-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M/1M7VWG7OvyqPN6qmYFqiLVa5XiZlK1KQCp4EQW357qSO1eJtmwMPl5WSAFNpNo 0PGIAzUuXNf5jWrSvzW/vg== 0000950130-98-001555.txt : 19980331 0000950130-98-001555.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950130-98-001555 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IROQUOIS BANCORP INC CENTRAL INDEX KEY: 0000846753 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 161351101 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18301 FILM NUMBER: 98577892 BUSINESS ADDRESS: STREET 1: 115 GENESEE ST CITY: AUBURN STATE: NY ZIP: 13021 BUSINESS PHONE: 3152529521 MAIL ADDRESS: STREET 1: 115 GENESEE STREET CITY: AUBURN STATE: NY ZIP: 13021 10-K405 1 FORM 10-K 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, 1997 [ ] 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 incorporation (I.R.S. Employer 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) Floating Rate Cumulative Preferred Stock, Series A, $1.00 par value ------------------------------------------------------------------- (Title of Class) Floating Rate Noncumulative Preferred Stock, Series B, $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. [_] The aggregate market value of the shares of Registrant's voting stock, its Common Stock, held by non-affiliates of Registrant as of February 27, 1998 was $44,176,000 based upon the closing sale price of $25.25 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 27, 1998 was 2,392,580. Documents Incorporated by Reference ----------------------------------- Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 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 30, 1998 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, which are contained in Management's Discussion and Analysis and 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. 2 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. Other services available from the Company include insurance and 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 23 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 (the "1997 Annual Report to Shareholders"), incorporated herein by reference to Exhibit (13) hereto. MARKET AREA The Company's market area currently covers the Central New York counties of Cayuga, Oswego and Oneida and is dominated by a steadily aging population base. According to market information provided by Claritas Inc., the population of Cayuga County increased by 1.4% between 1990 and 1996. In Oswego County, the increase was 4.4%. Based on 1990 census data, in Cayuga County 32.5% of the population is over the age of 60, a 3% increase over the 1980 census. In Oswego County the percentages are 25.3% and 6% respectively, and in Oneida County the percentages are 36.6% and 6%, respectively. These statistics appear 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, such as deposit accounts for senior citizens, trust and investment services for wealth building and retention, and products for meeting housing needs of the elderly through innovative mortgage programs. 3 Much of the market is rural in character, with 20,598 rural housing units out of 33,280 in Cayuga County, 32,443 rural housing units of 48,548 in Oswego County and 34,293 rural housing units out of 101,251 in Oneida County. In Cayuga County, there are 970 active farms, with 735 active farms in Oswego County and 887 active farms in Oneida County. The unemployment rate is 5.6% for Cayuga County, 6.8% for Oswego County and 4.7% for Oneida County. The Cayuga Bank market area is located in the Finger Lakes region, between the major Upstate New York cities of Rochester and Syracuse. Cayuga Bank operates five full service offices in Cayuga County, three of which are within the City of Auburn, and one office in Oswego County in the Village of Lacona. To a limited extent the Cayuga Bank market has recently been extended to reach into the Rochester market area through a brokered mortgage program. The metropolitan statistical area (MSA) unemployment rate for Rochester is 4.0%. At the end of the 1997 fiscal year, Cayuga Bank closed an office located in Lansing, Tompkins County. Cayuga Bank is making efforts to retain customers from the Lansing office by servicing them through the Moravia Office, the Bank's nearest location in a contiguous County. The Homestead Savings market area is located in the Mohawk Valley region, east of Syracuse, and it includes the City of Utica. In the past several years, the Mohawk Valley area has experienced a loss of manufacturing jobs and the closing of the Griffiss Air Force Base in Rome, New York. The region has, however, shown some signs of stabilization in the manufacturing sector, with the former Lockheed-Martin manufacturing complex being purchased by ConMed and announcement of expansion plans for local facilities by companies such as Special Metals, Xerox and Mobile Climate Control. 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 all of 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 individual customer's needs. The Subsidiaries utilize personal sales calls, convenient hours and locations, and loyalty programs. 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. STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES 4 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 Annual Report to Shareholders in Management's Discussion and Analysis on pages 12 through 14, in the discussion under the caption Non-Performing Assets, which discussion is incorporated herein by reference. 3. Foreign Outstandings The Company does not make loans to foreign companies and, at December 31, 1997, 1996 and 1995, there were no foreign loans outstanding. 5 4. Loan Concentrations Information required by this section of Guide 3 is presented in the Registrant's 1997 Annual Report to Shareholders on pages 42 and 43 in note (17) of the Notes to Consolidated Financial Statements relating to Commitments and Contingencies, which note (17) 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 1997 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 11 under the caption Allowance for Loan Losses and in the discussion on pages 12 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 1997 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 1997 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 1997 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 1997 Annual Report to Shareholders on pages 35 and 36 in note (7) of the Notes to Consolidated Financial Statements 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, 1997 and 1996 and in the discussion therein under the caption Line of Credit and Term Advances, which tabular information and discussions are incorporated herein by reference. 6 EMPLOYEES At December 31, 1997, the Company and its subsidiaries had 180 full-time and 37 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 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 any 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 $0.013 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 to $100,000 per depositor. The FDIC has the power to terminate insured status or to suspend it temporarily under special conditions. 7 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%, and 100 to 200 basis points higher for holding companies that do not meet certain other criteria. The other criteria include excellent asset quality, high liquidity, low interest rate exposure and good earnings. At December 31, 1997, 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, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 4% or greater, or 3% if it has a supervisory rating category (BOPEC) of 1 or has incorporated market risk measures in its risk-based capital ratio, 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. 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 8 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. 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, which lease expires in June, 1998. All of these properties are in generally good condition and appropriate for their intended use. The property used by the Cayuga Bank office in Lansing, New York until it was closed at the end of 1997 was under lease that expired in December of 1997 and was not renewed. 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 ------------------------------------
Name Age Title ---- --- ----- Richard D. Callahan 55 President and Chief Executive Officer Marianne R. O'Connor 43 Treasurer and Chief Financial Officer Richard J. Notebaert, Jr. 54 Vice President Melissa A. Komanecky 32 Vice President-Human Resources W. Anthony Shay, Jr. 55 Vice President-Operations
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 9 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. 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. Melissa A. Komanecky, Vice President-Human Resources, joined Cayuga Bank in December, 1994 as Human Resource Director. She was promoted to Vice President and Human Resource Director, first of Cayuga Bank and then of the Company, and became an executive officer of the Company in January, 1997. Prior to that time, she was Regional Human Resource Manager of Key Bank of New York from 1988 to 1994. 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. 10 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 1997 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 1997 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 1997 Annual Report to Shareholders on pages 5 through 23 thereof, incorporated herein by reference to Exhibit (13) hereto. Item 7A. Quantative and Qualitative Disclosures About Market Risk - -------- -------------------------------------------------------- Reference is made to the discussion under the caption Market Risk and Interest Rate Risk Management on pages 19 through 21 and to Table 10 - Net Portfolio Analysis and Table 11 - Interests Rate Sensitivity Table on page 20 of Management's Discussion and Analysis in the Company's 1997 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 1997 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. 11 PART III Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- (a) Identification of directors. Reference is made to pages 6 and 7 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 30, 1998 (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 5 thereof, incorporated herein by reference. Item 11. Executive Compensation - -------- ---------------------- Reference is made to the information under the caption EXECUTIVE COMPENSATION on pages 8 through 15 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 through 4 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 - -------- ---------------------------------------------- 12 Reference is made to the information under the caption CERTAIN TRANSACTIONS on page 17 of the Company's Proxy Statement, incorporated herein by reference. 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 1997 Annual Report to Shareholders annexed hereto as Exhibit (13): Report of Independent Auditors. Consolidated Balance Sheets as of December 31, 1997 and 1996. Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997. Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997. 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). 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. 13 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. 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). 14 10(I) Description of Iroquois Bancorp, Inc. Management Group Incentive Award Program, incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed with the Commission on March 18, 1996, wherein such exhibit is designated Exhibit 10.11. 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, 1997. 21 List of Subsidiaries. 23 Consent of KPMG Peat Marwick LLP for the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997. 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 Fiscal Year Ended December 31, 1997, together with Independent Auditors' Report Thereon. 15 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 17, 1997. 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 17, 1998 - ----------------------------- Richard D. Callahan Executive Officer, Director /s/Joseph P. Ganey Chairman of the Board March 17, 1998 - ----------------------------- Joseph P. Ganey /s/Marianne R. O'Connor Treasurer and Chief March 17, 1998 - ----------------------------- Marianne R. O'Connor Financial Officer 16 _____________________________ Director March __, 1998 Brian D. Baird _____________________________ Director March __, 1998 John Bisgrove, Jr. /s/Peter J. Emerson Director March 17, 1998 - ----------------------------- Peter J. Emerson /s/Arthur A. Karpinski Director March 17, 1998 - ----------------------------- Arthur A. Karpinski /s/Henry D. Morehouse Director March 17, 1998 - ----------------------------- Henry D. Morehouse /s/Edward D. Peterson Director March 17, 1998 - ----------------------------- Edward D. Peterson /s/Lewis E. Springer, II Director March 17, 1998 - ----------------------------- Lewis E. Springer, II 17 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). 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). 18 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. Management Group Incentive Award Program, incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed with the Commission on March 18, 1996, wherein such exhibit is designated Exhibit 10.11. 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). 19 ************ 13 Annual Report to Shareholders for Fiscal Year Ended December 31, 1997. 21 List of Subsidiaries. 23 Consent of KPMG Peat Marwick LLP for the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997. 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 Fiscal Year Ended December 31, 1997, together with Independent Auditors' Report Thereon. 20 EX-13 2 1997 ANNUAL REPORT IROQUOIS BANCORP [LOGO] Applying Technology With A Personal Touch 1997 IROQUOIS BANCORP, INC. ANNUAL REPORT ================================================================================ Table of Contents Financial Highlights This page 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 Report of Independent Auditors 24 Consolidated Financial Statements 25 Quarterly Information 46 Directors and Officers 47 Corporate Data 47 ========================= Stock Price* - ------------------------- [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
($ at year-end) Percent of Change --------------- ----------------- 1993 ................................. 8 3/4 1994 ................................. 8 1/4 -6% 1995 ................................. 13 +58% 1996 ................................. 17 +31% 1997 ................................. 25 3/4 +51%
*Restated for 1995 stock split FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------- (dollars in thousands, ==== Percent except per share amounts) 1997 1996 Change - -----------------------------------------------====----------------------------- For The Year: Net interest income $ 20,305 19,411 4.61% Provision for loan losses 1,520 1,334 13.94 Non-interest income 3,227 1,735 85.99 Non-interest expense 14,121 13,586 3.94 Net income 4,897 3,779 29.58 Per Common Share: Net income Basic $ 1.89 1.43 32.17% Diluted 1.85 1.41 31.21 Cash dividends declared .36 .32 12.50 Book value 14.42 12.71 13.45 Ratios: Net interest margin 4.37% 4.42 (1.13)% Interest rate spread 4.01 4.12 (2.67) Return on average assets 1.00 .82 21.95 Return on average shareholders' equity 13.54 11.51 17.64 Equity as a percent of average assets 7.39 7.12 3.79 Dividend payout ratio 19.05 22.38 (14.88) At Year-End: Assets $ 509,778 472,908 7.80% Loans, net 369,984 345,074 7.22 Borrowings 50,164 25,536 96.44 Deposits 417,011 410,222 1.65 Shareholders' equity 39,029 34,802 12.15 Number of: Common shares outstanding 2,388,936 2,367,940 .89 Common shareholders of record 1,365 1,206 13.18 Employees (full time equivalent) 200 191 4.71 Banking offices (full service) 11 12 (8.33)
================================================================================ The appropriate application of technology increases efficiency, improves our competitive position, and most importantly, further enhances our ability to be responsive to customer needs. IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- A Message To Our Shareholders [PHOTO] Richard D. Callahan President and Chief Executive Officer During 1997 we remained true to our mission of preserving the independence and close community ties of each member bank, while promoting the sharing of resources to make Iroquois member banks more competitive, responsive to customers, and profitable to our shareholders. Significant technology enhancements enabled us to both improve customer service and streamline corporate support functions such as human resources, marketing, computer systems, audit, finance and accounting. The Iroquois strategy is founded in a commitment to use technology as a tool to know more about each customer, deliver better products and services, and anticipate customers' future needs. With the appropriate application of technology -- one which makes personal service a priority -- we are confident we can increase efficiency and enhance our ability to meet each customer's unique needs. Our technology enhancements in 1997 included: o Implementation of a new technology platform -- A comprehensive system conversion was made with FISERV, our new technology partner, to provide customers with enhanced products and services and to support Iroquois' strategic operating plan. o Introduction of Database Marketing -- A personalized customer contact program using our Marketing Customer Information Files (MCIF) to sustain our competitive difference by leveraging knowledge of our customers and delivering value through strong, active, one-on-one business relationships. o Initiation of preparation for the Year 2000 -- A proactive plan to insure all Iroquois computer hardware, software, and network systems are programmed to recognize Year 2000 dates, avoiding service disruptions at member banks as we enter the new millennium. The benefits of these efforts are reflected in the following financial highlights of 1997. Iroquois generated a return on average total equity of 13.54% and a return of 14.24% on common shareholders' equity. Net interest income increased $894,000, or 4.6%, over 1996. This was driven by a 5.8% increase in average interest-earning assets and a 20.2% increase in average non-interest bearing funding sources. In addition, service fee income increased $341,000, or 13.0% in 1997. Residential mortgage loans increased 14.4% as a result of expanded product and service offerings by our member banks. Average total deposits increased $21.2 million in 1997. This included those deposits resulting from the introduction of municipal banking services at Cayuga. Looking forward, we will continue to match our advancements in operating efficiency with the high level of service and attention our customers deserve. We thank our staff for their outstanding teamwork throughout the comprehensive, year-long conversion of systems and applications. We also appreciate our customers' patience and support as we transition to a new way of serving their banking needs, now and into the future. In January 1998, William J. Humes, a founding director of Iroquois and a director of Cayuga Bank since 1987, died. We will miss his counsel, and extend our deepest sympathy to his wife and their family. Very truly yours, /s/ Richard D. Callahan Richard D. Callahan President and Chief Executive Officer 1 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Report of Cayuga Bank "...Cayuga Bank's service philosophy