
other comprehensive income 186 103 (76)
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax $ 277 157 (114)
- --------------------------------------------------------------------------------
</TABLE>
SEGMENT REPORTING -- During 1998, the Company adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
the Company to report financial and other information about key revenue-
producing segments of the Company for which such information is available and is
utilized by the chief operating decision maker. Specific information to be
reported for individual segments include profit and loss, certain revenue and
expense items, and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements is also provided.
Adoption of SFAS No. 131 did not result in significant changes in the Company's
reporting.
The Company's operations are solely in the financial service industry and
include the provision of traditional commercial banking services. The Company
operates solely in the geographical regions of Cayuga, Oswego, Oneida and
Madison Counties and surrounding areas in New York State. The Company has
identified separate operating segments, however, these segments did not meet the
quantitative thresholds for separate disclosure.
CASH AND CASH EQUIVALENTS -- For purposes of the Consolidated Statements of Cash
Flows, cash and cash equivalents include cash on hand and in banks, interest-
bearing deposits with other financial institutions and Federal funds sold.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -- The Company does not engage
in the use of derivative financial instruments and currently the Company's only
financial instruments with off-balance sheet risk consist of commitments to
originate loans and commitments under unused lines of credit.
EARNINGS PER SHARE -- Basic earnings per share is calculated by dividing net
income available to common shareholders by the weighted average number of shares
outstanding during the year. Diluted earnings per share includes the maximum
dilutive effect of stock issuable upon conversion of stock options. Unallocated
shares held by the Company's Employee Stock Ownership Plan ("ESOP") are not
included in the weighted average number of shares outstanding.
(3) Securities
The amortized cost and fair value of securities available for sale and
securities held to maturity at December 31, 1998 and 1997 were as follows:
32
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(dollars in thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government & agencies obligations $40,172 40,734 42,187 42,537
States and municipal obligations 6,959 7,090 231 232
Corporate bonds 3,362 3,471 1,507 1,517
Mortgage-backed securities 7,120 7,179 4,664 4,675
Other 3,000 2,957 3,000 2,983
- ----------------------------------------------------------------------------------
$60,613 61,431 51,589 51,944
- ----------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government & agencies obligations $ -- -- 25 25
States and municipal obligations 5,818 5,903 3,729 3,795
Corporate bonds 25,893 26,190 27,717 27,887
Mortgage-backed securities 15,345 15,624 20,205 20,475
- ----------------------------------------------------------------------------------
$47,056 47,717 51,676 52,182
- ----------------------------------------------------------------------------------
</TABLE>
Securities with an amortized cost of $48,447,000 (fair value of
$49,505,000) at December 31, 1998 were pledged to secure public deposits,
borrowings, and for other purposes. Gross unrealized gains and gross unrealized
losses on the securities portfolio at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized Unrealized
(dollars in thousands) Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government & agencies obligations $ 624 62 421 71
States and municipal obligations 134 3 1 --
Corporate bonds 111 2 10 --
Mortgage-backed securities 68 9 12 1
Other -- 43 -- 17
- -----------------------------------------------------------------------------------------
$ 937 119 444 89
- -----------------------------------------------------------------------------------------
Securities held to maturity:
States and municipal obligations $ 85 -- 66 --
Corporate bonds 298 1 172 2
Mortgage-backed securities 327 48 348 78
- -----------------------------------------------------------------------------------------
$ 710 49 586 80
- -----------------------------------------------------------------------------------------
</TABLE>
Maturities of debt securities classified as available for sale and held to
maturity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Amortized Fair
(dollars in thousands) Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Securities available for sale:
Maturing within one year $10,025 10,022
Maturing after one but within five years 31,267 31,876
Maturing after five but within ten years 6,958 7,081
Maturing after ten years. 5,243 5,273
- ------------------------------------------------------------------------------
53,493 54,252
Mortgage-backed securities 7,120 7,179
- ------------------------------------------------------------------------------
$60,613 61,431
- ------------------------------------------------------------------------------
Securities held to maturity:
Maturing within one year $10,871 10,926
Maturing after one but within five years 18,916 19,193
Maturing after five but within ten years 1,559 1,609
Maturing after ten years 365 365
- ------------------------------------------------------------------------------
31,711 32,093
Mortgage-backed securities 15,345 15,624
- ------------------------------------------------------------------------------
$47,056 47,717
- ------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Proceeds from sales of available for sale securities were $11,668,000 in
1998, $10,637,000 in 1997, and $10,038,000 in 1996. The gross realized gains and
gross realized losses on those sales were $202,000 and $0 in 1998, $105,000 and
$12,000 in 1997, and $33,000 and $11,000 in 1996, respectively.
(4) LOANS
Loans at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by first
mortgages on real estate:
Residential (1-4 Family):
Conventional $252,319 212,680
VA insured 929 1,201
FHA insured 858 1,089
Commercial 39,496 41,678
- --------------------------------------------------------------------------------
293,602 256,648
- --------------------------------------------------------------------------------
Other loans:
Consumer loans 44,826 44,881
Home equity lines of credit 26,221 26,877
Education loans 436 1,905
Commercial business loans 37,573 41,920
- --------------------------------------------------------------------------------
109,056 115,583
- --------------------------------------------------------------------------------
Total Loans 402,658 372,231
Unearned discount and net deferred costs 1,434 1,038
Allowance for loan losses (3,815) (3,285)
- --------------------------------------------------------------------------------
$400,277 369,984
- --------------------------------------------------------------------------------
</TABLE>
The Company serviced mortgage loans for others aggregating approximately
$12,300,000, and $11,246,000 at December 31, 1998 and 1997, respectively. During
1996, the Company sold $4,666,000 in commercial mortgages to a third party and
realized a loss of $1,050,000.
Transactions in the allowance for loan losses for the years ended December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years ended December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 3,285 3,389 3,380
Provision for loan losses 1,470 1,520 1,334
Charge-offs (1,061) (1,808) (1,406)
Recoveries 121 184 81
- --------------------------------------------------------------------------------
Balance at December 31 $ 3,815 3,285 3,389
- --------------------------------------------------------------------------------
</TABLE>
Impaired loans were $2,951,000 and $2,632,000 at December 31, 1998 and
1997, respectively. At December 31, 1998, impaired loans included $1,175,000 of
loans for which the related allowance for loan losses was $554,000. At December
31, 1997, impaired loans included $202,000 of loans for which the related
allowance for loan losses was $125,000. The average recorded investment in
impaired loans was $3,063,000, $2,256,000, and $2,416,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The effect on interest income
for impaired loans was not material to the accompanying consolidated financial
statements for the years ended December 31, 1998, 1997, and 1996.
Loans on nonaccrual status amounted to $5,255,000 at December 31, 1998, and
$5,902,000 at December 31, 1997, including the impaired loans described above.
The effect of nonaccrual loans on interest income for the years ended December
31, 1998, 1997, and 1996 is not material to the accompanying consolidated
financial statements. Other real estate owned amounted to $665,000 at December
31, 1998 and $565,000 at December 31, 1997, and is included in other assets in
the accompanying consolidated balance sheets.
34
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
A summary of the changes in outstanding loans to members of the board of
directors and officers of the Company, or their interests, follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance of loans outstanding at beginning of year $ 4,334 5,216
New loans and increase in existing loans 551 1,089
Loan principal repayments (3,132) (1,971)
- --------------------------------------------------------------------------------
Balance at end of year: $ 1,753 4,334
- --------------------------------------------------------------------------------
</TABLE>
These loans were made on substantially the same terms, including interest
rate and collateral, as those prevailing at the time for comparable transactions
with unrelated parties.
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation Depreciation
(dollars in thousands) Cost & Amortization Net Cost & Amortization Net
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Land $ 1,008 -- 1,008 1,008 -- 1,008
Bank premises 8,308 2,593 5,715 8,108 2,350 5,758
Furniture, fixtures
& equipment 5,301 3,954 1,347 4,930 3,526 1,404
- --------------------------------------------------------------------------------------------------------
Total $14,617 6,547 8,070 14,046 5,876 8,170
- --------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense amounted to $671,000, $673,000, and
$598,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
(6) Savings and Time Deposits
A summary of savings and time deposits at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Savings accounts $105,717 108,578
Time deposits 219,097 201,056
Money market accounts 46,066 41,033
Interest checking 41,454 38,781
- --------------------------------------------------------------------------------------------------------
$ 412,334 389,448
- --------------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturities of time deposits at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Under 12 months $173,358 79.1
12 months to 24 months 30,675 14.0
24 months to 36 months 5,188 2.4
36 months to 48 months 7,303 3.3
48 months to 60 months 2,516 1.2
Thereafter 57 --
- --------------------------------------------------------------------------------------------------------
$219,097 100.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Time deposits issued in amounts of $100,000 or more were approximately
$56,000,000 and $41,000,000 at December 31, 1998 and 1997, respectively.
Interest expense by depositor account type for the years ended December 31,
1998, 1997, and 1996 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings accounts $ 2,650 2,911 3,347
Time deposits 11,417 10,591 9,852
Money market accounts 1,653 1,446 1,166
Interest checking 432 509 394
- --------------------------------------------------------------------------------------------------------
$16,152 15,457 14,759
- --------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Interest expense on time deposits of $100,000 or more amounted to
$2,749,000, $2,272,000, and $999,000, for the years ended December 31, 1998,
1997, and 1996, respectively.
(7) BORROWINGS
Borrowings consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank Line of Credit $ -- 13,400
Federal Home Loan Bank Term Advances 61,462 36,477
Employee Stock Ownership Plan Notes 129 287
- ------------------------------------------------------------------------------------------
$61,591 50,164
- ------------------------------------------------------------------------------------------
</TABLE>
LINE OF CREDIT AND TERM ADVANCES
The Company maintains a $29,300,000 overnight line of credit with the
Federal Home Loan Bank of New York (FHLB). Advances are payable on demand and
bear interest at the federal funds rate plus 1/8%. The Company has access to the
FHLB's Term Advance Program and can borrow up to 25% of total assets at various
terms and interest rates. Term advances mature $18,000,000 in 1999, $19,000,000
in 2000, $16,000,000 in 2001, $2,000,000 in 2002, $6,000,000 in 2003, and
$462,000 in 2014 at interest rates ranging from 4.91% to 7.47%. Under the terms
of a blanket collateral agreement with the Federal Home Loan Bank of New York,
these outstanding balances are collateralized by certain qualifying assets not
otherwise pledged (primarily first mortgage loans).
Information related to the Federal Home Loan Bank Line of Credit for the
years ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding balance at end of year $ -- 13,400
Average interest rate -- 6.13%
Maximum outstanding at any month end $21,600 23,300
Average amount outstanding during year 6,786 10,132
Average interest rate during year 5.71% 5.78%
- ------------------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) NOTES
The ESOP Notes consist of borrowings by the Company's ESOP from a third
party lender. Proceeds of the Notes were used to acquire common stock of the
Company. These Notes are guaranteed by the Company and are secured by
unallocated shares of the Company's stock held by the ESOP. Payment of these
Notes is derived from the Company's contributions to the plan. (Note 15)
At December 31, 1998, the ESOP Notes consist of one loan payable in annual
principal payments of $43,000 plus interest at the Federal funds rate plus 250
basis points through 2001. During 1998, an ESOP note with an outstanding balance
of $115,000 at December 31, 1997 matured and was paid in full.
(8) INCOME TAXES
Total income taxes for the years ended December 31, 1998, 1997, and 1996
were allocated as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes, $2,711 2,994 2,447
Change in Shareholders' Equity, for unrealized
gain(loss) on securities 186 103 (76)
- ----------------------------------------------------------------------------------
$2,897 3,097 2,371
- ----------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997, and 1996, income tax expense
(benefit) attributable to income before income taxes consisted of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
State $ 256 389 578
Federal 2,804 2,324 1,934
- ---------------------------------------------------------------------------------
3,060 2,713 2,512
- ---------------------------------------------------------------------------------
Deferred:
State 78 59 (16)
Federal (427) 222 (49)
(349) 281 (65)
- ---------------------------------------------------------------------------------
$2,711 2,994 2,447
- ---------------------------------------------------------------------------------
</TABLE>
Income tax expense attributable to income before income taxes differed from
the amounts computed by applying the U.S. federal statutory income tax rate to
pretax income as a result of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $2,568 2,683 2,117
State taxes, net of Federal benefit 220 296 371
Other (77) 15 (41)
- ---------------------------------------------------------------------------------
Actual income tax expense $2,711 2,994 2,447
- ---------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Intangible assets $ 254 158
Financial statement allowance for loan losses 1,524 1,264
Postretirement benefits other than pension 177 147
Other 224 232
- ---------------------------------------------------------------------------------
Total gross deferred tax assets $2,179 1,801
- ---------------------------------------------------------------------------------
Deferred tax liabilities:
Bond discount $ 87 116
Other 41 73
Net unrealized gain on securities
available for sale 328 142
Undistributed earnings of subsidiary 355 340
Tax loan loss reserve in excess of base
year reserve 289 214
- ---------------------------------------------------------------------------------
Total gross deferred liabilities 1,100 885
- ---------------------------------------------------------------------------------
Net deferred tax asset $1,079 916
- ---------------------------------------------------------------------------------
</TABLE>
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within the
carryback 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 on its assessment, management determined that no valuation allowance is
necessary.
Included in retained earnings at December 31, 1998 is approximately
$2,038,000 representing aggregate provisions for loan losses taken under the
Internal Revenue Code. Use of these reserves to pay dividends in excess of
earnings and profits or to redeem stock, or if the institution fails to qualify
as a bank for Federal income tax purposes would result in taxable income to the
Company. However, it is not contemplated that the reserves will be used in a
manner that will create tax liabilities.
37
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
9) Regulatory Capital Matters
The Company and its subsidiary financial institutions are subject to
various regulatory capital requirements administered by the federal banking
agencies which regulate them. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Iroquois, Cayuga, and
Homestead must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require that each of the entities maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined). Management believes, as of December 31,
1998, that Iroquois, Cayuga, and Homestead meet all capital adequacy
requirements to which each is subject.
The most recent notifications from the Federal Reserve Bank of New York
(FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of
Thrift Supervision (OTS) categorized Iroquois, Cayuga, and Homestead,
respectively, as well capitalized under regulatory guidelines. To be categorized
as well capitalized, Iroquois, Cayuga, and Homestead must maintain the minimum
ratios as set forth in the table. There were no conditions or events since that
notification that management believes have changed the category of the
institutions.
The Company's actual capital amounts and ratios as of December 31, 1998,
and 1997 are presented in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
- -------------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Regulatory
Actual Adequacy Purposes Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated $40,212 11.65% 27,609 *8.0 34,511 *10.0
Cayuga 32,120 11.59 22,077 *8.0 27,596 *10.0
Homestead 7,278 11.12 5,237 *8.0 6,546 *10.0
Tier 1 Capital (to Risk Weighted Assets):
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated $36,397 10.55% 13,804 *4.0 20,708 *6.0
Cayuga 28,526 10.34 11,039 *4.0 16,558 *6.0
Homestead 7,057 10.78 2,618 *4.0 3,928 *6.0
Tier 1 Capital (to Average Assets):
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated $36,397 6.70% 21,730 *4.0 N/A --
Cayuga 28,526 6.82 16,729 *4.0 20,911 *5.0
Homestead 7,057 6.36 4,438 *4.0 5,547 *5.0
Tangible Capital (to Average Assets):
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated N/A -- N/A -- N/A --
Cayuga N/A -- N/A -- N/A --
Homestead $ 7,057 6.36% 1,664 *1.5 N/A --
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A- Not Applicable
* GREATER THAN OR EQUAL TO
38
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
- --------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Regulatory
Actual Adequacy Purposes Provisions
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
- --------------------------------------------------------------------------------------------------------------------------
Consolidated $39,697 12.14% 26,164 *8.0 N/A --
Cayuga 31,720 11.90 21,317 *8.0 26,646 *10.0
Homestead 6,800 11.07 4,913 *8.0 6,141 *10.0
Tier 1 Capital (to Risk Weighted Assets):
- --------------------------------------------------------------------------------------------------------------------------
Consolidated $36,412 11.13% 13,082 *4.0 N/A --
Cayuga 28,671 10.76 10,658 *4.0 15,987 *6.0
Homestead 6,564 10.69 2,457 *4.0 3,685 *6.0
Tier 1 Capital (to Average Assets):
- --------------------------------------------------------------------------------------------------------------------------
Consolidated $36,412 7.29% 27,480 *4.0 N/A --
Cayuga 28,671 7.48 15,327 *4.0 19,158 *5.0
Homestead 6,564 6.16 4,261 *4.0 5,326 *5.0
Tangible Capital (to Average Assets):
- --------------------------------------------------------------------------------------------------------------------------
Consolidated N/A -- N/A -- N/A --
Cayuga N/A -- N/A -- N/A --
Homestead $ 6,564 6.16% 1,598 *1.5 N/A --
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A- Not Applicable
* GREATER THAN OR EQUAL TO
(10) Shareholders' Equity
Preferred Stock, Series A -- In April 1998, the Company completed the redemption
of its Series A Floating Rate Cumulative Preferred Stock, which resulted in the
redemption during 1998 of 29,999 shares at a cost of $2,999,900. The Company
paid dividends per share on its Series A Preferred Stock of $2.38, $9.44, and
$9.38 for the years ended December 31, 1998, 1997, and 1996, respectively.
Preferred Stock, Series B -- In October 1998, the Company completed the
redemption of its Series B Floating Rate Cumulative Preferred Stock, which
resulted in the redemption during 1998 of 18,632 shares at a cost of $1,863,200.
The Company paid dividends per share on its Series B Preferred Stock of $6.38,
$8.44, and $8.38 for the years ended December 31, 1998, 1997, and 1996,
respectively.