extends to anticipating customer needs at various stages of their personal and professional lives." Cayuga Bank reached new service levels in 1997 by listening to customer needs and significantly improving technology. Thanks to upgraded teller and platform software systems, our customers experienced quicker, more streamlined transactions, along with the personal service and expert assistance to which they've become accustomed. A 24-hour Mortgage Approval Program was also introduced, made possible through new software that enables us to provide our mortgage customers with fast and efficient application processing. Another important aspect of service is convenience. Once again, we've put technology in the hands of the customer with a new 24-hour drive-up ATM at our Loop Road office. Beyond daily transactions, Cayuga Bank's service philosophy extends to anticipating customer needs at various stages of their personal and professional lives. This is where technology plays a critical role, helping us understand who our customers are, and how to best craft the products and services they need. In 1997, Cayuga Bank's database marketing program helped strengthen and expand customer relationships while making our commitment to "high-touch" personal service more visible. In addition, a new Customer Tracking System was installed, providing us with a tool to profile, track, and follow-up on each customer contact. This system enables us to capture and build on the important information received from each customer contact. In summary, Cayuga Bank has taken several major steps forward in our technology plan for the future. Most importantly, we continue to deliver a blend of high-quality personal service and products that our customers have come to rely on from our community bank for over 130 years. - -------------------------------------------------------------------------------- 1997 Highlights for Cayuga Bank - -------------------------------------------------------------------------------- Introduced a home affordability program and FHA "203K" home rehabilitation loan. Established the Auburn Housing Partnership, a public/private sector community housing rehabilitation program. Cayuga Financial Services became designated by the State of New York as a Registered Financial Investment Advisor. Announced new Money Market investment options with tiered pricing and rates. Improved customer service and efficiency with major renovations at our main office and corporate headquarters in Auburn, the introduction of saturday banking hours at our Moravia Branch, and the expansion of the teller line and parking facilities at our West Genesee Street Branch. Introduced municipal loans, and deposit services to the school districts and towns in the markets we serve. Supported the Cayuga Home for Children Fund Drive for the purchase of new beds. Assisted in strengthening economic development in Cayuga County through staff participation with city and county agencies and by providing commercial loan services in support of area business expansion. - -------------------------------------------------------------------------------- 2 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Report of The Homestead Savings (FA) Homestead Savings strengthened its competitive position in 1997 by improving operations at all bank locations. While continuing to market our specialized loan products and flexible savings plans, technology made its mark in both back office and customer service areas. Dramatic improvements in efficiency were realized with the installation of a Wide Area Network. This high speed communication system connects all our branches and provides electronic mail, centralized loan processing and underwriting, and improved network management capabilities. Back office PCs and an enhanced digital communication line and equipment were also part of Homestead's 1997 technology program. While many of these enhancements were not immediately evident to customers, the resulting smoothness and efficiency of daily operations is reflected in the improved service we can now provide. A more visible improvement for customers was the introduction of new teller and platform PCs, helping us streamline the new account process and numerous other daily transactions. Homestead continued in 1997 to enhance service at the branch level, particularly the use of technology to improve customer access and convenience. The most significant enhancement took place at the Clinton Office with the installation of a 24-hour drive-up ATM. Plans have been developed for a variety of other service and operational improvements which will be pursued in the coming year. In 1998, Homestead looks forward to tapping into Iroquois' database marketing capabilities, and further automation of our consumer lending area. Above all, we are dedicated to making personal service a top priority while we build a more efficient, more competitive organization. "...We are dedicated to making personal service a top priority while we build a more efficient, more compet- itive organization." - -------------------------------------------------------------------------------- & The Homestead Savings - -------------------------------------------------------------------------------- First in the market to offer a new vacation home lending program in the Adirondack north country. Improved customer access and convenience with the installation of a 24-hour drive-up ATM at the Clinton office. Participated in a tutoring program with the Utica City School District. All Homestead branches generously participated in collecting contributions for the local community food bank drives. Opened a new loan origination office in Old Forge. Provided support for several local fund drives, via employee participation, including United Way, Muscular Dystrophy, Cystic Fibrosis and the Cancer Society. Introduced the reverse mortgage, a new retirement planning option for senior homeowners. Sponsored the 17th annual "Spirit of the Season" gift drive for a local psychiatric center. - -------------------------------------------------------------------------------- 3 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Selected Consolidated Financial Data
- ------------------------------------------------------------------------------------------------------------------------------------ At, or for the year ended, December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except ==== for per share amounts) 1997 1996 1995 1994 1993 - -------------------------------------------------------------====------------------------------------------------------------------- BALANCE SHEET DATA Total assets $509,778 472,908 437,803 423,977 403,210 Securities 103,620 98,287 84,105 81,991 57,910 Total loans, net 369,984 345,074 325,707 316,432 317,805 Deposits 417,011 410,222 369,101 358,876 362,967 Borrowings 50,164 25,536 35,250 34,778 11,073 Shareholders' equity 39,029 34,802 31,846 28,110 26,754 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Interest income $ 37,522 35,763 33,713 30,639 30,842 Interest expense 17,217 16,352 15,752 12,521 12,945 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 20,305 19,411 17,961 18,118 17,897 Provision for loan losses 1,520 1,334 917 830 1,464 Non-interest income 3,227 1,735 2,461 1,556 2,196 Non-interest expense 14,121 13,586 12,650 13,138 13,169 Income tax expense 2,994 2,447 2,704 2,283 2,186 - ------------------------------------------------------------------------------------------------------------------------------------ Income before and cumulative effect of change in accounting principle 4,897 3,779 4,151 3,423 3,274 Cumulative effect of change in accounting principle -- -- -- -- 200 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 4,897 3,779 4,151 3,423 3,474 Dividends on preferred stock 441 451 469 415 423 - ------------------------------------------------------------------------------------------------------------------------------------ Net income applicable to common shares $ 4,456 3,328 3,682 3,008 3,051 - ------------------------------------------------------------------------------------------------------------------------------------ PER COMMON SHARE DATA Income before cumulative effect of change in accounting principle $ 1.89 1.43 1.60 1.32 1.23 Cumulative effect of change in accounting principle -- -- -- -- .09 Net income per common share: Basic 1.89 1.43 1.60 1.32 1.32 Diluted 1.85 1.41 1.59 1.31 1.31 Cash dividends declared .36 .32 .30 .28 .27 Book value 14.42 12.71 11.60 10.02 9.21 - ------------------------------------------------------------------------------------------------------------------------------------ RATIOS Yield on interest-earning assets 8.08% 8.15 8.18 7.73 8.12 Cost of interest-bearing liabilities 4.07 4.03 4.11 3.37 3.59 Interest rate spread 4.01 4.12 4.07 4.36 4.53 Net interest margin 4.37 4.42 4.36 4.57 4.71 Return on average assets 1.00 .82 .97 .83 .88 Return on average shareholders' equity 13.54 11.51 14.05 12.80 13.94 Equity as a percent of average assets 7.39 7.12 6.89 6.49 6.28 Dividend payout ratio 19.05 22.38 18.75 21.21 20.45 - ------------------------------------------------------------------------------------------------------------------------------------
Note: All share and per share data have been retroactively adjusted to reflect the stock split as of 8/31/95. 4 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 these two member banks and their subsidiaries (together, "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 provide a varying range of financial services reflecting the needs of their market area, including residential mortgage loans, consumer and commercial loans, credit cards, insurance and investment brokerage services, trust services and safe deposit facilities. The following discussion and analysis reviews the Company's business and provides information about the financial condition and results of operations of the Company. It should be read in conjunction with the consolidated financial statements and accompanying notes and other statistical information included elsewhere in this 1997 Annual Report. OVERVIEW OF 1997 Iroquois reported net income for 1997 of $4.9 million, or $1.89 basic earnings per share, compared to $3.8 million, or $1.43 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. Increases in net interest income and non-interest income contributed to growth in net income and earnings per share in 1997. In 1996, 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 SAIF Deposit Insurance Fund. Net interest income totaled $20.3 million for 1997 compared to $19.4 million for 1996, an increase of $.9 million, or 4.6%. Non-interest income, excluding net losses on sales of loans and securities, increased $372,000, or 13.5%, for 1997. Non-interest expenses, increased $535,000, or 3.9%, for 1997 compared to 1996. Total assets grew 7.8% in 1997 to end the year at $509.8 million. Net loans were $370.0 million at December 31, 1997, compared to $345.1 million at December 31, 1996. Total deposits increased $6.8 million to $417.0 million at December 31, 1997. Shareholders' equity increased to $39.0 million at December 31, 1997 and represented 7.66% of year-end assets. RESULTS OF OPERATIONS Net Interest Income Net interest income is one of the principal sources of Iroquois' earnings. It represents the difference between the interest earned on assets, primarily loans and securities, and the interest paid on liabilities, primarily deposits and other borrowed funds. Several factors contribute to the determination of net interest income, including the volume and mix of interest-earning assets and funding sources, as well as related interest rates and cost of funds. Iroquois has the ability to control the effect of some of these factors through its asset and liability management and planning. External factors, such as overall economic conditions, the strength of customer demand for loan ================================================================================ Assets - -------------------------------------------------------------------------------- [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
($ in millions) 1993 ........................................................... 403.2 1994 ........................................................... 424.0 1995 ........................................................... 437.8 1996 ........................................................... 472.9 1997 ........................................................... 509.8
================================================================================ Net Interest Margin - -------------------------------------------------------------------------------- [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
(Percentages) 1993 ........................................................... 4.71 1994 ........................................................... 4.57 1995 ........................................................... 4.36 1996 ........................................................... 4.42 1997 ........................................................... 4.37
5 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis and deposit products and Federal Reserve Board monetary policy can also have an effect on changes in net interest income from one period to another. 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 non-interest bearing funding sources, including demand deposits, other liabilities and shareholders' equity. 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 non-interest-bearing demand deposits and equity capital. Net interest margin for 1997 decreased to 4.37% from 4.42% in 1996 primarily because of the decrease in net interest spread from 4.12% in 1996 to 4.01% in 1997. The decrease is attributable to the average yield on interest-earning assets declining 7 basis points in 1997, to 8.08%, and the average cost of interest-bearing liabilities increasing 4 basis points, to 4.07%, for 1997. Average securities increased from $91.9 million, or 20.9% of average interest-earning assets in 1996, to $103.2 million, or 22.2%, in 1997 as a result of lower loan demand for commercial mortgages and consumer installment loans. Average loans increased $14.3 million to $356.5 million in 1997, from $342.2 million in 1996. As a percentage of average interest-earning assets, however, average loans declined to 76.7% in 1997, from 77.9% in 1996. Average mortgage loans increased $8.5 million in 1997, to $241.4 million, and accounted for 59.1% of the average loan growth in 1997. As a percentage of average assets, however, average mortgage loans declined to 51.9% in 1997 from 53.0% in 1996, resulting primarily from a continuing decline in commercial mortgage loans. The decrease in yield on mortgage loans from 8.32% in 1996 to 8.17% in 1997 was principally a result of the increase in residential mortgages, including lower-yielding adjustable-rate mortgages, as a percentage of the portfolio in 1997. In addition, the lower mortgage portfolio yield tracks the general decline in residential mortgage rates that occurred in 1997. Other loans in 1997 continued to represent approximately 25% of average interest-earning assets. The yield on other loans increased from 9.36% in 1996 to 9.44% in 1997 and corresponds primarily to the increase in the average prime rate from 1996 to 1997. Average interest-bearing deposits increased $15.0 million to $393.5 million in 1997, from $378.5 million in 1996. The increase in average interest-bearing deposits was concentrated in the $15.6 million increase in time deposits in 1997 of which the majority was attributable to the growth in public fund deposits at Cayuga. Cayuga was not able to accept public fund deposits prior to its conversion to a commercial bank charter in January 1997. The interest rate paid on average interest-bearing deposits increased to 3.93% in 1997, from 3.90% in 1996, due to the increase in higher-costing time deposits as a percentage of average interest-bearing deposits. In 1997, time deposits represented 47.2% of average interest-bearing deposits, compared to 45.4% in 1996. Average borrowings in 1997 increased $2.1 million to $29.9 million, and represented 7.1% of average interest-bearing liabilities for the year. This increase includes the use of Federal Home Loan Bank ("FHLB") borrowings to supplement deposit growth. The average cost of borrowings in 6 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis 1997 increased to 5.89%, from 5.74% in 1996, and primarily corresponds to the increase in the average federal funds rate from 1996 to 1997. An increase in average non-interest-bearing sources of funds during 1997 contributed 36 basis points to net interest margin, compared to only 30 basis points in 1996. The growth in shareholders' equity along with an increase in average commercial and retail demand deposits in 1997 were the primary reason for the higher level of interest-free sources of funds. A summary of net interest income, as well as average balances for interest-earning assets and interest-bearing liabilities for the years 1995 through 1997, is presented in Table 1. Table 2 shows changes in interest income, interest expense and net interest income due to changes in volumes and rates during that time period. A discussion of interest rate sensitivity is included in the section on Market Risk and Interest Rate Risk Management in this Annual Report. Table 1 -- NET INTEREST INCOME ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, - ------------------------------------------------====-------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------====-------------------------------------------------------------------------------- Average Average Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS Mortgage loans(1) $ 241,355 19,713 8.17% 232,907 19,378 8.32 222,893 18,449 8.28 Other loans, net(1) 115,135 10,866 9.44 109,286 10,225 9.36 99,581 9,678 9.72 Securities 103,218 6,606 6.40 91,924 5,838 6.35 82,659 5,118 6.19 Federal funds sold and other investments 4,883 337 6.90 4,933 322 6.53 7,011 468 6.68 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest- earning assets 464,591 37,522 8.08 439,050 35,763 8.15 412,144 33,713 8.18 Non-interest-earning assets 24,803 22,185 16,445 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 489,394 461,235 428,589 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Savings deposits $ 189,960 4,807 2.53% 190,243 4,846 2.54 178,040 4,707 2.64 Time deposits 200,010 10,591 5.30 184,401 9,852 5.34 169,394 9,022 5.33 Mortgage escrow 3,491 59 1.69 3,854 61 1.58 5,405 85 1.56 Borrowings 29,869 1,760 5.89 27,757 1,593 5.74 30,396 1,938 6.38 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 423,330 17,217 4.07 406,255 16,352 4.03 383,235 15,752 4.11 Non-interest-bearing liabilities 29,879 22,130 15,820 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 453,209 428,385 399,055 Shareholders Equity 36,185 32,850 29,534 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders Equity $ 489,394 461,235 428,589 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and interest rate spread $ 20,305 4.01% 19,411 4.12 17,961 4.07 Net interest margin on earning assets 4.37 4.42 4.36 Ratio of interest-earning assets to interest-bearing liabilities 109.75 108.07 107.54 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-accrual loans are included in the average asset totals presented above. 7 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis ================================================================================ Operating Revenues - -------------------------------------------------------------------------------- [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] [PLOT POINTS TO COME]