The Company's ability to pay dividends is primarily dependent upon the
ability of its subsidiary banks to pay dividends to the Company. The payment of
dividends by the Banks is subject to being in compliance with minimum regulatory
capital requirements. In addition, regulatory approval is generally required
prior to either Bank declaring dividends in an amount in excess of net income
for that year plus net income retained in the preceding two years.
The Company paid dividends per share on its common stock of $ .40, $ .36,
and $ .32 for the years ended December 31, 1998, 1997, and 1996, respectively.
39
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(11) Earnings per Share
Basic and diluted earnings per share for the years ended December 31, 1998,
1997, and 1996 were computed as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands, except share data) 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Earnings available for common shares:
Earnings from operations $ 4,842 4,897 3,779
Cash dividends on preferred stock 187 441 451
- ----------------------------------------------------------------------------------------------------------
Net earnings available for common shareholders $ 4,655 4,456 3,328
- ----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,378,049 2,355,285 2,324,847
- ----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.96 1.89 1.43
- ----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net earnings available for common shares and
common stock equivalent shares deemed to
have a dilutive effect $ 4,655 4,456 3,328
- ----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,378,049 2,355,285 2,324,847
Effect of dilutive securities:
Stock options 42,754 65,101 28,627
- ----------------------------------------------------------------------------------------------------------
Total 2,420,803 2,420,386 2,353,474
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.92 1.85 1.41
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(12) Retirement Plans
The Company's retirement plans cover substantially all of its full-time
employees who have been employed by the Company for more than one year. The
Company has a noncontributory defined contribution retirement plan and a 401(k)
plan. Contributions to the retirement plan are based on the participant's age
and compensation, generally 2.5% of each covered employee's wages. Contributions
to the 401(k) plan amount to 50% of participant contributions up to 6% of
employee compensation. Expense for these plans for the years ended December 31,
1998, 1997, and 1996 was $301,000, $246,000, and $193,000, respectively.
(13) Other Postretirement Benefit Plans
The Company sponsors a defined contribution Postretirement Medical Spending
Account Plan that provides funds for medical expenditures for retired full time
employees who meet minimum age and service requirements. In addition, the
Company sponsors a life insurance benefit of $10,000 for retired full time
employees meeting minimum age and service requirements.
40
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet at December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, at beginning of year $ 875 812
Service cost 13 13
Interest cost 66 62
Participant contributions 14 11
Actuarial loss 131 35
Benefits paid (59) (58)
- -------------------------------------------------------------------------------------------------------------
Benefit obligation, at end of year $ 1,040 875
- -------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of assets, at beginning of year $ -- --
Employer contributions 45 47
Participant contributions 14 11
Benefits paid (59) (58)
- -------------------------------------------------------------------------------------------------------------
Fair value of assets, at end of year $ -- --
- -------------------------------------------------------------------------------------------------------------
FUNDED STATUS
Benefit obligation $(1,040) (875)
Unrecognized transition obligation 604 647
Unrecognized net actuarial (gain)/loss 19 (112)
- -------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (417) (340)
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC COST
Service cost $ 13 13 16
Interest cost 66 62 57
Amortization of unrecognized
transition obligation 43 41 40
- -------------------------------------------------------------------------------------------------------------
Net periodic cost $ 122 116 113
- -------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a nine percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to five percent for 2007 and remain at that level
thereafter.
The postretirement benefit obligation was determined using a discount rate
of 6.5% for 1998 and 7.5% for 1997. A one-percentage-point increase or decrease
in assumed health care cost trend rates does not have a material effect on the
obligation.
(14) Stock Option Plan
Under the 1988 Plan which terminated in 1998, 55,600 shares of authorized
but unissued common stock has been reserved for the granting of options to key
employees. Options were granted at the market price of shares at the date of
grant, adjusted when applicable for the effect of changes in capitalization.
Vesting of options is determined by the Company's Stock Option Committee at the
time of grant and expire not later than ten years after the date of grant. All
options available under the Plan were granted prior to its expiration in 1998.
The terms, conditions and provisions of the 1996 Plan are substantially the
same as those of the 1988 Plan. Under the 1996 Plan, 230,000 shares of
authorized but unissued common stock were reserved for future issuance. At
December 31, 1998, there were 149,700 options available for grant under this
Plan.
Options outstanding at December 31, 1998 were at prices ranging from $8.80
to $25.65 per share.
41
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The following is a summary of the changes in options outstanding:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
# Average Price # Average Price # Average Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1 133,944 $13.39 122,450 12.62 96,000 10.76
Granted 23,200 25.65 26,900 17.20 39,900 15.35
Exercised (21,044) 11.32 (8,606) 11.77 (9,850) 5.59
Expired (2,900) 21.86 (6,800) 16.57 (3,600) 12.68
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31 133,200 15.67 133,944 13.39 122,450 12.62
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable, December 31 90,500 12.92 73,944 11.23 86,150 11.35
- ------------------------------------------------------------------------------------------------------------------------------------
Shares available for future grants 149,700 -- 173,600 -- 190,100 --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following summarizes outstanding and exercisable options at December
31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.80 - 12.68 56,700 5.5 years $ 11.48 56,700 $ 11.48
$15.35 - 17.20 54,900 4.4 years $ 16.06 33,800 $ 15.35
$25.65 - 25.65 21,600 6.1 years $ 25.65 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
133,200 90,500
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Had compensation cost been determined based on the fair value at the grant
dates for awards under the plans, consistent with the method of SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $4,842 4,897 3,779
Pro forma 4,768 4,836 3,738
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported 1.92 1.85 1.41
Pro forma 1.89 1.82 1.40
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The per share weighted average fair value of stock options granted during
1998, 1997, and 1996 of $7.45, $5.43, and $5.83 on the date of grant was
determined using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 1.6% 1.6 2.0
Risk free interest rate 5.4% 6.2 6.6
Expected life 5 years 5 years 5 years
Volatility 26.7% 27.5 39.9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(15) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has a noncontributory Employee Stock Ownership Plan (ESOP)
covering substantially all employees. The number of shares allocable to Plan
participants is determined by the Board of Directors. Allocations to individual
participant accounts is based on participant compensation.
In connection with establishing the ESOP, the ESOP borrowed $1,147,000 in
1988 and utilized a Company contribution of $70,000 to acquire 188,260 shares of
the Company's common stock. At December 31, 1998 all of these shares have been
allocated. Interest incurred by the ESOP on debt applicable to such shares was
$4,000, $16,000, and $24,000 in 1998, 1997, and 1996, respectively. The Company
contributed and expensed $115,000, $104,000, and $105,000 during 1998, 1997, and
1996, respectively, with respect to such shares.
42
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The Company accounts for shares purchased subsequent to December 31, 1992
in accordance with Statement of Position 93-6. Accordingly, as shares are
released from collateral, the Company reports compensation expense equal to the
current market price of the shares and the shares become outstanding for
earnings per share computations. In 1994, the ESOP borrowed $302,000 and used
the proceeds to purchase 34,188 shares of the Company's common stock. Interest
incurred by the ESOP on debt applicable to such shares was $14,000, $15,000, and
$21,000 in 1998, 1997, and 1996, respectively. In 1998, the ESOP borrowed
$289,000 from the Company to purchase an additional 15,000 shares of the
Company's common stock.
ESOP compensation expense applicable to shares purchased subsequent to 1992
was $103,000, $111,000, and $74,000 in 1998, 1997, and 1996, respectively.
Through December 31, 1998, a total of 19,536 of the 49,188 shares purchased
after 1992 had been released to participants. The fair value at December 31,
1998 of unreleased ESOP shares purchased subsequent to 1992 was $623,000.
(16) COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as standby letters of credit and commitments
to extend credit that are not reflected in the consolidated financial
statements. Financial instruments with off-balance sheet risk involve elements
of credit risk, interest rate risk, liquidity risk, and market risk. Management
does not anticipate any significant losses as a result of these transactions.
Commitments to originate mortgages and other loans were approximately
$12,592,000 and $10,994,000 at December 31, 1998 and 1997, respectively.
Commitments under unused lines of credit were approximately $42,326,000 and
$44,008,000 at December 31, 1998 and 1997, respectively. The majority of these
commitments carry a variable rate of interest.
Primarily all of the Company's loans are to borrowers in the New York
counties of Cayuga and Oneida and their surrounding areas. The ability and
willingness of borrowers to repay their loans is dependent on the overall
economic health of the Company's market area, current real estate values, and
the general economy. A majority of the Company's loans are secured by real
estate collateral.
The Company leases certain property and equipment under operating lease
arrangements. Rent expense under these arrangements amounted to $32,000 in 1998,
$75,000 in 1997, and $117,000 in 1996. Real estate taxes, insurance,
maintenance, and other operating expenses associated with leased property are
generally paid by the Company.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management based on review with counsel, the
proceedings should not have a material effect on the financial condition,
liquidity or results of operations of the Company.
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term instruments that generally mature in ninety days or
less, the carrying value approximates fair value.