($ in thousands) ---------------- Net Interest Income 1993 1994 1995 1996 1997 Non-Interest Income 1993 1994 1995 1996 1997
================================================================================ Efficiency Ratio - -------------------------------------------------------------------------------- [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
(Percentages) ------------- 1993 65.8 1994 64.2 1995 61.9 1996 61.3 1997 60.3
- ------------------------------------------------------------------------------------------------------------------ Comparison of the Comparison of the Years Ended Years Ended December 31, 1997 and 1996 December 31, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------------------------------------------ Loans, net $ 1,210 (234) 976 1,684 (208) 1,476 Securities 722 46 768 612 108 720 Federal funds sold and other investments (3) 18 15 (101) (45) (146) - ------------------------------------------------------------------------------------------------------------------ Interest income 1,929 (170) 1,759 2,195 (145) 2,050 - ------------------------------------------------------------------------------------------------------------------ Savings and time deposits and mortgage escrow 554 144 698 1,176 (231) 945 Borrowings 124 43 167 (169) (176) (345) - ------------------------------------------------------------------------------------------------------------------ Interest expense 678 187 865 1,007 (407) 600 - ------------------------------------------------------------------------------------------------------------------ Net interest income $ 1,251 (357) 894 1,188 262 1,450 - ------------------------------------------------------------------------------------------------------------------
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. Non-Interest Income Non-interest income, excluding the net gain or loss on the sale of securities and loans, totaled $3.1 million for 1997, up 13.5% compared to $2.8 million in 1996. The Company reported a 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. Service charges, the Company's primary source of non-interest income, represents revenue from various sources including service charges on deposits and loans, fees relating to trust and investment brokerage services, and electronic banking and credit card processing fees. Revenue from service charges for 1997 increased $341,000, to $3.0 million, compared to $2.6 million in 1996. Fees earned on the Business Manager(R) accounts receivable management program, as well as increases in retail loan fees and trust services revenue, accounted for a significant portion of the increase in non-interest income. Non-Interest Expense Non-interest expense for 1997 totaled $14.1 million, 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. Deposit insurance expense in 1996 included an assessment of $556,000 related to the government's plan for recapitalizing the SAIF Deposit Insurance Fund and lowering premiums for federally insured savings and loans. The Company's overhead ratio, its non-interest expense as a percentage of average assets, was 2.89% for 1997, compared to 2.95% for 1996. The Company's efficiency ratio, which measures non-interest expense as a percentage of revenues, was 60.3% for 1997, compared to 61.3% for 1996. Revenues for this analysis include net interest income and non-interest income excluding non-recurring items. 8 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis Salaries and benefits for 1997 increased $631,000 to $7.3 million, compared to $6.7 million for 1996. The increase was attributable to an increase in the average number of full-time equivalent employees ("FTEs") in 1997, general merit increases of approximately 4%, and the full implementation of a Company-wide incentive compensation plan designed to focus all employees on performance measurements and objectives. Salaries and benefits represented 51.9% of total non-interest expense for 1997, compared to 49.3% for 1996. Computer and product service fees for 1997 increased by $283,000, or 27.1%, to $1.3 million, compared to $1.0 million for 1996. Service fees relating to the Business Manager(R) product increased $116,000 in 1997 due to higher volume levels of customer usage. Computer service fees increased by $120,000 in 1997 as a result of the outsourcing of item processing services. The costs associated with outsourcing, however, were mostly offset by reductions in internal staffing and equipment costs. Computer service fees for 1997 also included expenses relating to the Company's conversion to Fiserv, Inc. as its primary data processing provider. Other real estate ("ORE") expenses decreased $55,000 to $333,000 for 1997, compared to $388,000 for 1996. The decrease represents a decline in the number of properties held in ORE during 1997, the length of time the properties were held prior to sale, and related losses. Other non-interest expenses for 1997 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 relating to Cayuga's costs in defending a civil suit. Consulting fees incurred in 1997 for corporate and employee benefit plan analyses also contributed to the increase. Provision for Income Taxes For 1997, the provision for income taxes was $3.0 million with 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%. A more comprehensive analysis of income tax expense is included in Note 8 to the consolidated financial statements included in this Annual Report. FINANCIAL CONDITION Loans Loans represent the largest component of the Company's earning assets. Total loans increased $24.8 million for the year, from $348.5 million at December 31, 1996, to $373.3 million at December 31, 1997. This increase was due primarily to the 14.4% growth in residential mortgage loans attributable to Cayuga's expansion of its mortgage lending program during 1997. Table 3 provides a five-year summary of the loan portfolio. Mortgage loans continue to represent the largest portion of the Company's loan portfolio. At December 31, 1997, mortgage loans represented 68.8% of total loans, compared to 67.2% at December 31, 1996. 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 generally underwritten and documented in accordance with secondary market standards, and fixed-rate residential mortgage loans with terms exceeding 20 years are sold at the time of origination. Commercial mortgage loans have generally been originated on properties in and around Cayuga's market area. 9 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis Table 3 -- SUMMARY OF THE LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------====-------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------------------------====-------------------------------------------------------------------------- Mortgage loans Residential $ 215,255 188,187 171,883 169,518 164,471 Commercial 41,678 46,022 53,363 54,321 53,313 - --------------------------------------------------------------------------------------------------------------------- Total mortgage loans $ 256,933 234,209 225,246 223,839 217,784 - --------------------------------------------------------------------------------------------------------------------- Other loans Home equity lines of credit 27,110 25,486 24,200 24,589 22,454 Consumer 45,401 46,551 40,974 32,499 26,028 Mobile home -- -- -- -- 12,125 Commercial 41,920 40,009 35,904 35,118 38,998 Education 1,905 2,208 2,763 3,651 3,240 - --------------------------------------------------------------------------------------------------------------------- Total other loans $ 116,336 114,254 103,841 95,857 102,845 - --------------------------------------------------------------------------------------------------------------------- Total loans receivable $ 373,269 348,463 329,087 319,696 320,629 Allowance for loan losses 3,285 3,389 3,380 3,264 2,824 - --------------------------------------------------------------------------------------------------------------------- Loans receivable, net $ 369,984 345,074 325,707 316,432 317,805 - ---------------------------------------------------------------------------------------------------------------------
The following table shows maturities of certain loan classifications at December 31, 1997 and an analysis of the rate structure for such loans due in over one year. 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 - ---------------------------------------------------------------------------------------------------------------------------------- Commercial Loans $ 38,847 2,267 806 41,920 3,073 -- - ----------------------------------------------------------------------------------------------------------------------------------
Residential mortgage loans increased to $215.3 million, or 57.7% of total loans, at December 31, 1997, compared to $188.2 million, or 54.0%, at December 31, 1996. The increase in residential mortgage loans came principally from loans originated through mortgage brokers in the greater Rochester area. Cayuga added approximately $31.3 million in broker originated loans to its residential mortgage loan portfolio, compared to $15.7 million in mortgages originated in its primary market area. Homestead generated mortgage loans in its market area of $7.2 million in 1997 including loans generated through its new loan production office opened in Old Forge, NY. Cayuga's expansion of its mortgage origination network allowed the Bank to take advantage of the full variety of its products, its fast turnaround times and highly personal service to meet the needs of one of the faster growing markets in upstate New York. Experienced staff, expanded quality control procedures, and extensive monitoring and reporting programs were added by the Bank to ensure broker loan originations meet the standards of the Company's lending policies. Commercial mortgage loans continued to decrease in 1997 and represented 11.1% of total loans, or $41.7 million, at December 31, 1997, compared to 13.2% of loans, or $46.0 million at year-end 1996. High rates of amortization and prepayment along with slow demand and increased competition caused the commercial mortgage loan portfolio to decline for the third straight year. Consumer loans, which include auto loans, fixed-rate home equity and home improvement loans, overdraft protection, credit cards, and other personal installment loans, decreased $1.2 million, 10 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis or 2.5%, in 1997. The decrease was marked by a decline in personal installment loans reflecting the consumer's increasing use of non-bank leasing and dealer financing programs. Home equity lines of credit increased $1.6 million, or 6.4%, during 1997. These loans are generally made at variable interest rates with the prime rate as the repricing index. This product provides the customer with an open line of credit, secured by a lien on residential real estate, and accessible through check writing privileges. The line of credit, together with all loans collateralized by the underlying property, is generally limited to 75%-80% of the property's appraised value. Educational loans, which consist of loans originated under federal and state sponsored student lending programs, declined $303,000, or 13.7%, at December 31, 1997. This decrease from 1996 reflects the continued impact of federally sponsored direct student lending initiatives. Commercial loans increased $1.9 million to $41.9 million at December 31, 1997, compared to $40.0 million at December 31, 1996. Commercial loans represented 11.2% of total loans at year end 1997, compared to 11.5% at year end 1996. Cayuga, presently, is the only member bank in the holding company to offer commercial business lending. The Bank offers a variety of loan products to its commercial customers including notes, lines of credit, installment loans and the Business Manager(R) program, an accounts receivable cash flow management program in which the Bank purchases and manages a customer's accounts receivable on a full recourse basis. The program was first offered by Cayuga in 1996 and at year end 1997 and 1996 there were $3.7 million and $1.9 million, respectively, in outstanding accounts receivable purchases under the program. Commercial lending is generally considered to involve a higher degree of risk than the Banks' other lending products. These loans tend to 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 assets of the business, which may be subject to market obsolescence. Because such risks can be significantly affected by economic and competitive factors, the Company attempts to control the risk by limiting lending to any one borrower, or group of related borrowers, to a maximum of 10% of its capital. At December 31, 1997, Iroquois had no significant concentration of loans in any single industry, nor did the loan portfolio contain any loans to finance highly speculative transactions. Iroquois will continue to emphasize a high quality diversified loan portfolio. New lending volume in 1998 is expected to continue to come from residential mortgage lending and home equity financing, as well as targeted growth in commercial lending. 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 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 ================================================================================ Loans Receivable, Net - --------------------------------------------------------------------------------
($ in millions) --------------- 1993 317.5 1994 316.4 1995 325.7 1996 345.1 1997 370.0 - --------------------------------------------------------------------------------
11 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis 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, 1997, the allowance for loan losses totaled $3.3 million, compared to $3.4 million at year end 1996. 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 to maintain a sufficient coverage level given increases in net charge-offs and non-performing loans. Net charge-offs of $1.6 million increased by $299,000 in 1997 over the previous year. Net charge-offs of residential mortgages and commercial loans declined in 1997 compared to 1996, while net charge-offs of consumer loans increased only slightly. Net charge-offs of commercial mortgage loans increased $406,000 and was driven primarily by a $667,000 charge-off of a particular commercial mortgage loan. Management believes that the conditions relating to this loan's underlying collateral make it uncharacteristic of the loans in the commercial mortgage portfolio. The allowance for loan losses as a percent of total loans was .88% at December 31, 1997, compared to .97% at year end 1996. The decrease in the allowance as a percentage of total loans reflects the changing mix of the loan portfolio toward a greater proportion of residential mortgages. Residential mortgage loans, compared to consumer and commercial loans, generally carry a lower risk of loss or net charge-off. Management believes that the allowance for loan losses at December 31, 1997 is adequate based on all currently available information. Table 4 summarizes activity in the allowance for loan losses for the years 1993 through 1997 and an allocation of the year end balances, 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 being incurred within the various loan categories. The allocation is based primarily on previous net charge-off experience, adjusted for changes in the risk profile of each category, as well as additional amounts allocated based on potential losses identified through the loan review process. The anticipated effect of 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. Non-Performing Assets Non-performing assets include non-performing loans and real estate acquired by foreclosure. Non-performing loans include loans that have been placed on nonaccrual status and loans past due ninety days or more and still accruing interest. Table 5 provides a five-year summary of non-performing assets. Non-performing assets increased $2.5 million, or 58.5%, from December 31, 1996 to December 31, 1997. At December 31, 1997, non-performing assets represented 1.8% of total loans and other real estate ("ORE") and 1.3% of total assets, compared to 1.2% and .9%, respectively, at year end 1996. The increase in non-performing assets was due to the increase in non-performing loans from $3.6 million, or 1.0% of total loans, at December 31, 1996 to $6.2 million, or 1.7% of total loans, at December 31, 1997. 12 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis Table 4 -- ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, - ----------------------------------------------------====---------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------====---------------------------------------------------------------------------- Balance at beginning of period $ 3,389 3,380 3,264 2,824 2,602 Provision for loan losses 1,520 1,334 917 830 1,464 Charge-offs Residential mortgages (216) (247) (225) (103) (30) Commercial mortgages (1,065) (634) (205) -- (140) Commercial loans (140) (180) (157) (92) (248) Mobile home loans -- -- -- (55) (332) Consumer loans (387) (345) (353) (263) (569) - ------------------------------------------------------------------------------------------------------------------------------------ Total charge-offs (1,808) (1,406) (940) (513) (1,319) Recoveries Residential mortgages 57 2 7 7 1 Commercial mortgages 25 -- -- -- -- Commercial loans 22 11 33 35 4 Mobile home loans -- -- -- 11 -- Consumer loans 80 68 99 70 72 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 184 81 139 123 77 - ------------------------------------------------------------------------------------------------------------------------------------ Net charge-offs (1,624) (1,325) (801) (390) (1,242) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period $ 3,285 3,389 $ 3,380 3,264 2,824 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of charge-offs net of recoveries to loans outstanding .44% .38 .24 .13 .39 Allowance for loan losses as a percent of: Total loans .88 .97 1.03 1.02 .88 Non-performing loans 53.21 93.28 63.67 75.75 131.96 - ------------------------------------------------------------------------------------------------------------------------------------
Allocation of Allowance for Loan Losses at December 31, - --------------------------------====------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 - --------------------------------====------------------------------------------------------------------------------------------------ % 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 $ 585 57.67% 471 54.00 402 52.23 201 53.02 74 51.30 Commercial mortgages 1,246 11.16 1,677 13.21 1,452 16.22 1,201 16.99 582 16.63 Commercial loans 826 11.23 617 11.48 807 10.91 1,297 10.99 861 12.16 Mobile home loans -- -- -- -- -- -- -- -- 669 3.78 Consumer loans 628 19.94 624 21.31 719 20.64 565 19.00 638 16.13 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 3,285 99.88% 3,389 100.00 3,380 100.00 3,264 100.00 2,824 100.00 - ------------------------------------------------------------------------------------------------------------------------------------