SECURITIES
Fair values for securities are based on quoted market prices or dealer
quotes, where available. Where quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
43
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
LOANS
For variable-rate loans that reprice frequently and have no significant
credit risk, fair values are based on carrying values. Fair values for fixed-
rate residential mortgage loans are based on quoted market prices of similar
loans sold in the secondary market, adjusted for differences in loan
characteristics. The fair values for other loans are estimated through
discounted cash flow analysis using interest rates currently being offered for
loans with similar terms and credit quality.
FHLB STOCK
The carrying value of this instrument, which is redeemable at par,
approximates fair value.
DEPOSITS
The fair values disclosed for demand deposits, savings accounts, and money
market accounts are, by definition, equal to the amounts payable on demand at
the reporting date (i.e. their carrying values). The fair value of fixed
maturity deposits is estimated using a discounted cash flow approach that
applies interest rates currently being offered on time deposits to a schedule of
aggregated expected monthly maturities.
These estimated fair values do not include the value of core deposit
relationships which comprise a significant portion of the Company's deposit
base. Management believes that the Company's core deposit relationships provide
a relatively stable low-cost funding source which has a substantial intangible
value separate from the deposit balances.
BORROWINGS
The fair value of the term advances from the Federal Home Loan Bank is
estimated using discounted cash flow analysis based on the Company's current
incremental borrowing rate for similar borrowing arrangements.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit are based on fees currently
charged to enter into similar agreements, the counterparty's credit standing and
discounted cash flow analysis. The fair value of these commitments to extend
credit approximates the recorded amounts of the related fees and is not material
at December 31, 1998 and 1997.
The estimated fair values of the Company's financial instruments as of
December 31, 1998 and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value/1/ Amount Value/1/
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents. $ 15,964 15,964 13,483 13,483
Securities 108,487 109,148 103,620 104,126
Loans, net 400,277 419,829 369,984 385,859
FHLB stock 4,079 4,079 3,629 3,629
- -----------------------------------------------------------------------------------
Financial Liabilities:
Deposits:
Demand accounts, savings, and
money market accounts $224,142 224,142 215,955 215,955
Time Deposits 219,097 220,175 201,056 202,134
Borrowings 61,591 62,235 50,164 52,130
- -----------------------------------------------------------------------------------
</TABLE>
(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.
44
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(18) Parent Company Only Financial Statements
The following presents the financial position of the parent company as of
December 31, 1998 and 1997 and the results of its operations and cash flows for
the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 563 1,277
Other assets 311 117
Investment in subsidiaries 38,018 37,843
- -------------------------------------------------------------------------------------------------
$38,892 39,237
- -------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Other liabilities $ 132 36
Borrowings 418 172
Shareholders' equity 38,342 39,029
- -------------------------------------------------------------------------------------------------
$38,892 39,237
- -------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------
Year ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Dividends from subsidiaries $ 5,044 1,250 1,200
Other income from subsidiaries 706 594 632
- -------------------------------------------------------------------------------------------------
Total income 5,750 1,844 1,832
Operating expenses 810 635 632
Interest expense 18 15 21
- -------------------------------------------------------------------------------------------------
Total expenses 828 650 653
- -------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiaries 4,922 1,194 1,179
Income tax benefit 23 -- --
Equity in undistributed income of subsidiaries (103) 3,703 2,600
- -------------------------------------------------------------------------------------------------
Net Income $ 4,842 4,897 3,779
- -------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------
Year ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Operating activities:
Net Income $ 4,842 4,897 3,779
Adjustments to reconcile net income to net cash
provided(used) by operating activities:
Equity in undistributed income of subsidiaries 103 (3,703) (2,600)
(Increase)decrease in other assets (194) 73 (48)
Increase(decrease) in other liabilities
and due to subsidiaries 96 22 (162)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,847 1,289 969
- -------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of common stock 285 366 338
Stock plan distributions 213 236 211
Cash dividends paid to shareholders (1,153) (1,289) (1,198)
Redemption of preferred stock (4,863) (140) (50)
Stock purchase for ESOP (289) -- --
Increase (decrease) in borrowings 246 (43) (86)
- -------------------------------------------------------------------------------------------------
Net cash used by financing activities (5,561) (870) (795)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (714) 419 174
Cash and cash equivalents at beginning of year 1,277 858 684
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 563 1,277 858
- -------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Quarterly Summarized Financial Information (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands, except share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
By Quarter 1 2 3 4 Year 1 2 3 4 Year
- ---------------------------------------------------------------------------------------------------------
Interest income $9,647 9,785 9,945 10,027 39,404 9,112 9,323 9,476 9,611 37,522
Interest expense 4,591 4,795 4,915 4,918 19,219 4,046 4,218 4,406 4,547 17,217
- ---------------------------------------------------------------------------------------------------------
Net interest income 5,056 4,990 5,030 5,109 20,185 5,066 5,105 5,070 5,064 20,305
Provision for
loan losses 360 360 387 363 1,470 373 372 373 402 1,520
- ---------------------------------------------------------------------------------------------------------
4,696 4,630 4,643 4,746 18,715 4,693 4,733 4,697 4,662 18,785
Noninterest income 815 929 969 1,004 3,717 724 849 845 809 3,227
Noninterest expense 3,596 3,626 3,676 3,981 14,879 3,429 3,491 3,594 3,607 14,121
- ---------------------------------------------------------------------------------------------------------
Income before
income taxes 1,915 1,933 1,936 1,769 7,553 1,988 2,091 1,948 1,864 7,891
Income taxes 697 697 705 612 2,711 759 793 724 718 2,994
- ---------------------------------------------------------------------------------------------------------
Net income 1,218 1,236 1,231 1,157 4,842 1,229 1,298 1,224 1,146 4,897
Preferred stock
dividend 111 38 38 -- 187 108 111 111 111 441
- ---------------------------------------------------------------------------------------------------------
Net income
attributable to
common shares $1,107 1,198 1,193 1,157 4,655 1,121 1,187 1,113 1,035 4,456
- ---------------------------------------------------------------------------------------------------------
Net income per
common share:
Basic $ .47 .50 .50 .49 1.96 .48 .50 .47 .44 1.89
Diluted .45 .49 .49 .48 1.92 .47 .49 .46 .43 1.85
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Summation of the quarterly net income per common share does not necessarily
equal the annual amount due to the averaging effect of the number of shares
throughout the year.
Common Stock Price and Dividend Information (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
By Quarter 1 2 3 4 Year 1 2 3 4 Year
Stock price
High 27 26 1/2 25 21 27 21 1/2 21 3/4 27 1/2 28 1/4 28 1/4
Low 24 1/4 24 19 1/2 17 3/4 17 3/4 16 1/4 20 20 1/2 24 1/4 16 1/4
- -----------------------------------------------------------------------------------------------------------------------
Dividends .10 .10 .10 .10 .40 .08 .08 .10 .10 .36
</TABLE>
The common stock of the Company is presently traded on the Nasdaq Stock
Market under the symbol "IROQ." The above table indicates the high and low
closing prices as reported in the Nasdaq National Market listings for the
Iroquois Bancorp, Inc. common stock, and dividend information for each quarter
in the last two calendar years. The prices may represent interdealer
transaction, without retail markups, markdowns, or commissions. The number of
registered shareholders of Iroquois Bancorp, Inc. stock as of December 31, 1998,
was 1,302.
46
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Directors and Officers/Corporate Data
<TABLE>
<CAPTION>
IROQUOIS CAYUGA THE HOMESTEAD
BANCORP, INC. BANK SAVINGS (FA)
<S> <C> <C> <C>
DIRECTORS: OFFICERS: DIRECTORS: DIRECTORS:
JOSEPH P. GANEY RICHARD D. CALLAHAN JOSEPH P. GANEY, CHAIRMAN ANNETTE M. DIMON
Chairman President & JOHN BISGROVE, JR. DAVID A. ENGELBERT
Chief Executive Officer RICHARD D. CALLAHAN RICHARD R. GRIFFITH
BRIAN D. BAIRD CAROL I. CONTIGUGLIA PATRICK J. HART
Attorney, Kavinoky & Cook MARIANNE R. O'CONNOR PETER J. EMERSON WILLIAM E. JAKES
CPA, Treasurer & DR. ARTHUR A. KARPINSKI HENRY D. MOREHOUSE
JOHN BISGROVE, JR. Chief Financial Officer MARTHA S. MACKAY RICHARD J. NOTEBAERT, JR.
President & Owner of LAWRENCE H. POOLE, PH.D. EDWARD D. PETERSON
Sunrise Farms RICHARD J. NOTEBAERT, JR. FREDERICK N. RICHARDSON
Vice President LEWIS E. SPRINGER, II OFFICES:
RICHARD D. CALLAHAN President & Chief Executive DONALD E. STAPLES
President & Officer, The Homestead MAIN OFFICE
Chief Executive Officer Savings (FA) OFFICES: 283 Genesee Street
Utica, NY 13501
PETER J. EMERSON HENRY M. O'REILLY MAIN OFFICE (315) 797-1350
Director, Fred L. Emerson Director of Internal Audit 115 Genesee Street
Foundation, Inc. Auburn, NY 13021 SOUTH UTICA OFFICE
W. ANTHONY SHAY, JR. (315) 252-9521 1930 Genesee Street
DR. ARTHUR A. KARPINSKI Vice President-Operations Utica, NY 13502
Retired Periodontist GRANT AVENUE OFFICE
Auburn, NY 13021 ROME OFFICE
HENRY D. MOREHOUSE Freedom Mall
Owner, Morehouse LOOP ROAD OFFICE Rome, NY 13440
Appliances Auburn, NY 13021
WATERVILLE OFFICE
EDWARD D. PETERSON WEST GENESEE STREET OFFICE 129 Main Street
Retired Manager, Human 355 Genesee Street Waterville, NY 13480
Resources, General Electric Auburn, NY 13021
Aerospace Operations Dept.; CLINTON OFFICE
Management Consultant WEEDSPORT OFFICE Homestead Plaza
9015 North Seneca Street Clinton, NY 13323
LEWIS E. SPRINGER, II Weedsport, NY 13166
Executive, OLD FORGE-LOAN CENTER
Creative Electric, Inc. MORAVIA OFFICE Green Sleeves Common
Andersen Laboratories, Inc. 31-33 Main Street Professional Building
and Sawgrass Electronics Moravia, NY 13118 Old Forge, NY 13420
Group, Inc.
LACONA OFFICE LAKE PLACID - LOAN CENTER
1897 Harwood Drive Crestview Plaza
Lacona, NY 13083 Saranac Ave
Lake Placid, NY 12946
CORPORATE DATA
CORPORATE OFFICES REQUEST FOR FINANCIAL COUNSEL AUTOMATIC DIVIDEND
INFORMATION REINVESTMENT PLAN
Iroquois Bancorp, Inc. Harris Beach & Wilcox, LLP
115 Genesee Street Shareholders and others The Granite Building A convenient, no-cost means
Auburn, New York 13021 seeking information about 130 East Main Street for Iroquois Bancorp, Inc.
(315) 252-9521 Iroquois Bancorp, Inc., Rochester, NY 14604 shareholders to increase
including copies of the their holdings is available
ANNUAL MEETING annual and quarterly reports, INDEPENDENT AUDITORS through the Automatic Dividend
as well as Form 10-K, as Reinvestment Plan. This plan is
The annual meeting of filed with the Securities KPMG LLP administered by American Stock
Iroquois Bancorp, Inc. will Exchange Commission, are 113 South Salina Street Transfer & Trust Co. acting as
be held at 10:00 a.m., invited to contact: Syracuse, NY 13202 your Agent.
Thursday, April 29, 1999,
at the Holiday Inn, Marianne R. O'Connor MARKET MAKERS Quarterly dividends and optional
75 North Street, Auburn, Chief Financial Officer (as of year-end) additional cash investments may
New York 13021. (315) 252-9521 be used to purchase additional
F. J. Morrissey & Co., Inc. shares.
Transfer Agent & Registrar: Sandler O'Neill & Partners
American Stock Transfer & For further information contact:
Trust Co. American Stock
40 Wall Street Transfer & Trust Co.
New York, NY 10005 40 Wall Street
(800) 937-5449 New York, NY 10005
(800) 987-5449
</TABLE>
47
<PAGE>
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------------------------------------
Notes
48
<PAGE>
Iroquois Bancorp, Inc. 115 Genesee Street, Auburn, New York 13021
<PAGE>
Exhibit 21
----------
LIST OF SUBSIDIARIES
The Registrant has two subsidiaries:
1. Cayuga Bank, a trust company organized under and governed by the laws of
the State of New York.
2. The Homestead Savings (FA), a federally chartered stock form savings
association with offices in New York State, under the jurisdiction of the
Office of Thrift Supervision.
<PAGE>
Exhibit 23(A)
-------------
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Iroquois Bancorp, Inc.:
We consent to incorporation by reference in the registration statement Nos.
33-36826, 33-36827, 33-36828, 33-94214 and 333-10063 on Form S-8 and No.
33-36825 on Form S-3 of Iroquois Bancorp, Inc. of our report dated January 22,
1999, relating to the consolidated balance sheets of Iroquois Bancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 1998,
which report has been incorporated by reference in the December 31, 1998 annual
report on Form 10-K of Iroquois Bancorp, Inc.
We also consent to incorporation by reference in the Registration Statement No.
33-36828 on Form S-8 of Iroquois Bancorp, Inc. of our report dated March 3, 1998
relating to the statements of net assets available for benefits, with fund
information of the Iroquois Bancorp, Inc. 401(k) Savings Plan as of December 31,
1997, and the related statement of changes in net assets available for benefits,
with fund information for the year ended December 31, 1997, which report appears
in the December 31, 1998 annual report on Form 10-K of Iroquois Bancorp, Inc.
/s/KPMG LLP
- ----------------
KPMG LLP
Syracuse, New York
March 22, 1999
<PAGE>
Exhibit 23(B)
-------------
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Iroquois Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statement No.
33-36828, on Form S-8 of Iroquois Bancorp, Inc. of our report dated March 10,
1999 relating to the statement of net assets available for benefits, with fund
information of the Iroquois Bancorp, Inc. 401(k) Savings Plan as of December 31,
1998 and the related statement of changes in net assets available for benefits,
with fund information for the year ended December 31, 1998 and related schedules
as of and for the year ended December 31, 1998, which report appears in the
December 31, 1998 annual report on Form 10-K of Iroquois Bancorp, Inc.
/s/The Fagliarone Group, P.C.
- ----------------------------------
The Fagliarone Group, P.C.
Syracuse, New York
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DECEMBER 31, 1998 10-K REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 9,571 12,778
<INT-BEARING-DEPOSITS> 6,393 705
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 61,431 51,944
<INVESTMENTS-CARRYING> 47,056 51,676
<INVESTMENTS-MARKET> 47,717 52,182
<LOANS> 404,092 373,269
<ALLOWANCE> 3,815 3,285
<TOTAL-ASSETS> 547,420 509,778
<DEPOSITS> 443,239 417,011
<SHORT-TERM> 61,591 50,164
<LIABILITIES-OTHER> 4,248 3,574
<LONG-TERM> 0 0
0 0
0 49
<COMMON> 2,410 2,389
<OTHER-SE> 35,932 36,591
<TOTAL-LIABILITIES-AND-EQUITY> 547,420 509,778
<INTEREST-LOAN> 32,401 30,579
<INTEREST-INVEST> 6,421 6,606
<INTEREST-OTHER> 582 337
<INTEREST-TOTAL> 39,404 37,522
<INTEREST-DEPOSIT> 16,152 15,457
<INTEREST-EXPENSE> 19,219 17,217
<INTEREST-INCOME-NET> 20,185 20,305
<LOAN-LOSSES> 1,470 1,520
<SECURITIES-GAINS> 223 99
<EXPENSE-OTHER> 14,879 14,121
<INCOME-PRETAX> 7,553 7,891
<INCOME-PRE-EXTRAORDINARY> 7,553 7,891
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,842 4,897
<EPS-PRIMARY> 1.96 1.89
<EPS-DILUTED> 1.92 1.85
<YIELD-ACTUAL> 4.01 4.37
<LOANS-NON> 5,255 5,902
<LOANS-PAST> 783 272
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 3,285 3,389
<CHARGE-OFFS> 1,061 1,808
<RECOVERIES> 121 184
<ALLOWANCE-CLOSE> 3,815 3,285
<ALLOWANCE-DOMESTIC> 3,815 3,285
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<PAGE>
Exhibit 99
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Financial Statements and Schedules
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports 1-2
Financial statements for the years ended December 31, 1998 and 1997:
Statements of Net Assets Available for Benefits at
December 31, 1998 and 1997, with Fund Information 3-4
Statements of Changes in Net Assets Available for
Benefits for the Years Ended December 31, 1998 and 1997, with Fund Information 5-6
Notes to financial statements 7-12
Supplemental schedules as of and for the year ended December 31, 1998:
Item 27a Schedule of Assets Held for Investment Purposes - Income Fund 13
Item 27a Schedule of Assets Held for Investment Purposes - Equity Fund 14
Item 27a Schedule of Assets Held for Investment Purposes - Balanced Fund 15
Item 27a Schedule of Assets Held for Investment Purposes - Common Stock Fund 16
Item 27a Schedule of Assets Held for Investment Purposes - Employee Loan Fund 17
Item 27d Schedule of Reportable (5%) Transactions 18
</TABLE>
<PAGE>
Independent Auditors' Report
The Pension Plan Trustees of Iroquois Bancorp, Inc.