Non-performing residential mortgage loans increased $1.4 million to $3.0 million at December 31, 1997, compared to $1.5 million at December 31, 1996. Based on recent analyses of delinquency trends, the increase in non-performing loans within the residential mortgage portfolio appears to be a result of such factors as job loss, illness, marital difficulties, and bankruptcy. Property values in the Company's market areas are fairly stable, although the resale market has been sluggish. Management has committed additional resources toward collection and workout efforts in the residential mortgage portfolio. Non-performing commercial mortgages accounted for $2.4 million, or 39.5%, of non-performing loans at December 31, 1997, compared to $1.6 million, or 43.2%, at year-end 1996. All non-performing commercial mortgages at December 31, 1997 are either in the process of foreclosure 13 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis Table 5 -- SUMMARY OF NON-PERFORMING ASSETS
- --------------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------------====-------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------------------------------====-------------------------------------------------------- Loans in nonaccrual $ 5,902 3,288 4,299 3,383 977 Loans past due 90 days or more and still accruing 272 345 1,010 813 1,163 - --------------------------------------------------------------------------------------------------------- Total non-performing loans 6,174 3,633 5,309 4,196 2,140 Other real estate 565 618 427 193 1,503 - --------------------------------------------------------------------------------------------------------- Total non-performing assets $ 6,739 4,251 5,736 4,389 3,643 - --------------------------------------------------------------------------------------------------------- Percent of: Total loans and real estate acquired by foreclosure 1.80% 1.22 1.74 1.37 1.14 Total assets 1.32 .90 1.31 1.04 .90 Non-performing loans as a percent of total loans 1.65 1.04 1.61 1.31 .67 - ---------------------------------------------------------------------------------------------------------
or operating under an agreed upon workout plan. One loan, previously classified as a potential problem loan, represents 50% of the non-performing commercial mortgage balance at December 31, 1997. The loan, as of year-end 1997, was in a workout status with an established payment plan. In addition, management believes there to be adequate collateral supporting the loan. Management believes that, through its loan review program, it has taken a conservative approach to evaluating non-performing loans and the loan portfolio in general, both in acknowledging the general condition of the portfolio and in establishing the allowance for loan loss. Non-performing 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, $3.0 million in "potential problem loans" at December 31, 1997. These problem loans are defined as loans not included as non-performing loans above, but about which management has developed information regarding possible credit problems which may cause the borrowers future difficulties in complying with present 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 non-performing or which 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, 1997 to lend additional funds to borrowers whose loans were classified as non-performing. Iroquois will continue to focus on improving asset quality through active management of problem assets, early detection of potential problem assets, consistent and adequate collection procedures, and timely charge-offs. Securities The Company's investment strategy continues to focus on maintaining a securities portfolio that provides a source of liquidity through maturities and selling opportunities, contributes to overall profitability, and provides 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. Given the strong loan to asset ratios of the Banks, a conservative posture is taken in respect to the types of securities carried in the portfolio. Investment securities are primarily US Treasuries, US Government agencies and Government sponsored mortgage-backed 14 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis securities providing high quality and low risk to the overall composition of the balance sheet. A portion of the portfolio is classified as available for sale to provide flexibility in making adjustments to the portfolio based on changes in the economic or interest rate environment, unanticipated liquidity needs, or alternative investment opportunities. The available for sale portfolio is evaluated regularly with respect to changes in interest rates to determine the appropriate degree of exposure and potential volatility. At December 31, 1997, securities represented 20.3% of total assets, compared to 20.8% at year-end 1996. Securities available for sale, which are carried at fair value, increased from $43.9 million at December 31, 1996 to $51.9 million at year-end 1997, and consisted primarily of US Government and agencies obligations including pools of SBA-guaranteed adjustable rate loans. The available for sale portfolio represented 50.1% and 44.7% of total securities at December 31, 1997 and 1996, respectively. Securities held to maturity at December 31, 1997 represented 49.9% of total securities and consisted primarily of corporate bonds and mortgage-backed securities. At December 31, 1996, the held to maturity portfolio totaled $54.4 million and represented 55.3% of total securities. Table 6 presents a three-year summary of the securities portfolio. Table 7 presents the maturity distribution of the securities portfolio along with the weighted average yields. Mortgage-backed securities are classified in this Table according to their final maturity date and do not project any forecasted amortization or prepayment. Table 6 -- SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------- December 31, - -------------------------------------------------====-------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 - -------------------------------------------------====-------------------------------------------------------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government & agencies obligations $ 42,187 42,537 33,654 33,784 29,444 29,683 State and municipal obligations 231 232 -- -- -- -- Corporate 1,507 1,517 500 501 1,514 1,518 Other 3,000 2,983 3,000 2,976 3,000 2,976 Mortgage-backed securities 4,664 4,675 6,648 6,634 5,142 5,206 - ------------------------------------------------------------------------------------------------------------------------------- 51,589 51,944 43,802 43,895 39,100 39,383 - ------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: U.S. Government & agencies obligations 25 25 60 60 60 61 State and municipal obligations 3,729 3,795 1,489 1,519 1,200 1,233 Corporate 27,717 27,887 27,638 27,723 22,918 23,175 Mortgage-backed securities 20,205 20,475 25,205 25,316 20,544 20,883 - ------------------------------------------------------------------------------------------------------------------------------- 51,676 52,182 54,392 54,618 44,722 45,352 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 103,265 104,126 98,194 98,513 83,822 84,735 - -------------------------------------------------------------------------------------------------------------------------------
15 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis Table 7 -- MATURITY SCHEDULE OF SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------ at December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ Securities available for sale: U.S. Government & agencies obligations $ 7,024 5.87% 30,500 6.37 -- -- 4,663 6.54 State and municipal obligations -- -- -- -- 231 4.35 -- -- Corporate -- -- 1,507 6.39 -- -- -- -- Other 3,000 5.99 -- -- -- -- -- -- Mortgage-backed securities -- -- -- -- -- -- 4,664 6.20 - ------------------------------------------------------------------------------------------------------------------------------------ 10,024 5.91 32,007 6.37 231 4.35 9,327 6.37 - ------------------------------------------------------------------------------------------------------------------------------------ Securities held to maturity: U.S. Government & agencies obligations 25 7.38 -- -- -- -- -- -- State and municipal obligations 861 4.24 818 5.23 2,050 4.72 -- -- Corporate 8,719 6.24 18,495 6.45 -- -- 503 7.42 Mortgage-backed securities 400 4.66 5,014 6.37 1,807 6.98 12,984 6.94 - ------------------------------------------------------------------------------------------------------------------------------------ 10,005 6.01 24,327 6.39 3,857 5.78 13,487 6.96 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 20,029 5.96% 56,334 6.38 4,088 5.70 22,814 6.71 - ------------------------------------------------------------------------------------------------------------------------------------
Funding Sources Customer deposits, consisting of savings and money market accounts, time deposits, mortgage escrow deposits, and retail and commercial 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 $6.8 million, or 1.7%, from $410.2 million at December 31, 1996 to $417.0 million at December 31, 1997. Average total deposits for 1997 were $419.9 million compared to $398.7 million for 1996. The growth in public fund (municipal) deposits held at Cayuga was primarily responsible for the increase in deposits in 1997. Municipal deposits at December 31, 1997 totaled $27.1 million, belonging to a diversified customer base of local municipalities and school districts. Overall deposit trends for 1997 demonstrated a continued reduction in savings accounts, growth in retail money market accounts, outflows of retail time deposits offset by growth in municipal time deposits, and growth in interest-bearing checking and demand deposit accounts. At December 31, 1997, savings accounts were $105.1 million, or 25.2% of total deposits, compared to $121.7 million, or 29.7% of deposits at December 31, 1996. Money market accounts increased from $37.3 million, or 9.1% of deposits, at year-end 1996 to $41.0 million, or 9.8% of deposits, at December 31, 1997. Checking and demand deposits accounted for $66.3 million, or 15.9%, of total deposits, at December 31, 1997, compared to $60.7 million, or 14.8%, at December 31, 1996. At December 31, 1997, time deposits represented 48.2%, or $201.1 million, of deposits compared to 45.7%, or $187.4 million, at year-end 1996. Time deposits of $100,000 or greater, all of which are from customers within the Banks' local market areas, totaled $41.0 million, or 9.8% of total deposits, at December 31, 1997, compared to $18.0 million, or 4.4%, at year-end 1996. The increase in time deposits of $100,000 or greater is principally due to the addition of $20.1 million in 16 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis municipal time deposits during 1997. Table 9 presents a maturity schedule of time deposits of $100,000 and over. Total borrowings at December 31, 1997 were $50.2 million, or 10.7% of total liabilities, compared to $25.5 million, or 5.8%, at December 31, 1996. Borrowings averaged 6.6% and 6.5% of total liabilities during 1997 and 1996, respectively, and consisted primarily of overnight and term advances from the FHLB. Iroquois anticipates that retail deposit growth will continue to be challenging in 1998 given local economic and demographic trends in the Banks' market areas and recent declines in interest rates. Changes in Individual Retirement Account ("IRA") laws may generate retirement savings growth opportunities during 1998 as customers take advantage of favorable tax treatment for IRA contributions and rollovers. In addition, the Banks will continue to focus on building upon existing relationships with their customers through targeted marketing and personal sales efforts designed to attract additional accounts and deposits. Table 8 -- DEPOSITS
- -------------------------------------------------------------------------------- December 31, - ----------------------------------====------------------------------------------ (dollars in thousands) 1997 1996 1995 - ----------------------------------====------------------------------------------ Savings accounts $ 105,132 121,737 112,894 Time deposit accounts 201,056 187,360 178,210 Money market accounts 41,033 37,255 26,056 Mortgage escrow deposits 3,446 3,131 4,881 Interest checking 38,781 35,805 32,614 Commercial checking & other demand deposits 27,563 24,934 14,446 - -------------------------------------------------------------------------------- Total $ 417,011 410,222 369,101 - --------------------------------------------------------------------------------
Table 9 -- MATURITIES OF TIME DEPOSITS-$100,000 AND OVER
- -------------------------------------------------------------------------------- (dollars in thousands) December 31, 1997 - -------------------------------------------------------------------------------- Maturity Amount - -------------------------------------------------------------------------------- Three months or less $ 26,874 Over three through six months 4,168 Over six through twelve months 4,417 Over twelve months 5,530 - -------------------------------------------------------------------------------- $ 40,989 - --------------------------------------------------------------------------------
CAPITAL RESOURCES Shareholders' equity increased from $34.8 million at December 31, 1996 to $39.0 million at year-end 1997. Equity per common share, commonly referred to as book value, increased 13.5%, from $12.71 at year-end 1996 to $14.42 at December 31, 1997. Iroquois paid total cash dividends of $1.3 million in 1997, of which $441,000 was paid to preferred shareholders. Common shareholders received $.36 per share, for a total of $848,000 and a payout ratio to earnings per share of 19.1%, compared to 22.4% in 1996. Cash dividends have 17 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis been paid on the Company's common stock for eleven 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. 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, 1997, Iroquois exceeded all regulatory required minimum capital ratios and each of the Banks met the definition of a "well capitalized institution" as defined by applicable regulation. On a consolidated basis at December 31, 1997, Iroquois had a total capital to assets ratio (leverage ratio) of 7.66%, a common equity to assets ratio of 6.70%, a tangible common equity to assets ratio of 6.23% and a total capital to risk-weighted assets ratio of 11.75%. A more comprehensive analysis of regulatory capital requirements is included in Note 16 to Iroquois' consolidated financial statements included in this Annual Report. 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. Iroquois, as the parent company, also serves as the vehicle for access to capital markets that cannot be met through internal capital growth. While internally generated capital is the Company's primary strategy for capital growth of the Banks, Iroquois remains the source of funds, if necessary, to strengthen the capital position of its subsidiaries. For its own capital needs, Iroquois also looks to the Banks as a primary source of funds, and to capital markets for capital needs that cannot be met by earnings from its subsidiaries, such as for the acquisition of new 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 MANAGEMENT Liquidity management involves the ability to meet the cash flow requirements of customers, such as depositors wanting to withdraw funds or borrowers wishing to obtain funds to meet their credit needs. Proper liquidity management provides the necessary access to funds to satisfy cash flow requirements. Failure to manage liquidity properly can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. 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. In addition, liquidity is continuously provided through the acquisition of new deposits and borrowings, or the renewal of maturing deposits and borrowings. 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. At December 31, 1997, the Company held securities maturing in one year or less, excluding estimated payments from amortizing securities, of $20 million, or 19.3% of the total securities portfolio. Securities available for sale at December 31, 1997 totaled $51.9 million, or 10.2% of total assets. In addition, funding is currently available to each Bank through its membership in the Federal Home Loan Bank of New York ("FHLB"). Through the FHLB, each Bank can borrow up to 25% of total assets at various terms and interest rates. 18 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis 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 1997, operating activities generated cash flows of $7.3 million, while financing activities provided $30.4 million. Investing activities, primarily net investments in loans and securities, used $34.9 million, resulting in a net increase in cash and cash equivalents of $2.8 million in 1997. While many factors, such as economic and competitive factors, customer demand for loans and deposits, bank reputation and market share, affect the Banks' ability to effectively manage their liquidity, management 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. 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 that reflects a gradual change in rates of up to 200 basis points. At December 31, 1997, 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 also uses a net portfolio value ("NPV") analysis as another means of measuring and monitoring its interest rate risk. NPV (also referred to as the "market value of equity") 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, 1997, 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. 19 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis Table 10 -- NET PORTFOLIO VALUE ANALYSIS
- -------------------------------------------------------------------------------- (dollars in thousands) at December 31, 1997 - -------------------------------------------------------------------------------- Change in interest rate Estimated Change in NPV (basis points) NPV Amount % - -------------------------------------------------------------------------------- +200 $41,260 $(11,778) (22.2)% +100 47,135 (5,903) (11.1) 0 53,038 -- -- -100 58,768 5,730 10.8 -200 62,614 9,576 18.1 - --------------------------------------------------------------------------------
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, 1997, the Company had a virtually neutral one year cumulative gap position. Table 11 -- INTEREST RATE SENSITIVITY TABLE
- ------------------------------------------------------------------------------------------------------------------------------------ At December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ 0 - 3 4 - 12 1 - 5 Over 5 (dollars in thousands) Months Months Years Years Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest-sensitive assets Mortgage loans: Residential $ 21,038 62,934 82,376 48,907 215,255 Commercial 10,668 9,975 19,506 1,529 41,678 Consumer and commercial loans 66,447 14,276 28,807 6,806 116,336 Securities 9,375 14,927 51,319 3,119 78,740 Mortgage-backed securities 1,785 7,377 11,723 3,995 24,880 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-sensitive assets $ 109,313 109,489 193,731 64,356 476,889 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-sensitive liabilities Deposits: Savings and NOW accounts $ 6,020 17,886 53,335 66,672 143,913 Money market deposit accounts 1,950 5,847 14,772 18,464 41,033 Certificates of deposit 56,055 90,294 54,705 2 201,056 Borrowed funds 23,687 17,000 9,000 477 50,164 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-sensitive liabilities $ 87,712 131,027 131,812 85,615 436,166 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate sensitivity gap $ 21,601 (21,538) 61,919 (21,259) 40,723 Cumulative interest rate sensitive gap $ 21,601 63 61,982 40,723 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios Cumulative gap to total assets: at 12/31/97 4.2% 0 12.2 8.0 at 12/31/96 11.2% (3.0) 7.8 8.3 - ------------------------------------------------------------------------------------------------------------------------------------