401(k) Savings Plan:
We have audited the accompanying statement of net assets available for benefits,
with fund information of Iroquois Bancorp, Inc. 401(k) Savings Plan as of
December 31, 1998, and the related statement of changes in net assets available
for benefits, with fund information for the year then ended. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The
financial statements of Iroquois Bancorp, Inc. 401(k) Savings Plan as of and for
the year ended December 31, 1997 were audited by other auditors whose report
dated March 3, 1998 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of Iroquois
Bancorp, Inc. 401(k) Savings Plan as of December 31, 1998, and the changes in
net assets available for benefits for the year then ended in conformity with
generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules, as listed in
the accompanying index, are presented for the purpose of additional analysis and
are not a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The supplemental schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/The Fagliarone Group, P.C.
- ------------------------------
The Fagliarone Group, P.C.
Syracuse, NY
March 10, 1999
1
<PAGE>
Independent Auditors' Report
The Pension Plan Trustees of Iroquois Bancorp, Inc.
401(k) Savings Plan:
We have audited the accompanying statement of net assets available for benefits,
with fund information of Iroquois Bancorp, Inc. 401(k) Savings Plan as of
December 31, 1997, and the related statement of changes in net assets available
for benefits, with fund information for the year then ended. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of Iroquois
Bancorp, Inc. 401(k) Savings Plan as of December 31, 1997, and the changes in
net assets available for benefits for the year then ended in conformity with
generally accepted accounting principles.
/s/KPMG LLP
- ----------------
KPMG LLP
Syracuse, New York
March 3, 1998
2
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Statement of Net Assets Available for Benefits, with Fund Information
December 31, 1998
<TABLE>
<CAPTION>
Common Employee
Income Equity Balanced Stock Loan
Assets Fund Fund fund Fund Fund Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value:
Money market funds $ -- 136,242 33,096 23 -- 169,361
U.S. Government securities -- -- 87,688 -- -- 87,688
Corporate bonds 400,666 -- 110,737 -- -- 511,403
Common stocks -- 1,163,989 259,479 2,452,758 -- 3,876,226
Employees' loans -- -- -- -- 222,719 222,719
---------------------------------------------------------------------------
400,666 1,300,231 491,000 2,452,781 222,719 4,867,397
---------------------------------------------------------------------------
Receivables:
Accrued interest and dividends 1 2,820 4,089 13 -- 6,923
Due from employees 6,027 25,773 10,520 6,501 -- 48,821
Due from employer 458 4,395 890 8,411 -- 14,154
---------------------------------------------------------------------------
6,486 32,988 15,499 14,925 -- 69,898
===========================================================================
Net assets available for
benefits $ 407,152 1,333,219 506,499 2,467,706 222,719 4,937,295
===========================================================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Statement of Net Assets Available for Benefits, with Fund Information
December 31, 1997
<TABLE>
<CAPTION>
Common Employee
Income Equity Balanced Stock Loan
Assets Fund Fund fund Fund Fund Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value:
Cash $ -- -- 300 -- -- 300
Money market funds -- 53,448 38,730 17 -- 92,195
U.S. Government securities -- -- 120,881 -- -- 120,881
Corporate bonds 350,206 -- 80,874 -- -- 431,080
Common stocks -- 1,172,424 214,155 2,949,044 -- 4,335,623
Preferred stock 10,600 -- -- -- -- 10,600
Employees' loans -- -- -- -- 186,187 186,187
---------------------------------------------------------------------------
360,806 1,225,872 454,940 2,949,061 186,187 5,176,866
---------------------------------------------------------------------------
Receivables:
Accrued interest and dividends -- 1,955 4,383 19 -- 6,357
Due from employees 5,598 18,538 9,569 4,062 -- 37,767
Due from employer -- -- -- 10,340 -- 10,340
---------------------------------------------------------------------------
5,598 20,493 13,952 14,421 -- 54,464
===========================================================================
Net assets available for
benefits $ 366,404 1,246,365 468,892 2,963,482 186,187 5,231,330
===========================================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Statement of Changes in Net Assets Available for Benefits,
with Fund Information
Year ended December 31, 1998
<TABLE>
<CAPTION>
Common Employee
Income Equity Balanced Stock Loan
Fund Fund fund Fund Fund Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends on Iroquois Bancorp
Inc. common stock $ -- -- -- 46,178 -- 46,178
Interest and dividends 907 30,042 22,416 171 16,442 69,978
Net appreciation(depreciation)
in fair value of investments 24,419 (164,702) (15,208) (555,737) -- (711,228)
--------------------------------------------------------------------------------
25,326 (134,660) 7,208 (509,388) 16,442 (595,072)
--------------------------------------------------------------------------------
Contributions:
Employees 41,876 166,862 90,591 53,592 -- 352,921
Employer 2,905 22,687 5,998 108,063 -- 139,653
--------------------------------------------------------------------------------
44,781 189,549 96,589 161,655 -- 492,574
--------------------------------------------------------------------------------
Total additions 70,107 54,889 103,797 (347,733) 16,442 (102,498)
--------------------------------------------------------------------------------
Benefits paid to participants 14,973 52,205 22,690 67,775 -- 157,643
Administrative expenses 1,493 16,857 6,975 8,569 -- 33,894
--------------------------------------------------------------------------------
Total deductions 16,466 69,062 29,665 76,344 -- 191,537
--------------------------------------------------------------------------------
Transfers among funds (12,893) 101,027 (36,525) (71,699) 20,090 --
--------------------------------------------------------------------------------
Net increase(decrease) 40,748 86,854 37,607 (495,776) 36,532 (294,035)
Net assets available for benefits:
Beginning of year 366,404 1,246,365 468,892 2,963,482 186,187 5,231,330
--------------------------------------------------------------------------------
End of year $ 407,152 1,333,219 506,499 2,467,706 222,719 4,937,295
================================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Statement of Changes in Net Assets Available for Benefits,
with Fund Information
Year ended December 31, 1997
<TABLE>
<CAPTION>
Common Employee
Income Equity Balanced Stock Loan
Fund Fund fund Fund Fund Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends on Iroquois Bancorp
Inc. common stock $ -- -- -- 41,122 -- 41,122
Interest and dividends 1,000 24,576 19,434 420 14,499 59,929
Net appreciation in fair value
of investments 22,868 206,904 43,832 974,819 -- 1,248,423
-------------------------------------------------------------------------------
23,868 231,480 63,266 1,016,361 14,499 1,349,474
-------------------------------------------------------------------------------
Contributions:
Employees 38,018 149,766 69,876 42,490 -- 300,150
Employer -- -- -- 109,444 -- 109,444
-------------------------------------------------------------------------------
38,018 149,766 69,876 151,934 -- 409,594
-------------------------------------------------------------------------------
Total additions 61,886 381,246 133,142 1,168,295 14,499 1,759,068
-------------------------------------------------------------------------------
Benefits paid to participants 56,560 107,126 40,535 195,134 -- 399,355
Administrative expenses 1,808 13,325 5,791 7,426 -- 28,350
-------------------------------------------------------------------------------
Total deductions 58,368 120,451 46,326 202,560 -- 427,705
-------------------------------------------------------------------------------
Transfers among funds (9,743) 54,296 (6,813) (4,876) (32,864) --
-------------------------------------------------------------------------------
Net increase(decrease) (6,225) 315,091 80,003 960,859 (18,365) 1,331,363
Net assets available for benefits:
Beginning of year 372,629 931,274 388,889 2,002,623 204,552 3,899,967
-------------------------------------------------------------------------------
End of year $ 366,404 1,246,365 468,892 2,963,482 186,187 5,231,330
===============================================================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Notes to Financial Statements
December 31, 1998
(1) Description of the Plan
The following description of the Iroquois Bancorp, Inc. 401(K) Savings Plan
(Plan) is provided for general informational purposes only. Participants
should refer to the Plan agreement for more complete information.
General
The Plan is a defined contribution plan sponsored by Iroquois Bancorp, Inc.
(the "Company") for the benefit of its employees and the employees of its
wholly owned subsidiaries, Cayuga Bank and The Homestead Savings (FA).
Employees may elect to participate in the Plan after completion of 1,000
hours of service in a Plan year and attainment of age 21. Participants may
not be subject to the terms of a collective bargaining agreement with the
Company, or its subsidiaries.
Description of Funds
Participants elect to have their contributions allocated to any combination
of the Plan's funds. The following is a description of the investment of
each fund:
Income Fund - Contracts issued by insurance companies, money market
and other fixed income funds, interest-bearing savings accounts, term
accounts and certificates of deposit.
Equity Fund - Common stock, securities convertible into common stock
and money market funds.
Balanced Fund - Common stock, securities convertible into common
stock, bonds, notes, debentures, and money market funds.
Common Stock Fund - Common stock of the Company and money market funds
or interest-bearing savings accounts.
Contributions
Contributions to the Plan are determined as follows:
(1) Employee contributions are 1% to 10% of the participant's
compensation, as defined, and are subject to IRS limitations for any
Plan year.
(2) Employer matching contributions are equal to 50% of employee
contributions for any Plan year up to 6% of compensation, as defined.
The Company may also contribute to the Plan a discretionary amount as
determined by the Board of Directors.
Participants' Accounts
An account is maintained for each participant. The fair value of each
participant's account is determined as of each valuation date. The change
in the fair value of each participant's account includes the effect of
employer and employee contributions, income collected or accrued, realized
and unrealized appreciation or depreciation of assets, distributions,
withdrawals, expenses, and all other transactions affecting the assets.
7
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Notes to Financial Statements
(1) Description of the Plan (continued)
Participants may elect to transfer their interest between funds in
multiples of 10% of either account balance or annual contributions.
Net investment income by fund is allocated to each participant's account
based on the proportion in which the value of each participant's account
bears to the total value of all participants' accounts.
Participants who have attained age 59 1/2 may withdraw the portion of their
account attributed to employee contributions prior to normal retirement
(age 65).
Forfeitures are applied to the Company's matching and discretionary
contributions as a reduction of those contributions.
As of any valuation date, a participant with a hardship, as defined in the
Internal Revenue Code, may withdraw funds available for hardship
withdrawal.
Participants have the right to borrow from their accounts, amounts not
exceeding 50% of the participant's vested balance and not less than $1,000.
The interest rate charged on employee loans is based on the prime rate at
the time a loan is granted. Loans shall be for a period of not less than
one year and not more than ten years. These loans are subject to terms and
conditions as set forth by the plan administrator. Participant loans are
treated as a transfer from the participant directed accounts into the Loan
Fund. Principal and interest payments on the loans are allocated to the
Loan Fund and transferred to the participant directed accounts based on
their current investment allocations.
Vesting
Cumulative employer contributions and related income become vested at the
rate of 20% per year during the first five years of employment. After five
years of employment, employer contributions vest immediately to the benefit
of the employee. Upon attaining age 65, retirement, death, full or partial
Plan termination, or a change in control of the Company, as defined, a
participant becomes 100% vested in the portion of their accounts
attributable to employer contributions.
Payment of Benefits
Vested benefits are payable in a lump-sum payment.
Participants' Claims Upon Plan Termination
Although it has not expressed any intent to do so, the Company may
terminate the Plan, subject to the provisions of ERISA, at any time. In the
event the Plan is terminated, participants will become fully vested in
their asset accounts and their accounts will be paid to them as provided by
the Plan document.
8
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Notes to Financial Statements
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting, adjusted for fair value changes of assets. Management
of the Plan has made estimates and assumptions relating to the reporting of
net assets available for plan benefits to prepare the financial statements.
Actual results could differ from those estimates.
Investment Valuation and Income Recognition
Marine Midland Bank, NA is Custodian and Trustee for the Plan. Clover
Capital Management, Inc. manages the equity and balanced funds and Marine
Midland Bank, NA manages the income, common stock and employee loan funds.
The Plan's investments are stated at fair value. The fair values are
determined as follows:
Stocks and corporate bonds are valued at the closing prices on national
exchanges.
Investments in certificates of deposit, money market funds, savings
accounts and employee loans are stated at cost which approximates fair
value.
Investments in U.S. Government and U.S. Government Agency obligations are
stated at fair value based on quoted market prices.
Investment contracts with insurance companies are stated at the cost of the
underlying contract plus interest earned to date as reported to the Plan,
which approximates fair value.
Security transactions are accounted for on a trade date basis. Realized
gains and losses on securities are derived using the specific
identification method for determining the cost of securities.
Administrative Expenses
All normal expenses of operating and administering the Plan are paid by the
Plan except to the extent paid by the Company.
Payment of Benefits Benefits are recorded when paid.
Federal Income Taxes
The Internal Revenue Service issued its latest determination letter on
November 3, 1993 which stated that the Plan and its underlying trust, as
designed, qualify under the applicable provisions of the Internal Revenue
Code. In the opinion of the plan administrator, the Plan and its underlying
trust have operated within the terms of the Plan and remain qualified under
the applicable provisions of the Internal Revenue Code.
As long as the Plan continues to be qualified under present federal income
tax laws and regulations, participants will not be taxed on Company
contributions or on investment earnings on such contributions at the time
such contributions and investment earnings are received by the Trustee, but
may be subject to tax thereon at such time as they receive distributions
under the Plan.
9
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Notes to Financial Statements
(3) Investments
The following table presents the fair value of investments. Investments
that represent 5 percent or more of the Plan's net assets available for
plan benefits are separately identified.
<TABLE>
<CAPTION>
Number of
Shares or
Principal
December 31, 1998 Amount
----------
Common Employee
Income Equity Balanced Stock Loan
Fund Fund Fund Fund Fund Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at fair value
as determined by quoted
market price:
U.S. Government securities 75,351 $ -- -- 87,688 -- -- 87,688
Corporate bonds:
Marine Midland Collective Trust 18,088 400,666 -- -- -- -- 400,666
Other 110,000 -- -- 110,737 -- -- 110,737
Common stocks:
Iroquois Bancorp, Inc. 116,798 -- -- -- 2,452,758 -- 2,452,758
Other 66,239 -- 1,163,989 259,479 -- -- 1,423,468
---------------------------------------------------------------------
400,666 1,163,989 457,904 2,452,758 -- 4,475,317
---------------------------------------------------------------------
Investments valued at cost, which
approximates fair value:
Employee loans -- -- -- -- -- 222,719 222,719
Money market funds 169,361 -- 136,242 33,096 23 -- 169,361
---------------------------------------------------------------------
-- 136,242 33,096 23 222,719 392,080
$ 400,666 1,300,231 491,000 2,452,781 222,719 4,867,397
=====================================================================
</TABLE>
10
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Notes to Financial Statements
(3) Investments (continued)
<TABLE>
<CAPTION>
Number of
Shares or
Principal
December 31, 1997 Amount
----------
Common Employee
Income Equity Balanced Stock Loan
Fund Fund Fund Fund Fund Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at fair value
as determined by quoted
market price:
U.S. Government securities 111,721 $ -- -- 120,881 -- -- 120,881
Corporate bonds:
Marine Midland Collective Trust 16,881 350,206 -- -- -- -- 350,206
Other 80,000 -- -- 80,874 -- -- 80,874
Common stocks:
Iroquois Bancorp, Inc. 114,526 -- -- -- 2,949,044 -- 2,949,044
Other 59,291 -- 1,172,424 214,155 -- -- 1,386,579
Preferred stock 106 10,600 -- -- -- -- 10,600
---------------------------------------------------------------------
360,806 1,172,424 415,910 2,949,044 -- 4,898,184
---------------------------------------------------------------------
Investments valued at cost, which
approximates fair value:
Employee loans -- -- -- -- -- 186,187 186,187
Cash -- -- -- 300 -- -- 300
Money market funds 92,195 -- 53,448 38,730 17 -- 92,195
---------------------------------------------------------------------
-- 53,448 39,030 17 186,187 278,682
$ 360,806 1,225,872 454,940 2,949,061 186,187 5,176,866
=====================================================================
</TABLE>
11
<PAGE>
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Notes to Financial Statements
(3) Investments (continued)
The Plan's investments (including investments bought, sold, and held during the
year) appreciated(depreciated) in value by $(711,228) and $1,248,423 during 1998
and 1997, respectively, as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