20 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis 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, therefore, 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 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. COMPARISON OF 1996 WITH 1995 Iroquois reported net income for 1996 of $3.8 million, or $1.43 basic earnings per share, compared to $4.2 million, or $1.60 per share, reported for 1995. The return on average assets and return on average equity for 1996 were .82% and 11.51%, respectively, compared to .97% and 14.05%, respectively, for 1995. The results for 1996 were negatively affected by a one-time charge of $556,000 assessed against the insured deposits of Homestead as part of federal legislation to recapitalize the SAIF Deposit Insurance Fund. In addition, during 1996 Cayuga sold $4.6 million of classified commercial mortgage loans which resulted in a pretax loss of $1.0 million. Net interest income for 1996 was $19.4 million, an increase of 8.1% over net interest income in 1995 of $18.0 million. The increase of $1.4 million resulted from both a higher level of earning assets and wider net interest spread. Average interest-earning assets increased $27.0 million in 1996. Net interest spread widened from 4.07% in 1995 to 4.12% in 1996, due primarily to a decline in the average cost of interest-bearing liabilities, from 4.11% in 1995 to 4.03% in 1996. The May 1996 branch acquisition by Cayuga, which provided $46.6 million of primarily core retail and business deposits, allowed higher cost borrowings to be reduced and the overall cost of funds to decline for 1996. Net interest margin was 4.42% in 1996 compared to 4.36% in 1995. The improved spread, along with a 21.2% increase in non-interest bearing sources of funds, contributed to the increase in net interest margin. The provision for loan losses was $1.3 million for 1996, compared to $917,000 for 1995. The increase in the provision for 1996 reflected additions to the allowance for loan losses to maintain sufficient coverage ratios given increases in non-performing and classified loans as well as net charge-offs in 1996. Non-interest income for 1996, excluding the $1.0 million net loss on sales of loans and securities, totaled $2.8 million, an increase of $295,000, or 11.9%, compared to 1995. Service fee income increased $252,000, or 10.7%, compared to 1995 and included increases in fees generated by deposit service charges, Business Manager(R) fees, insurance and brokerage activities, and trust services. Non-interest expense for 1996 increased $936,000, or 7.4%, including the one-time special SAIF assessment of $556,000. Non-interest expense as a percentage of average assets was 2.95% for 1996, unchanged from 1995. The Company generated an efficiency ratio of 61.3% for 1996, compared to 61.9% for 1995. Salaries and benefits increased $431,000, or 6.9%, over 1995 as a result of staffing changes and general merit increases. Computer and product service fees increased $167,000, or 19.0%, in 1996 compared to 1995 as a result of higher service fees for correspondent 21 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis banking services, trust and credit card processing and Business Manager(R) accounts. Other real estate expenses increased $242,000, or 165.8%, for 1996 and reflected an increase in foreclosures on both residential and commercial mortgages. The provision for income taxes for 1996 was $2.5 million with an effective tax rate of 39.3%, compared to $2.7 million for 1995 with an effective rate of 39.4%. IMPACT OF THE YEAR 2000 The financial services industry relies extensively on computer programs with dates. Many existing computer programs were written using only the last two digits to identify the applicable year. These programs were designed and developed without considering the impact of the upcoming change to a new century. Computer programs that have date-sensitive software may, therefore, recognize a date using "00" as the year 1900 rather than the year 2000. The potential exists that such a mistake could result in system failures or miscalculations causing disruptions of operations, not only for the Company, but for its commercial customers who rely on computer software in managing their businesses. A committee comprised of representatives from both Banks has been formed to direct Iroquois' Year 2000 activities. The Committee has contacted all of the Company's hardware and software vendors regarding their individual Year 2000 compliance initiatives. The Company is working closely with Fiserv, Inc., its data services and item processing provider, regarding Year 2000 compliance. Fiserv has set a schedule which anticipates testing to be completed by December 31, 1998. In addition, the Banks will initiate formal communications with their larger commercial borrowers, during 1998, to determine the extent to which they may be vulnerable to the Year 2000 issue. The Company presently believes that the Year 2000 problem will not pose significant operational problems or have significant impact on its financial condition, results of operations or cash flows. However, if third party modification plans are not completed and tested on a timely basis, the Year 2000 may have a material impact on the operations of the Company. RECENT ACCOUNTING DEVELOPMENTS Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," except for those transactions governed by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is based on consistent application of a "financial components approach" that focuses on control. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 127 deferred for one year the effective date of SFAS 125 as it relates to transfers of financial assets and secured borrowings and collateral. The adoption of SFAS 125, as amended by SFAS 127, did not have a material effect on the Company's 1997 financial statements. On December 31, 1997, the Company adopted the provisions of SFAS 128, "Earnings Per Share." SFAS 128, which supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share," establishes standards for computing and presenting earnings per share (EPS) for entities with publicly held common stock and common stock equivalents. All prior 22 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Management's Discussion and Analysis period EPS amounts included in the consolidated financial statements and in the Company's 1997 Annual Report have been restated to conform with the computational provisions of SFAS 128. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 is effective for years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods provided for comparative purposes. SFAS 130 establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is defined as all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has not yet determined the impact of SFAS 130 on its financial statements. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. The Company has not yet determined the impact of SFAS 131 on its financial statements. IMPACT OF INFLATION Since most of the assets and liabilities of a financial institution are monetary in nature, changes in interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Inflation has an impact on the Company in terms of asset growth, as well as having an effect on the pricing of products and services both purchased and sold by the Banks. Asset growth tends to be affected by inflation primarily through increases in average loan balances needed by customers to fund purchases of new homes, businesses, consumer goods. Pricing of products and services is reviewed periodically and adjusted to reflect changes in current costs. Cost control and productivity initiatives are implemented to reduce the impact of increased costs of goods and services on Company profitability. PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT In addition to historical information, this Annual Report includes certain forward-looking statements with respect to the financial condition, results of operations and business of the Company and its subsidiaries based on current management expectations. The Company's ability to predict results or the effect of future plans and strategies is inherently uncertain and actual results, performance or achievements could differ materially from those 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 the quality or composition of the Banks' loan and securities portfolios, 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. 23 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 depends upon 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 Peat Marwick 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Iroquois Bancorp, Inc. and subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Syracuse, New York January 16, 1998 24 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Balance Sheets
December 31, - -------------------------------------------------------------------------------- (dollars in thousands ==== except for per share amounts) 1997 1996 - -------------------------------------------------------====--------------------- ASSETS Cash and due from banks $ 12,778 10,375 Federal funds sold and interest-bearing deposits with other financial institutions 705 300 Securities available for sale, at fair value 51,944 43,895 Securities held to maturity (fair value of $52,182 in 1997 and $54,618 in 1996) 51,676 54,392 Loans receivable 373,269 348,463 Less allowance for loan losses 3,285 3,389 - -------------------------------------------------------------------------------- Loans receivable, net 369,984 345,074 Premises and equipment, net 8,170 7,114 Federal Home Loan Bank Stock, at cost 3,629 2,279 Accrued interest receivable 3,855 3,571 Other assets 7,037 5,908 - -------------------------------------------------------------------------------- Total Assets $ 509,778 472,908 - -------------------------------------------------------------------------------- LIABILITIES Savings and time deposits $ 389,448 385,288 Demand deposits 27,563 24,934 Borrowings 50,164 25,536 Accrued expenses and other liabilities 3,574 2,348 - -------------------------------------------------------------------------------- Total Liabilities $ 470,749 438,106 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred Stock, $1.00 par value, 3,000,000 shares authorized: Series A - 29,999 and 30,957 shares issued and outstanding in 1997 and 1996 respectively, liquidation value $3,000 $ 30 31 Series B - 18,632 and 19,082 shares issued and outstanding in 1997 and 1996 respectively, liquidation value $1,863 19 19 Common Stock, $1.00 par value; 6,000,000 shares authorized; 2,388,936 and 2,367,940 shares issued and outstanding in 1997 and 1996 respectively 2,389 2,368 Additional paid-in capital 13,793 13,520 Retained earnings 22,868 19,260 Net unrealized gain on securities available for sale, net of taxes 213 56 Unallocated shares of Stock Ownership Plans (283) (452) - -------------------------------------------------------------------------------- Total Shareholders' Equity $ 39,029 34,802 - -------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 509,778 472,908 - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Income
- ------------------------------------------------------------------------------------------------ Year ended December 31, - ------------------------------------------------------------------------------------------------ (dollars in thousands, except ==== for per share amounts) 1997 1996 1995 - -------------------------------------------------------====------------------------------------- Interest Income: Loans $ 30,579 29,603 28,127 Securities 6,606 5,838 5,118 Other 337 322 468 - ------------------------------------------------------------------------------------------------ 37,522 35,763 33,713 - ------------------------------------------------------------------------------------------------ Interest Expense: Deposits 15,457 14,759 13,814 Borrowings 1,760 1,593 1,938 - ------------------------------------------------------------------------------------------------ 17,217 16,352 15,752 - ------------------------------------------------------------------------------------------------ Net Interest Income 20,305 19,411 17,961 Provision for loan losses 1,520 1,334 917 - ------------------------------------------------------------------------------------------------ Net Interest Income after Provision for Loan Losses 18,785 18,077 17,044 - ------------------------------------------------------------------------------------------------ Non-Interest Income: Service charges 2,958 2,617 2,365 Net gain(loss) on sales of securities and loans 99 (1,021) -- Other 170 139 96 - ------------------------------------------------------------------------------------------------ Total Non-Interest Income 3,227 1,735 2,461 - ------------------------------------------------------------------------------------------------ Non-Interest Expense: Salaries and employee benefits 7,328 6,697 6,266 Occupancy and equipment 1,725 1,671 1,668 Computer and product service fees 1,328 1,045 878 Promotion and marketing 356 379 350 Other real estate expenses 333 388 146 Deposit insurance 97 742 518 Other 2,954 2,664 2,824 - ------------------------------------------------------------------------------------------------ Total Non-Interest Expenses 14,121 13,586 12,650 - ------------------------------------------------------------------------------------------------ Income Before Income Taxes 7,891 6,226 6,855 Income taxes 2,994 2,447 2,704 - ------------------------------------------------------------------------------------------------ Net Income $ 4,897 3,779 4,151 - ------------------------------------------------------------------------------------------------ Preferred stock dividend 441 451 469 - ------------------------------------------------------------------------------------------------ Net income applicable to common shares $ 4,456 3,328 3,682 - ------------------------------------------------------------------------------------------------ Net income per common share: Basic $ 1.89 1.43 1.60 Diluted $ 1.85 1.41 1.59 - ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 26 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------- Year ended December 31, - ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net Income $ 4,897 3,779 4,151 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense, provision for loan losses, deferred taxes and other 2,195 2,225 1,491 Net (gain)loss on sales of securities and loans (99) 1,021 -- Increase in accrued interest receivable and other assets (394) (135) (777) Increase(decrease) in accrued expenses and other liabilities 716 620 (651) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 7,315 7,510 4,214 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sales of securities available for sale 10,637 10,038 5,962 Proceeds from maturities and redemptions of securities available for sale 6,121 7,439 3,703 Proceeds from maturities and redemptions of securities held to maturity 12,732 11,704 17,274 Purchases of securities available for sale (23,669) (23,240) (18,297) Purchases of securities held to maturity (10,896) (20,470) (10,186) Loans made to customers net of principal payments received (27,636) (18,610) (14,119) Loans of acquired branches -- (10,270) -- Proceeds from sales of loans 2,835 8,461 4,612 Capital expenditures (1,250) (1,090) (654) Purchase of FHLB stock (1,350) (85) (112) Premium paid for deposits -- (3,138) -- Other - net (2,385) (462) (35) - ------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (34,861) (39,723) (11,852) - ------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase(decrease) in savings accounts and demand deposits (6,907) (2,120) (20,599) Net increase(decrease) in time deposits 13,696 (3,410) 30,824 Deposits of acquired branches -- 46,652 -- Net increase(decrease) in borrowings 24,628 (9,714) 472 Proceeds from issuance of common stock 366 338 134 Dividends paid (1,289) (1,198) (1,159) Redemption of preferred stock (140) (50) (73) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 30,354 30,498 9,599 - ------------------------------------------------------------------------------------------------------------------------- Net increase(decrease) in cash and cash equivalents 2,808 (1,715) 1,961 Cash and cash equivalents at beginning of year 10,675 12,390 10,429 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 13,483 10,675 12,390 - ------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 17,071 16,280 15,663 Income taxes 1,623 2,134 2,431 Supplemental schedule of non-cash investing activities: Loans to facilitate the sale of other real estate 422 530 129 Additions to other real estate 842 1,675 1,160 Transfer of securities held to maturity to securities available for sale -- -- 8,082 - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 27 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gain Unallocated (Loss) on Shares of Additional Securities Stock (dollars in thousands, Preferred Common Paid-In Retained Available Ownership except for per share amounts) Stock Stock Capital Earnings For Sale Plans Total - ----------------------------------------------------------------------------------------------------------------------------------- Series A Series B - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 $ 31 20 1,164 13,163 14,852 (328) (792) 28,110 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income -- -- -- -- 4,151 -- -- 4,151 Stock Options Exercised -- -- 1 12 -- -- -- 13 Change in net unrealized gain on securities available for sale, net of taxes of $332 -- -- -- -- -- 498 -- 498 Allocation of Common stock under: Employee Stock Ownership Plan -- -- -- 15 -- -- 154 169 Director Stock Compensation Plan -- -- -- -- -- -- 16 16 Preferred Stock Redemption (732 shares) -- (1) -- (72) -- -- -- (73) Stock Issued - Dividend Reinvestment Plan -- -- 9 112 -- -- -- 121 Stock Dividend -- -- 1,165 -- (1,165) -- -- -- Cash dividends declared: Common stock ($.30 per share) -- -- -- -- (690) -- -- (690) Series A Preferred stock ($9.63 per share) -- -- -- -- (302) -- -- (302) Series B Preferred stock ($8.63 per share) -- -- -- -- (167) -- -- (167) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 $ 31 19 2,339 13,230 16,679 170 (622) 31,846 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income -- -- -- -- 3,779 -- -- 3,779 Stock Options Exercised -- -- 10 45 -- -- -- 55 Change in net unrealized gain on securities available for sale, net of taxes of $76 -- -- -- -- -- (114) -- (114) Allocation of Common stock under: Employee Stock Ownership Plan -- -- -- 31 -- -- 154 185 Director Stock Compensation Plan -- -- -- -- -- -- 16 16 Preferred Stock Redemption (499 shares) -- -- -- (50) -- -- -- (50) Stock Issued - Dividend Reinvestment Plan -- -- 19 264 -- -- -- 283 Cash dividends declared: Common stock ($.32 per share) -- -- -- -- (747) -- -- (747) Series A Preferred stock ($9.38 per share) -- -- -- -- (291) -- -- (291) Series B Preferred stock ($8.38 per share) -- -- -- -- (160) -- -- (160) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1996 $ 31 19 2,368 13,520 19,260 56 (452) 34,802 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income -- -- -- -- 4,897 -- -- 4,897 Stock Options Exercised -- -- 9 93 -- -- -- 102 Change in net unrealized gain on securities available for sale, net of taxes of $103 -- -- -- -- -- 157 -- 157 Allocation of Common stock under: Employee Stock Ownership Plan -- -- -- 67 -- -- 154 221 Director Stock Compensation Plan -- -- -- -- -- -- 15 15 Preferred Stock Redemption (1,408 shares) (1) -- -- (139) -- -- -- (140) Stock Issued - Dividend Reinvestment Plan -- -- 12 252 -- -- -- 264 Cash dividends declared: Common stock ($.36 per share) -- -- -- -- (848) -- -- (848) Series A Preferred stock ($9.44 per share) -- -- -- -- (284) -- -- (284) Series B Preferred stock ($8.44 per share) -- -- -- -- (157) -- -- (157) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 $ 30 19 2,389 13,793 22,868 213 (283) 39,029 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 28 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (1) Business Iroquois Bancorp, Inc. ("Iroquois"), 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 subsidiary, Cayuga Bank, to a state chartered commercial bank. Previously, Iroquois was a thrift holding company and the 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 subsidiary ("Cayuga") and The Homestead Savings (FA) and its 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 disclosures 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 separate component of shareholders' equity until realized. 