Common Employee
Income Equity Balanced Stock Loan
Fund Fund Fund Fund Fund Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities $ -- -- 4,665 -- -- 4,665
Corporate bonds 24,419 -- (347) -- -- 24,072
Common Stock -- (164,702) (19,526) (555,737) -- (739,965)
--------------------------------------------------------------------------
$ 24,419 (164,702) (15,208) (555,737) -- (711,228)
==========================================================================
<CAPTION>
Year ended December 31, 1997
Common Employee
Income Equity Balanced Stock Loan
Fund Fund Fund Fund Fund Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities $ -- -- 3,215 -- -- 3,215
Corporate bonds 22,868 -- 1,349 -- -- 24,217
Common Stock -- 206,904 39,268 974,819 -- 1,220,991
--------------------------------------------------------------------------
$ 22,868 206,904 43,832 974,819 -- 1,248,423
==========================================================================
</TABLE>
12
<PAGE>
Schedule 1
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Item 27a - Schedule of Assets Held for Investment Purposes -
Income Fund
December 31, 1998
<TABLE>
<CAPTION>
Number
of Shares
or Par Value Description Cost Fair Value
- ------------ ----------- ---- ----------
<S> <C> <C> <C>
18,088* Marine Midland Collective Trust $331,128 $400,666
Managed Guaranteed Investment contract ======== ========
</TABLE>
* Party in interest
13
<PAGE>
Schedule 2
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Item 27a - Schedule of Assets Held for Investment Purposes -
Equity Fund
December 31, 1998
<TABLE>
<CAPTION>
Number
of Shares
or Par Value Description Cost Fair Value
- ------------ ----------- ---- ----------
Money Market Funds
------------------
<S> <C> <C> <C>
136,242 Provident Institutional Funds $ 136,242 $ 136,242
---------- ----------
Common Stocks
-------------
700 AGL Resources Inc. 14,005 16,144
3,800 Agrium Inc. 43,029 33,012
700 American Greetings Corp. Cl A 27,932 28,744
2,384 Ascent Entmt Group Inc. 23,713 17,582
400 Avnet Inc. 19,444 24,200
350 Bausch & Lomb Inc. 19,644 21,000
300 Baxter Intl Inc. 18,865 19,294
750 BCE Inc. 21,789 28,453
729 Chateau Cmntys Inc. 15,951 21,369
3,800 Citizens Utils Co. Del Cl B 29,520 30,400
2,000 Clayton Homes Inc. 33,714 27,625
400 Crown Cork & Seal Inc. 22,295 12,325
1,200 DeBeers Cons. Mines Ltd Adr Defd 18,000 15,300
1,200 Department 56 Inc. 34,602 45,075
500 Dow Jones & Co. Inc. 20,577 24,062
400 Eastern Enterprises 15,775 17,500
400 Electronic Data Sys. Corp. New 18,978 20,075
2,700 Frontier Corp. 55,898 91,800
1,200 Geon Co. 27,417 27,600
500 Hannaford Brothers Co. 22,212 26,500
800 Harman Intl. Inds. Inc. New 32,248 30,500
800 King World Productions Inc. 13,922 23,550
1,200 Kroger Co. 15,596 72,600
1,500 Mapics Inc. 12,691 24,750
750 Marcam Solutions Inc. 4,231 4,688
3,020 Meditrust 55,294 45,300
700 Morton Intl. Inc. Ind. New 21,890 17,150
250 NAC Re Corp. 12,919 11,734
400 Network Assocs. Inc. 21,672 26,500
1,500 Nine West Group Inc. 42,007 23,344
500 Northwest Nat. Gas Co. 13,338 12,937
800 Occidental Petr. Corp. 20,452 13,500
500 Oracle Sys. Corp. 18,091 21,562
1,300 Pioneer Nat Res Co. 18,278 11,375
400 PMI Group Inc. 21,395 19,750
600 Policy Mgmt Sys. Corp. 9,145 30,300
500 Potlatch Corp. 18,536 18,438
300 Renaissance RE Holdings Ltd. 14,340 10,987
2,200 Santa Fe Energy Res. Inc. 17,693 15,950
400 Sears Roebuck & Co. 20,073 17,000
900 Storage Tr Rlty Sh Ben Int 18,225 21,037
800 Sungard Data Sys Inc. 16,813 31,750
1,400 Ucar Intl Inc. 48,465 24,938
5,777 United Biscuits Group 31,878 23,091
500 Wells Fargo & Co. New 18,719 19,969
1,300 Yellow Corp. 25,269 24,862
450 York Intl Corp New 18,318 18,366
---------- ----------
1,084,858 1,163,989
---------- ----------
$1,221,100 $1,300,231
========== ==========
</TABLE>
14
<PAGE>
Schedule 3
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Item 27a - Schedule of Assets Held for Investment Purposes -
Balanced Fund
December 31, 1998
<TABLE>
<CAPTION>
Number
of Shares
or Par Value Description Cost Fair Value
- ------------ ----------- ---- ----------
Money Market Funds
------------------
<S> <C> <C> <C>
33,096 Provident Institutional Funds $ 33,096 $ 33,096
-------- --------
Government
----------
10,000 U.S. Treasury Note 6.25% 2/15/03 10,279 10,569
10,000 U.S. Treasury Note 7.25% 8/15/04 10,483 11,247
10,000 U.S. Treasury Note 9.375% 2/15/06 10,557 12,775
15,000 U.S. Treasury Note 6.25% 2/15/07 15,628 16,453
25,000 U.S. Treasury Note 7.50% 11/15/16 26,109 31,086
5,351 GNMA Gtd Pass thru Ctf Pool #212177 5,547 5,558
-------- --------
78,603 87,688
-------- --------
Corp Bonds
----------
10,000 Abbott labs NT 5.60% 10/01/03 9,323 10,194
15,000 Canandaigua Wine Inc. SR NT 8.75% 12/15/03 14,606 15,450
15,000 Lilly Inds Inc. SR NT Ser B 7.75% 12/01/07 15,418 15,641
15,000 Meditrust NT 7.00% 8/15/07 14,854 12,348
15,000 Pitney Bowes Cr Corp. SR DEB 5.65% 1/15/03 14,792 15,114
15,000 Private Export Fdg Corp. Seed NT 6.62% 10/01/05 15,578 16,163
15,000 Tenet Healthcare Corp. SR NT 8.00% 1/15/05 15,081 15,487
10,000 Zeneca Wilmington Inc. GTD NT 6.30% 6/15/03 9,650 10,340
-------- --------
109,302 110,737
-------- --------
Common Stocks
-------------
250 AGL Resources Inc. 4,606 5,766
900 Agrium Inc. 10,191 7,819
200 American Greetings Corp. Cl A 7,981 8,213
195 Ascent Entmt Group Inc. 1,672 1,438
100 Avnet Inc. 4,861 6,050
100 Bausch & Lomb Inc. 5,613 6,000
75 Baxter Intl Inc. 4,716 4,823
312 Chateau Cmntys Inc. 6,602 9,145
900 Citizen Utils Co. Del Cl B 6,992 7,200
300 DeBeers Cons Mines Ltd ADR Defd 4,500 3,825
400 Department 56 Inc. 10,795 15,025
150 Eastern Enterprises 5,811 6,562
100 Electronic Data Sys. Corp. New 4,744 5,019
700 Frontier Corp. 13,629 23,800
100 Hannaford Brothers Co. 4,830 5,300
200 Harman Intl. Inds. Inc. New 8,062 7,625
400 King World Productions Inc. 6,930 11,775
400 Kroger Co. 5,199 24,200
400 Mapics Inc. 6,718 6,600
400 Meditrust 8,853 6,000
100 Networks Assocs Inc. 5,418 6,625
400 Nine West Groups Inc. 11,202 6,225
200 Northwest Nat Gas Co. 5,360 5,175
125 Oracle Sys Corp. 4,523 5,391
325 Pioneer Nat Res Co. 4,569 2,844
100 PMI Group Inc. 5,349 4,937
125 Potlatch Corp. 4,634 4,609
600 Santa Fe Energy Res. Inc. 4,825 4,350
150 Sears Roebuck & Co. 7,527 6,375
300 Storage Tr Rlty Sh Ben Int 6,590 7,013
400 Ucar Intl Inc. 13,440 7,125
2,222 United Biscuits Group 11,305 8,881
125 Wells Fargo & Co. New 4,680 4,992
400 Yellow Corp. 8,170 7,650
125 York International Corp. New 5,088 5,102
-------- --------
235,985 259,479
-------- --------
$456,986 $491,000
======== ========
</TABLE>
15
<PAGE>
Schedule 4
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Item 27a - Schedule of Assets Held for Investment Purposes -
Common Stock Fund
December 31, 1998
<TABLE>
<CAPTION>
Number
of Shares
or Par Value Description Cost Fair Value
- ------------ ----------- ---- ----------
Money Market Funds
------------------
<S> <C> <C> <C>
23 * Marine Midland Collective Trust $ 23 $ 23
Short Term Investment Fund
Common Stocks
-------------
116,798 * Iroquois Bancorp, Inc. 1,378,254 2,452,758
---------- ----------
$1,378,277 $2,452,781
========== ==========
</TABLE>
* Party In Interest
16
<PAGE>
Schedule 5
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Item 27a - Schedule of Assets Held for Investment Purposes -
Employee Loan Fund
December 31, 1998
<TABLE>
<CAPTION>
Par
Value Description Cost Fair Value
----- ----------- ---- ----------
<S> <C> <C> <C>
Employees' Loans
----------------
222,719 Loans to Employees at various rates ranging from $ 222,719 $ 222,719
7.25% to 9.0% with maturities ranging from 1 year ========= =========
to 10 years
</TABLE>
17
<PAGE>
Schedule 6
----------
IROQUOIS BANCORP, INC.
401(K) SAVINGS PLAN
Item 27d - Schedule of Reportable (5%) Transactions
Year ended December 31, 1998
<TABLE>
<CAPTION>
Value of
Asset on
Purchase Selling Expenses Transaction Net
Date Party/Description Price Price Incurred Cost Date Gain
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Various Marine Midland Bank
Collective Trust
Short Term Investment Fund
Directed $ 394,925 -- -- 394,925 394,925 --
Various Marine Midland Bank
Collective Trust
Short Term Investment Fund
Directed -- 394,924 -- 394,924 394,924 --
Various Iroquois Bancorp, Inc.
Common Stock 214,253 -- -- 214,253 214,253 --
Various Iroquois Bancorp, Inc.
Common Stock -- 136,651 -- 66,418 136,651 70,233
Various Marine Midland Bank
Provident Institutional Funds 1,376,853 -- -- 1,376,853 1,376,853 --
Various Marine Midland Bank
Provident Institutional Funds -- 1,299,698 -- 1,299,698 1,299,698 --
</TABLE>
18