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. 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 fees. 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 repayment status. The Company sells residential fixed-rate mortgages with terms exceeding 20 years in the secondary market. 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. 29 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. Subsequent recognition of income occurs only to the extent payment is received. Loans are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. 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. 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 provision 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. 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 allowance is maintained at a level believed by management to be sufficient to absorb 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 identify estimated potential 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. 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 30 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements the properties are charged to expense as incurred. Gains on the sale of other real estate are included in income when title has passed and the sale has met the minimum down payment and other requirements prescribed by generally accepted accounting principles. Intangible Asset -- Intangible asset represents the premium paid in connection with the May 1996 acquisition of three branches from OnBank & Trust Co. The premium of $3,138,000, less accumulated amortization of $744,000 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's policy is to fund retirement plan contributions accrued. Postretirement Benefits -- In addition to pension 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 postretirement benefit obligation at January 1, 1993 over a 20 year transition period. Stock-Based Compensation -- Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No.25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. 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. 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. 31 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Per Share Amounts -- On December 31, 1997 the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share" and specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock. All prior period EPS amounts included in the consolidated financial statements and in the related notes thereto have been restated to conform with the computational provisions of this statement. 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. (3) Securities The amortized cost and fair value of securities available for sale and securities held to maturity at December 31, 1997 and 1996 were as follows:
- -----------------------------------------------------------====-------------------------------------- 1997 1996 - -----------------------------------------------------------====-------------------------------------- Amortized Fair Amortized Fair (dollars in thousands) Cost Value Cost Value - ----------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government & agencies obligations $ 42,187 42,537 33,654 33,784 State and municipal obligations 231 232 Corporate 1,507 1,517 500 501 Other 3,000 2,983 3,000 2,976 Mortgage-backed securities 4,664 4,675 6,648 6,634 - ----------------------------------------------------------------------------------------------------- $ 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 3,729 3,795 1,489 1,519 Corporate 27,717 27,887 27,638 27,723 Mortgage-backed securities 20,205 20,475 25,205 25,316 - ----------------------------------------------------------------------------------------------------- $ 51,676 52,182 54,392 54,618 - -----------------------------------------------------------------------------------------------------
Securities with an amortized cost of $1,508,000 (fair value of $1,501,000) at December 31, 1997 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, 1997 and 1996 were as follows:
- --------------------------------------------------------------====---------------------------------------- 1997 1996 - --------------------------------------------------------------====---------------------------------------- Unrealized Unrealized Unrealized Unrealized (dollars in thousands) Gains Losses Gains Losses - ---------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government & agencies obligations $ 421 71 233 103 State and municipal obligations 1 -- -- -- Corporate 10 -- 1 -- Other -- 17 -- 24 Mortgage-backed securities 12 1 15 29 - ---------------------------------------------------------------------------------------------------------- $ 444 89 249 156 - ---------------------------------------------------------------------------------------------------------- Securities held to maturity: U.S. Government & agencies obligations $ -- -- -- -- State and municipal obligations 66 -- 30 -- Corporate 172 2 122 37 Mortgage-backed securities 348 78 288 177 - ---------------------------------------------------------------------------------------------------------- $ 586 80 440 214 - ----------------------------------------------------------------------------------------------------------
32 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Maturities of securities classified as available for sale and held to maturity were as follows:
- --------------------------------------------------------------------------------------------------- December 31, 1997 - --------------------------------------------------------------------------------------------------- Amortized Fair (dollars in thousands) Cost Value - --------------------------------------------------------------------------------------------------- Securities available for sale: Maturing within one year $ 10,024 9,999 Maturing after one but within five years 32,007 32,368 Maturing after five but within ten years 231 232 Maturing after ten years 4,663 4,670 - --------------------------------------------------------------------------------------------------- 46,925 47,269 Mortgage backed securities 4,664 4,675 - --------------------------------------------------------------------------------------------------- $ 51,589 51,944 - --------------------------------------------------------------------------------------------------- Securities held to maturity: Maturing within one year $ 9,605 9,618 Maturing after one but within five years 19,313 19,489 Maturing after five but within ten years 2,050 2,095 Maturing after ten years 503 505 - --------------------------------------------------------------------------------------------------- 31,471 31,707 Mortgage-backed securities 20,205 20,475 - --------------------------------------------------------------------------------------------------- $ 51,676 52,182 - ---------------------------------------------------------------------------------------------------
Proceeds from sales of available for sale securities were $10,637,000 in 1997, $10,038,000 in 1996, and $5,962,000 in 1995. The gross realized gains and gross realized losses on those sales were $105,000 and $12,000 in 1997, $33,000 and $11,000 in 1996, respectively. In 1995, gross gains realized on sales of securities were $36,000. In November, 1995, the Financial Accounting Standards Board published "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" (Guide). Concurrent with the initial adoption of the Guide but no later than December 31, 1995, the Company was permitted to reassess the appropriateness of the classifications of all securities held at that time and implement reclassifications without calling into question the intent of the Company to hold other debt securities to maturity in the future. Effective December 1, 1995, the Company transferred securities with amortized costs of $8,082,000, having fair values of $8,038,000 from the held to maturity portfolio to the available for sale portfolio. The net unrealized losses were $44,000. The transferred securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of related taxes. As required by the Guide, financial statements prior to adoption were not restated. (4) Loans Receivable Loans at December 31, 1997 and 1996 were as follows:
- ---------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------- Loans secured by first mortgages on real estate: Residential (1-4 Family): Conventional $ 212,680 185,510 VA insured 1,201 1,482 FHA insured 1,089 1,355 Commercial 41,678 46,022 - ---------------------------------------------------------------------------------------------------- 256,648 234,369 - ---------------------------------------------------------------------------------------------------- Other loans: Consumer loans 44,881 46,009 Home equity lines of credit 26,877 25,309 Education loans 1,905 2,208 Commercial business loans 41,920 40,009 - ---------------------------------------------------------------------------------------------------- 115,583 113,535 - ---------------------------------------------------------------------------------------------------- Total Loans 372,231 347,904 Unearned discount and net deferred costs 1,038 559 Allowance for loan losses (3,285) (3,389) - ---------------------------------------------------------------------------------------------------- $ 369,984 345,074 - ----------------------------------------------------------------------------------------------------
33 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements During 1997, 1996 and 1995, the Company sold $1,527,000, $1,852,000, and $2,356,000, respectively, of education loans at par to the Student Loan Marketing Association (SLMA). During 1997, 1996 and 1995, the Company sold $338,000, $367,000 and $1,135,000, respectively, of mortgage loans at par to the State of New York Mortgage Agency (SONYMA). During 1996, the Company sold $4,666,000 in commercial mortgages to a third party and realized a loss of $1,050,000. During 1997, 1996 and 1995, the Company sold $970,000, $1,576,000, and $1,121,000, respectively, of mortgage loans to FHLMC and realized $6,000, $7,000 and $11,000, respectively, of gains on the sales. The Company serviced mortgage loans for others aggregating approximately $11,246,000 and $10,857,000 at December 31, 1997 and 1996. Transactions in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------- Years ended December 31, - -------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Balance at January 1 $ 3,389 3,380 3,264 Provision for loan losses 1,520 1,334 917 Charge-offs (1,808) (1,406) (940) Recoveries 184 81 139 - -------------------------------------------------------------------------------- Balance at December 31 $ 3,285 3,389 3,380 - --------------------------------------------------------------------------------
Impaired loans were $2,632,000 and $1,751,000 at December 31, 1997 and 1996, respectively. At December 31, 1997, impaired loans included $202,000 of loans for which the related allowance for loan losses was $125,000 and $2,430,000 of impaired loans with no related allowance for loan loss. At December 31, 1996, impaired loans included $1,233,000 of loans for which the related allowance for loan losses was $824,000 and $518,000 of impaired loans with no related allowance for loan losses. The impairment loss at December 31, 1997 and 1996 was based on the collateral value method. The average recorded investment in impaired loans was $2,256,000, $2,416,000 and $1,700,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The effect on interest income for impaired loans was not material to the accompanying consolidated financial statements for the years ended December 31, 1997, 1996 and 1995. Loans on nonaccrual status amounted to $5,902,000 at December 31, 1997, and $3,288,000 at December 31, 1996. There were no restructured loans at December 31, 1997 or 1996. The effect of nonaccrual loans on interest income for the years ended December 31, 1997, 1996 and 1995 is not material to the accompanying consolidated financial statements. Other real estate owned amounted to $565,000 at December 31, 1997 and $618,000 at December 31, 1996, and is included in other assets in the accompanying consolidated balance sheets. (5) Premises and Equipment A summary of premises and equipment follows:
- ------------------------------------------------------------------------------------------------------------- December 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------- Accumulated Accumulated Depreciation Depreciation (dollars in thousands) Cost & Amortization Net Cost & Amortization Net - ------------------------------------------------------------------------------------------------------------- Land $ 1,008 -- 1,008 1,008 -- 1,008 Bank premises 8,108 2,350 5,758 7,664 2,624 5,040 Furniture, fixtures & equipment 4,930 3,526 1,404 4,434 3,368 1,066 - ------------------------------------------------------------------------------------------------------------- Total $ 14,046 5,876 8,170 13,106 5,992 7,114 - -------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense amounted to $673,000, $598,000, and $654,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 34 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (6) Savings and Time Deposits A summary of savings and time deposits at December 31, 1997 and 1996 follows:
- ----------------------------------------------------====------------------------ 1997 1996 - ----------------------------------------------------====------------------------ (dollars in thousands) Amount Amount - -------------------------------------------------------------------------------- Savings accounts $ 105,132 121,737 Time deposits 201,056 187,360 Money market accounts 41,033 37,225 Advance payments by borrowers for property taxes and insurance 3,446 3,131 Interest checking 38,781 35,805 - -------------------------------------------------------------------------------- $ 389,448 385,288 - --------------------------------------------------------------------------------
Contractual maturities of time deposits at December 31, 1997 and 1996 were as follows:
- --------------------------------------====-------------------------------------- 1997 1996 - --------------------------------------====-------------------------------------- (dollars in thousands) Amount % Amount % - -------------------------------------------------------------------------------- Under 12 months $ 146,405 72.8 147,054 78.5 12 months to 24 months 39,531 19.7 26,516 14.2 24 months to 36 months 5,259 2.6 7,583 4.0 36 months to 48 months 4,557 2.3 4,152 2.2 48 months to 60 months 5,304 2.6 2,039 1.1 Thereafter -- -- 16 -- - -------------------------------------------------------------------------------- $ 201,056 100.0% 187,360 100.0% - --------------------------------------------------------------------------------
Time deposits issued in amounts of $100,000 or more were approximately $41,000,000 and $18,000,000 at December 31, 1997 and 1996, respectively. Interest expense by depositor account type for the years ended December 31, 1997, 1996 and 1995 was as follows:
- ----------------------------------------------------====------------------------ (dollars in thousands) 1997 1996 1995 - ----------------------------------------------------====------------------------ Savings accounts $ 2,852 3,286 3,361 Time deposits 10,591 9,852 9,022 Money market accounts 1,446 1,166 954 Advance payments by borrowers for property taxes & insurance 59 61 85 Retail checking 509 394 392 - -------------------------------------------------------------------------------- $ 15,457 14,759 13,814 - --------------------------------------------------------------------------------
Interest expense on time deposits of $100,000 or more amounted to $2,272,000, $999,000, and $818,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (7) Borrowings Borrowings consisted of the following at December 31, 1997 and 1996:
- -----------------------------------------------------------====----------------- (dollars in thousands) 1997 1996 - -----------------------------------------------------------====----------------- Federal Home Loan Bank Line of Credit $ 13,400 11,600 Federal Home Loan Bank Term Advances 36,477 13,491 Employee Stock Ownership Plan Notes 287 445 - -------------------------------------------------------------------------------- $ 50,164 25,536 - --------------------------------------------------------------------------------
Information related to the Federal Home Loan Bank Line of Credit at December 31, 1997 and 1996 were as follows:
- ------------------------------------------------------------====---------------- (dollars in thousands) 1997 1996 - ------------------------------------------------------------====---------------- Outstanding balance at end of year $ 13,400 11,600 Average interest rate 6.13% 7.13 Maximum outstanding at any month end $ 23,300 15,100 Average amount outstanding during year $ 10,132 6,683 Average interest rate during year 5.78% 5.50 - --------------------------------------------------------------------------------
35 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Line of Credit and Term Advances The Company maintains a $26,600,000 overnight line of credit with the Federal Home Loan Bank of New York (FHLBNY). 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 $27,000,000 in 1998, $9,000,000 in 1999, and $477,000 in 2014 at interest rates ranging from 5.17% to 7.47%. Under the terms of a blanket collateral agreement with the Federal Home Loan Bank of New York (FHLBNY), these outstanding balances are collateralized by certain qualifying assets not otherwise pledged (primarily first mortgage loans). Employee Stock Ownership Plan (ESOP) Notes In 1988, the Company's ESOP Plan borrowed $1,147,000 from a third party lender (note 16) to acquire, in the open market, common stock of the Company. The note is payable in annual principal payments of $115,000 plus interest at 83% of the prime rate through 1998. In 1994, the Company's ESOP Plan borrowed $302,000 from a third party lender to acquire additional common stock of the Company. The note is payable in annual principal payments of $43,000 plus interest at the Federal Funds Rate plus 250 basis points through 2001. The notes are guaranteed by the Company and are secured by the unallocated shares of the Company's stock held by the ESOP and a $500,000 U.S. Treasury Note owned by Cayuga with an amortized cost of $501,000 (fair value of $498,000) at December 31, 1997. Payment of the notes is derived from the Company's contributions to the plan. Because the Company has committed to make future contributions to the ESOP sufficient to meet the debt service requirements of the promissory notes, the outstanding principal balance of the notes are included in borrowings, and shareholders' equity outstanding has been reduced by the same amount in the accompanying financial statements. (8) Income Taxes Total income taxes for the years ended December 31, 1997, 1996 and 1995 were allocated as follows:
- ------------------------------------------------------====---------------------- (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------====---------------------- Income before income taxes $ 2,994 2,447 2,704 Change in Shareholders' Equity, for unrealized gain(loss) on securities 103 (76) 332 - -------------------------------------------------------------------------------- $ 3,097 2,371 3,036 - --------------------------------------------------------------------------------
For the years ended December 31, 1997, 1996 and 1995, income tax expense (benefit) attributable to income before income taxes consisted of:
- -------------------------------------------------====--------------------------- (dollars in thousands) 1997 1996 1995 - -------------------------------------------------====--------------------------- Current: State $ 389 578 647 Federal 2,324 1,934 2,468 - -------------------------------------------------------------------------------- 2,713 2,512 3,115 - -------------------------------------------------------------------------------- Deferred: State 59 (16) (93) Federal 222 (49) (318) - -------------------------------------------------------------------------------- 281 (65) (411) - -------------------------------------------------------------------------------- $ 2,994 2,447 2,704 - --------------------------------------------------------------------------------
36 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 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:
- -----------------------------------------------====----------------------------- (dollars in thousands) 1997 1996 1995 - -----------------------------------------------====----------------------------- Tax expense at statutory rate $ 2,683 2,117 2,331 State taxes, net of Federal benefit 296 371 366 Other 15 (41) 7 - -------------------------------------------------------------------------------- Actual income tax expense $ 2,994 2,447 2,704 - --------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 were as follows:
- -----------------------------------------------------------====----------------- (dollars in thousands) 1997 1996 - -----------------------------------------------------------====----------------- Deferred tax assets: Intangible assets $ 158 62 Financial statement allowance for loan losses 1,264 1,354 Postretirement benefits other than pension 147 120 Other 232 180 - -------------------------------------------------------------------------------- Total gross deferred tax assets $ 1,801 1,716 - -------------------------------------------------------------------------------- Deferred tax liabilities: Bond discount $ 116 112 Other 73 41 Net unrealized gain on securities available for sale 142 39 Undistributed earnings of Subsidiary 340 -- Tax loan loss reserve in excess of base year reserve 214 222 - -------------------------------------------------------------------------------- Total gross deferred liabilities $ 885 414 - -------------------------------------------------------------------------------- Net deferred tax asset $ 916 1,302 - --------------------------------------------------------------------------------
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, 1997 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. (9) Shareholders' Equity Series A Preferred Stock -- Dividends are cumulative from the date of issuance and are payable quarterly at prime plus 1%, not to exceed 12% or fall below 8% (9.50% at December 31, 1997). The preferred stock is redeemable at the Company's sole discretion for $100 per share. During 1997 and 1996, the Company redeemed 958 and 398 shares, respectively, of the Series A preferred stock. Series B Preferred Stock -- In connection with the acquisition of Homestead, the Company issued 21,700 shares of floating-rate non-cumulative preferred stock. Dividends are payable quarterly at prime, not to exceed 10.5% or fall below 7.5% (8.50% at December 31, 1997). The preferred stock is redeemable at the Company's sole discretion at $100 per share. During 1997 and 1996, the Company redeemed 450 and 101 shares, respectively, of the Series B preferred stock. 37 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The Company's ability to pay dividends is primarily dependent upon the ability of its subsidiary banks to pay dividends to the Parent Company. The payment of dividends by Cayuga and Homestead is subject to being in compliance with minimum regulatory capital requirements. (10) Regulatory Capital Matters The Company's subsidiary banks 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, 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 the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) categorized Cayuga and Homestead, respectively, as well capitalized, under the regulatory framework for prompt corrective actions. To be categorized well capitalized, 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 institution's category. The Company's actual capital amounts and ratios are presented in the following table:
As of December 31, 1997: - ------------------------------------------------------------------------------------------------------------------------ To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------ Total Capital (to Risk Weighted Assets): - ------------------------------------------------------------------------------------------------------------------------ Consolidated $ 38,520 11.75% 26,230 >|=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 $ 35,235 10.75% 13,115 >|=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 $ 35,235 7.20% 26,933 >|=5.5 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 - ------------------------------------------------------------------------------------------------------------------------ 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 -- - ------------------------------------------------------------------------------------------------------------------------
N/A- Not Applicable 38 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------- As of December 31, 1996: - ---------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets): - ---------------------------------------------------------------------------------------------------------------------------- Consolidated $ 34,365 11.23% 24,489 -- N/A -- Cayuga 28,144 11.47 19,634 >|=8.0 24,542 >|=10.0 Homestead 6,221 10.25 4,855 >|=8.0 6,069 >|=10.0 Tier 1 Capital (to Risk Weighted Assets): - ---------------------------------------------------------------------------------------------------------------------------- Consolidated $ 31,068 10.15% 12,245 -- N/A -- Cayuga 25,075 10.22 9,817 >|=4.0 14,725 >|=6.0 Homestead 5,993 9.87 2,428 >|=4.0 3,641 >|=6.0 Tier 1 Capital (to Average Assets): - ---------------------------------------------------------------------------------------------------------------------------- Consolidated $ 31,068 6.62% 18,765 -- N/A -- Cayuga 25,075 6.94 14,453 >|=4.0 18,067 >|=5.0 Homestead 5,993 5.56 4,312 >|=4.0 5,390 >|=5.0 Tangible Capital - ---------------------------------------------------------------------------------------------------------------------------- Consolidated N/A -- N/A -- N/A -- Cayuga N/A -- N/A -- N/A -- Homestead $ 5,993 5.56% 1,617 >|=1.5 N/A -- - ----------------------------------------------------------------------------------------------------------------------------
N/A- Not Applicable (11) Earnings Per Share Calculation of Basic Earnings Per Share (Basic EPS) and Diluted Earnings Per Share (Diluted EPS) were as follows:
- ---------------------------------------------------------------------------------------------- For Year Ended December 31, 1997 - ---------------------------------------------------------------------------------------------- Average (dollars in thousands) Income Shares Amounts - ---------------------------------------------------------------------------------------------- Basic EPS Net income $ 4,897 Less: Preferred stock dividends (441) - ---------------------------------------------------------------------------------------------- Income available to common shareholders $ 4,456 2,355,285 1.89 Effect of Dilutive Securities Stock Options 65,101 - ---------------------------------------------------------------------------------------------- Diluted EPS Income available to common shareholders plus assumed conversions $ 4,456 2,420,386 1.85 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- For Year Ended December 31, 1996 - ---------------------------------------------------------------------------------------------- Average (dollars in thousands) Income Shares Amounts - ---------------------------------------------------------------------------------------------- Basic EPS Net income $ 3,779 Less: Preferred stock dividends (451) - ---------------------------------------------------------------------------------------------- Income available to common shareholders $ 3,328 2,324,847 1.43 Effect of Dilutive Securities Stock Options 28,627 - ---------------------------------------------------------------------------------------------- Diluted EPS Income available to common shareholders plus assumed conversions $ 3,328 2,353,474 1.41 - ----------------------------------------------------------------------------------------------
39 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------- For Year Ended December 31, 1995 - ---------------------------------------------------------------------------------------------- Average (dollars in thousands) Income Shares Amounts - ---------------------------------------------------------------------------------------------- Basic EPS Net income $ 4,151 Less: Preferred stock dividends (469) - ---------------------------------------------------------------------------------------------- Income available to common shareholders $ 3,682 2,303,425 1.60 Effect of Dilutive Securities Stock Options 16,438 - ---------------------------------------------------------------------------------------------- Diluted EPS Income available to common shareholders plus assumed conversions $ 3,682 2,319,863 1.59 - ----------------------------------------------------------------------------------------------
(12) Retirement Plans The Company's pension 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 non-contributory 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, 1997, 1996 and 1995 was $246,000, $193,000, and $261,000, 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. The following table presents the plan's funded status reconciled with amounts recognized in the Company's Consolidated Balance Sheet at December 31, 1997, 1996 and 1995:
- ------------------------------------------------------------------------====------------------------------ (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------====------------------------------ Accumulated postretirement benefit obligation: Retirees $ (741) (673) (711) Active plan participants (134) (139) (119) - ---------------------------------------------------------------------------------------------------------- (875) (812) (830) Plan assets at fair value -- -- -- - ---------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets (875) (812) (830) Unrecognized transition obligation 647 690 734 Unrecognized net gain (112) (149) (106) - ---------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost included in other liabilities $ (340) (271) (202) - ----------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the following components:
- ------------------------------------------------------------------------====------------------------------ (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------====------------------------------ Service cost $ 13 16 8 Interest cost 62 57 60 Amortization of transition obligation 41 40 37 - ---------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 116 113 105 - ----------------------------------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9.5% in 1997, decreasing 0.5% in each year until attaining the ultimate level of 5.0% per year. A 1% increase in the trend rate for all future years does not have a material effect on the obligation. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% in 1997 and 7.5% in 1996. 40 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (14) Stock Option Plan The Company's stock option plans include the 1996 Stock Option Plan (1996 Plan) and the 1988 Stock Option Plan (1988 Plan). The 1996 Plan provides for the award of incentive stock options or nonstatutory stock options to key employees of the Company. Awards may be made under the Plan until May 2001. During 1995, an additional 21,600 shares were authorized for issuance under the 1988 Plan. Shares issued under these plans may be authorized but unissued shares or treasury shares. Options are granted at prices equal to the fair market value of the common stock on the date of grant. Options granted under the 1996 Plan are exercisable in full two years after the date of grant and expire not later than seven years after the date of grant. Options under the 1988 Plan are fully vested and expire not later than ten years after the date of grant. A total of 173,600 shares of common stock were reserved for issuance under the above plans at December 31, 1997. Options outstanding at December 31, 1997 were at prices ranging from $8.80 to $17.20 per share. The following is a summary of the changes in options outstanding:
- -----------------------------------------------------====------------------------------------------------------------------ 1997 1996 1995 - -----------------------------------------------------====------------------------------------------------------------------ Weighted Weighted Weighted # Average Price # Average Price # Average Price - --------------------------------------------------------------------------------------------------------------------------- Options outstanding, January 1 122,450 $12.62 96,000 10.76 42,800 7.51 Granted 26,900 17.20 39,900 15.35 57,700 12.68 Exercised (8,606) 11.77 (9,850) 5.59 (3,000) 4.50 Expired (6,800) 16.57 (3,600) 12.68 (1,500) 4.50 - --------------------------------------------------------------------------------------------------------------------------- Options outstanding, December 31 133,944 13.39 122,450 12.62 96,000 10.76 - --------------------------------------------------------------------------------------------------------------------------- Options exercisable, December 31 73,944 11.23 86,150 11.35 96,000 10.76 - --------------------------------------------------------------------------------------------------------------------------- Shares available for future grants 173,600 -- 190,100 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------
The following summarizes outstanding and exercisable options at December 31, 1997:
- ----------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------- Range of Weighted Average Weighted Weighted Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------------------- $ 8.80 - 8.80 27,500 6.6 years $8.80 27,500 $ 8.80 $12.68 - 12.68 46,444 7.6 years 12.68 46,444 12.68 $15.35 - 17.20 60,000 5.7 years 16.04 -- -- - ----------------------------------------------------------------------------------------------------------------------- 133,944 73,944 - -----------------------------------------------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its stock option plans, and, accordingly no compensation cost has been recognized for its stock options in the accompanying consolidated financial statements. Had compensation cost been determined based on the fair value at the grant dates for awards under the plans, consistent with the method of the Financial Accounting Standards Board's Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- -------------------------------------------------------====---------------------------- (dollars in thousands) 1997 1996 1995 - -------------------------------------------------------====---------------------------- Net Income: As reported $ 4,897 3,779 4,151 Pro forma $ 4,836 3,738 3,949 - --------------------------------------------------------------------------------------- Basic Earnings per share: As reported $ 1.89 1.43 1.60 Pro forma $ 1.85 1.41 1.51 - ---------------------------------------------------------------------------------------
41 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The per share weighted average fair value of stock options granted during 1997, 1996 and 1995 of $5.43, $5.83 and $5.63, respectively, on the date of grant determined using the Black-Scholes option-pricing model with the following weighted average assumptions:
- -----------------------------------------------====---------------------------- 1997 1996 1995 - -----------------------------------------------====---------------------------- Expected dividend yield 1.6% 2.0 2.0 Risk free interest rate 6.2% 6.6 6.4 Expected life 5 years 5 years 7 years Volatility 27.5% 39.9 42.8 - -------------------------------------------------------------------------------
(15) Leases The Company leases certain property and equipment under operating lease arrangements. Rent expense under these arrangements amounted to $75,000 in 1997, $117,000 in 1996 and $148,000 in 1995. Real estate taxes, insurance, maintenance and other operating expenses associated with leased property are generally paid by the Company. (16) Employee Stock Ownership Plan The Company has a non-contributory 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 (see note 8) and utilized a Company contribution of $70,000 to acquire 188,260 shares of the Company's common stock. At December 31, 1997 and 1996, 171,286 and 154,294 of these shares have been allocated to employees with the remaining shares at December 31, 1997 held in trust. Interest incurred by the ESOP on debt applicable to such shares was $16,000, $24,000 and $34,000 in 1997, 1996 and 1995, respectively. The Company contributed and expensed $104,000, $105,000 and $109,000 during 1997, 1996 and 1995, respectively, with respect to such shares. 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 $15,000, $21,000 and $26,000 in 1997, 1996 and 1995, respectively. ESOP compensation expense applicable to shares purchased subsequent to 1992 was $111,000, $74,000, and $58,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, there were 14,652 of these ESOP shares allocated and 19,536 shares unreleased. The fair value at December 31, 1997 of unreleased ESOP shares purchased subsequent to 1992 was $503,000. (17) 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 $10,994,000 and $7,722,000 at December 31, 1997 and 1996, respectively. Commitments under unused lines of credit were approximately $44,008,000 and $42,743,000 at December 31, 1997 and 1996, respectively. The majority of these commitments were at variable rates of interest. 42 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Primarily all of the Company's loans are to borrowers in Cayuga and Oneida, New York, counties and 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. In the normal course of business, there are various outstanding legal proceedings. In the opinion of management based on review with counsel, the aggregate amount involved in such proceedings is not material to the financial condition, liquidity or results of operations of the Company. (18) Loans to Directors and Officers A summary of the changes in outstanding loans to members of the board of directors and officers of the Company, or their interests, follows:
Year Ended December 31, - -----------------------------------------------------====----------------------- (dollars in thousands) 1997 1996 - -----------------------------------------------------====----------------------- Balance of loans outstanding at beginning of year $ 5,216 5,638 New loans and increase in existing loans 1,089 592 Loan principal repayments (1,971) (1,014) - -------------------------------------------------------------------------------- Balance at end of year $ 4,334 5,216 - --------------------------------------------------------------------------------
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. (19) 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. Loans Receivable 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 analyses using interest rates currently being offered for loans with similar terms and credit quality. Delinquent loans are valued using the methods noted above. While credit risk is a component of the discount rate used to value loans, delinquent loans are presumed to possess additional risk. Therefore, the calculated fair value of loans delinquent more than thirty days are reduced by an allocated amount of the general allowance for loan losses. FHLB Stock The carrying value of this instrument, which is redeemable at par, approximates fair value. 43 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Deposits The fair values disclosed for demand deposits, mortgage escrow accounts, 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 certificates of deposit is estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Borrowings The fair value of the term advances from the Federal Home Loan Bank is estimated using discount 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 counter party'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, 1997 and 1996. The estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996 are as follows:
- -----------------------------------------------------------====---------------------------------------- 1997 1996 - -----------------------------------------------------------====---------------------------------------- Carrying Fair Carrying Fair (dollars in thousands) Amount Value(1) Amount Value(1) - ------------------------------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 13,483 13,483 10,675 10,675 Securities available for sale 51,944 51,944 43,895 43,895 Securities held to maturity 51,676 52,182 54,392 54,618 Loans Receivable: Adjustable rate residential 77,698 81,067 47,597 47,556 Fixed-rate residential 137,557 142,565 140,590 143,086 Commercial mortgages 41,678 45,014 46,022 46,143 Commercial loans 41,920 43,786 40,009 40,012 Consumer loans and other 74,416 76,712 74,245 74,066 Allowance for loan losses 3,285 3,285 3,389 3,389 FHLB stock 3,629 3,629 2,279 2,279 - ------------------------------------------------------------------------------------------------------- Financial Liabilities: Deposits: Demand accounts, savings and money market accounts $ 212,509 212,509 219,731 219,731 Certificates of Deposit 201,056 202,134 187,360 187,446 Advance payments by borrowers for insurance and taxes 3,446 3,446 3,131 3,131 Borrowings 50,164 52,130 25,536 25,536 - -------------------------------------------------------------------------------------------------------
(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 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (20) Parent Company Only Financial Statements The following presents the financial position of the parent company as of December 31, 1997 and 1996 and the results of its operations and cash flows for the years ended December 31, 1997, 1996 and 1995: CONDENSED BALANCED SHEETS
- -------------------------------------------------------------------------------- December 31, - ------------------------------------------------------====---------------------- (dollars in thousands) 1997 1996 - ------------------------------------------------------====---------------------- Assets Cash and Due from Banks $ 1,277 858 Other assets 117 190 Investment in subsidiaries 37,843 33,983 - -------------------------------------------------------------------------------- $ 39,237 35,031 - -------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Other liabilities $ 36 14 Borrowings 172 215 Shareholders' Equity 39,029 34,802 - -------------------------------------------------------------------------------- $ 39,237 35,031 - --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------- Year ended December 31, - ----------------------------------------------------====------------------------ (dollars in thousands) 1997 1996 1995 - ----------------------------------------------------====------------------------ Income from subsidiaries $ 594 632 679 Dividends from subsidiaries 1,250 1,200 1,250 Equity in undistributed income of subsidiaries 3,703 2,600 2,940 Operating expenses (635) (632) (692) Interest expense (15) (21) (26) - -------------------------------------------------------------------------------- Net Income $ 4,897 3,779 4,151 - --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------- Year ended December 31, - ----------------------------------------------------====------------------------ (dollars in thousands) 1997 1996 1995 - ----------------------------------------------------====------------------------ Operating activities: Net income $ 4,897 3,779 4,151 Adjustments to reconcile net income to net cash provided(used) by operating activities: Equity in undistributed income of subsidiaries (3,703) (2,600) (2,940) Amortization -- -- 14 (Increase) decrease in other assets 73 (48) (91) Increase (decrease) in other liabilities and due to subsidiaries 22 (162) 62 - -------------------------------------------------------------------------------- Net cash provided by operating activities 1,289 969 1,196 - -------------------------------------------------------------------------------- Financing activities: Net proceeds from issuance of common and preferred stock 366 338 134 Director Stock Plan distributions 15 16 16 Employee Stock Ownership Plan distributions 221 185 169 Cash dividends paid to shareholders (1,289) (1,198) (1,158) Redemption of Preferred stock (140) (50) (73) Decrease in borrowings (43) (86) -- - -------------------------------------------------------------------------------- Net cash used by financing activities (870) (795) (914) - -------------------------------------------------------------------------------- Net increase in cash and cash equivalents 419 174 282 Cash and cash equivalents at beginning of year 858 684 402 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,277 858 684 - --------------------------------------------------------------------------------
45 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Quarterly Summarized Financial Information (Unaudited)
- ----------------------------------------------------------------====---------------------------------------------------------------- (dollars in thousands) 1997 1996 - ----------------------------------------------------------------====---------------------------------------------------------------- By Quarter 1 2 3 4 Year 1 2 3 4 Year - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $9,112 9,323 9,476 9,611 37,522 8,518 8,986 9,136 9,123 35,763 Interest expense 4,046 4,218 4,406 4,547 17,217 4,075 4,111 4,066 4,100 16,352 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 5,066 5,105 5,070 5,064 20,305 4,443 4,875 5,070 5,023 19,411 Provision for loan losses 373 372 373 402 1,520 296 446 227 365 1,334 - ------------------------------------------------------------------------------------------------------------------------------------ 4,693 4,733 4,697 4,662 18,785 4,147 4,429 4,843 4,658 18,077 Non-interest income 724 849 845 809 3,227 587 691 (309)A 766 1,735 Non-interest expense 3,429 3,491 3,594 3,607 14,121 3,102 3,232 4,051B 3,201 13,586 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 1,988 2,091 1,948 1,864 7,891 1,632 1,888 483 2,223 6,226 Income taxes 759 793 724 718 2,994 640 737 193 877 2,447 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $1,229 1,298 1,224 1,146 4,897 992 1,151 290 1,346 3,779 Preferred stock dividend 108 111 111 111 441 118 111 111 111 451 - ------------------------------------------------------------------------------------------------------------------------------------ Net income attributable to common shares $1,121 1,187 1,113 1,035 4,456 874 1,040 179 1,235 3,328 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common share: Basic $ .48 .50 .47 .44 1.89 .38 .45 .08 .52 1.43 Diluted $ .47 .49 .46 .43 1.85 .37 .44 .08 .52 1.41 - ------------------------------------------------------------------------------------------------------------------------------------
(A) Includes $1.0 million loss on sale of commercial mortgage loans. (B) Includes $556,000 SAIF Assessment. Common Stock Price and Dividend Information (Unaudited)
- -----------------------------------------------====--------------------------------------------------------------------------------- 1997 1997 1996 - -----------------------------------------------====--------------------------------------------------------------------------------- By Quarter 1 2 3 4 Year 1 2 3 4 Year - ------------------------------------------------------------------------------------------------------------------------------------ Stock price High 21 1/2 21 3/4 27 1/2 28 1/4 28 1/4 15 1/4 16 1/2 16 1/4 17 17 Low 16 1/4 20 20 1/2 24 1/4 16 1/4 13 14 1/2 14 3/4 16 13 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends .08 .08 .10 .10 .36 .08 .08 .08 .08 .32 - ------------------------------------------------------------------------------------------------------------------------------------
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 inter-dealer transaction, without retail markups, markdowns, or commissions. The number of registered shareholders of Iroquois Bancorp, Inc. stock as of December 31, 1997, was 1,365. 46 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Directors and Officers/Corporate Data Iroquois Bancorp, Inc. Directors: Joseph P. Ganey Chairman Brian D. Baird Attorney, Kavinoky & Cook John Bisgrove, Jr. President & Owner of Sunrise Farms Richard D. Callahan President & Chief Executive Officer Peter J. Emerson Director, Fred L. Emerson Foundation, Inc. Dr. Arthur A. Karpinski Retired Periodontist Henry D. Morehouse Owner, Morehouse Appliances Edward D. Peterson Retired Manager, Human Resources, General Electric Aerospace Operations Dept.; Management Consultant Lewis E. Springer, II President, Creative Electric, Inc; Chairman, Andersen Laboratories, Inc. Officers: Richard D. Callahan President & Chief Executive Officer Marianne R. O'Connor CPA, Treasurer & Chief Financial Officer Melissa A. Komanecky Vice President-Human Resources Richard J. Notebaert, Jr. Vice President President & Chief Executive Officer, The Homestead Savings (FA) Henry M. O'Reilly Director of Internal Audit W. Anthony Shay, Jr. Vice President-Operations Cayuga Bank Directors: Joseph P. Ganey, Chairman John Bisgrove, Jr. Richard D. Callahan Carol I. Contiguglia Peter J. Emerson Dr. Arthur A. Karpinski Martha S. MacKay Lawrence H. Poole, Ph.D. Frederick N. Richardson Lewis E. Springer, II Donald E. Staples Offices: Main Office 115 Genesee Street Auburn, NY 13021 (315) 252-9521 Grant Avenue Office Auburn, NY 13021 Loop Road Office Auburn, NY 13021 West Genesee Street Office 351 West Genesee Street Auburn, NY 13021 Weedsport Office 9015 North Seneca Street Weedsport, NY 13166 Moravia Office 31-33 Main Street Moravia, NY 13118 Lacona Office 1897 Harwood Drive Lacona, NY 13083 The Homestead Savings (FA) Directors: Annette M. Dimon David A. Engelbert Richard R. Griffith William E. Jakes Henry D. Morehouse Richard J. Notebaert, Jr. Edward D. Peterson Offices: Main Office 283 Genesee Street Utica, NY 13501 (315) 797-1350 South Utica Office 1930 Genesee Street Utica, NY 13502 Rome Office Freedom Mall Rome, NY 13440 Waterville Office 129 Main Street Waterville, NY 13480 Clinton Office Homestead Plaza Clinton, NY 13323 Old Forge-Loan Center Green Sleeves Common Professional Building Old Forge, NY 13420 Corporate Data Corporate Offices Iroquois Bancorp, Inc. 115 Genesee Street Auburn, New York 13021 (315) 252-9521 Annual Meeting The annual meeting of Iroquois Bancorp, Inc. will be held at 10:00 a.m., Thursday, April 30, 1998, at the Holiday Inn, 75 North Street, Auburn, New York 13021. Request for Financial Information Shareholders and others seeking information about Iroquois Bancorp, Inc., including copies of the annual and quarterly reports, as well as Form 10-K, as filed with the Securities Exchange Commission, are invited to contact: Marianne R. O'Connor Chief Financial Officer (315) 252-9521 Transfer Agent & Registrar: American Stock Transfer & Trust Co. 40 Wall Street New York, NY 10005 (800) 937-5449 Counsel Harris Beach & Wilcox, LLP The Granite Building 130 East Main Street Rochester, NY 14604 Independent Auditors KPMG Peat Marwick LLP 113 South Salina Street Syracuse, NY 13202 Market Makers (as of year-end) F. J. Morrissey & Co., Inc. Sandler O'Neill & Partners Automatic Dividend Reinvestment Plan A convenient, no-cost means for Iroquois Bancorp, Inc. shareholders to increase their holdings is available through the Automatic Dividend Reinvestment Plan. This plan is administered by American Stock Transfer & Trust Co. acting as your Agent. Quarterly dividends and optional additional cash investments may be used to purchase additional shares. For further information contact: American Stock Transfer & Trust Co. 40 Wall Street New York, NY 10005 (800) 937-5449 47 IROQUOIS BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes Iroquois Bancorp, Inc. 115 Genesee Street, Auburn, New York 13021 EX-21 3 LIST OF SUBSIDIARIES 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. EX-23 4 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23 ---------- 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 16, 1998, relating to the consolidated balance sheets of Iroquois Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report has been incorporated by reference in the December 31, 1997 annual report on Form 10-K of 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 plan benefits, with fund information of the Iroquois Bancorp, Inc. 401(k) Savings Plan as of December 31, 1997 and 1996, and the related statements of changes in net assets available for plan benefits, with fund information for the years ended December 31, 1997 and 1996, and related schedules as of and for the year ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Iroquois Bancorp, Inc. /s/ KPMG Peat Marwick LLP - ----------------------------- KPMG Peat Marwick LLP Syracuse, New York March 19, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE YEAR 1997
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1997 10-K REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 12778 705 0 0 51944 51676 52182 373269 3285 509778 417011 50164 3574 0 0 49 2389 36591 509778 30579 6606 337 37522 15457 17217 20305 1520 99 14121 7891 7891 0 0 4897 1.89 1.85 4.37 5902 272 0 0 3389 1808 184 3285 3285 0 0
EX-27.2 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER 30, 1997 10-Q REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 9-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 SEP-30-1997 SEP-30-1996 14,763 11,567 2,700 400 0 0 0 0 48,525 42,395 54,105 53,217 0 0 362,706 345,975 (3,030) (3,165) 498,959 473,684 414,887 411,125 43,225 26,097 2,894 3,077 0 0 0 0 49 50 2,388 2,361 35,516 30,974 498,959 473,684 22,702 22,087 4,957 4,282 252 271 27,911 26,640 11,571 11,006 12,670 12,252 15,241 14,388 1,118 969 89 (1,038) 10,514 10,385 6,027 4,003 0 0 0 0 0 0 3,751 2,433 1.45 .91 1.42 .89 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.3 7 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30, 1997 10-Q REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS 6-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 JAN-01-1997 JAN-01-1996 JUN-30-1997 JUN-30-1996 MAR-01-1997 MAR-31-1996 15067 10326 12216 9217 3000 700 2000 3900 0 0 0 0 0 0 0 0 51059 40640 48050 39503 52670 54029 54065 50796 0 0 0 0 356817 347995 348735 332806 (2938) (3236) (3589) (3389) 496903 470710 481205 451060 428052 412513 422832 372605 29529 22601 20333 43104 2498 2312 2546 2912 0 0 0 0 0 0 0 0 49 50 49 50 2377 2357 2373 2349 34398 30877 33072 30040 496903 470710 481205 451060 14989 14510 7447 7110 3280 2783 1628 1372 166 211 37 36 18435 17504 9112 8518 7597 7230 3701 3535 8264 8186 4046 540 10171 9318 5066 4443 745 742 373 296 37 1 30 2 6920 6334 3429 3102 4079 3520 1988 1632 0 0 0 0 0 0 0 0 0 0 0 0 2527 2143 1229 992 .98 .83 .98 .38 .76 .81 .47 .37 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.4 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS 12-mos DEC-31-1996 DEC-31-1995 DEC-31-1994 JAN-01-1996 JAN-01-1995 JAN-01-1994 DEC-31-1996 DEC-31-1995 DEC-31-1994 10,375 9,290 9,329 0 0 0 300 3,100 1,100 0 0 0 43,895 39,383 21,918 54,392 44,722 60,073 54,618 45,352 58,377 348,463 329,087 319,696 (3,389) (3,380) (3,264) 472,908 437,803 423,977 410,222 369,101 258,876 25,536 35,250 34,778 2,348 1,606 2,213 0 0 0 0 0 0 50 50 51 2,368 2,339 1,164 32,384 29,457 26,895 472,908 437,803 423,977 29,603 28,127 25,993 5,838 5,118 4,194 322 468 452 35,763 33,713 30,639 14,759 13,814 11,557 16,352 15,752 12,521 19,411 17,961 18,118 1,334 917 830 (1,021) 0 (789) 13,586 12,650 13,138 6,226 6,855 5,706 0 0 0 0 0 0 0 0 0 3,779 4,151 3,423 1.43 1.60 1.32 1.41 1.59 1.31 0 0 0 3,288 4,299 3,383 345 1,010 813 0 0 0 0 0 0 3,380 3,264 2,824 1,406 940 513 81 139 123 3,389 3,380 3,264 3,389 3,380 3,264 0 0 0 0 0 0
EX-99 9 IROQUIOS BANCORP, INC. 401(K) SAVINGS PLAN FINAN. IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Financial Statements and Schedules December 31, 1997 and 1996 (With Independent Auditors' Report Thereon) IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Table of Contents ----------------- Page ---- Independent Auditors' Report 1 Financial statements for the years ended December 31, 1997 and 1996: Statements of Net Assets Available for Plan Benefits at December 31, 1997 and 1996, with Fund Information 2-3 Statements of Changes in Net Assets Available for Plan Benefits for the Years Ended December 31, 1997 and 1996, with Fund Information 4-5 Notes to financial statements 6-11 Supplemental schedules as of and for the year ended December 31, 1997: Item 27a Schedule of Assets Held for Investment Purposes - Income Fund 12 Item 27a Schedule of Assets Held for Investment Purposes - Equity Fund 13 Item 27a Schedule of Assets Held for Investment Purposes - Balanced Fund 14 Item 27a Schedule of Assets Held for Investment Purposes - Common Stock Fund 15 Item 27a Schedule of Assets Held for Investment Purposes - Employee Loan Fund 16 Item 27d Schedule of Reportable (5%) Transactions 17 INDEPENDENT AUDITORS' REPORT ---------------------------- The Pension Plan Trustees of Iroquois Bancorp, Inc. 401(k) Savings Plan: We have audited the accompanying statements of net assets available for plan benefits, with Fund information of Iroquois Bancorp, Inc. 401(k) Savings Plan as of December 31, 1997 and 1996, and the related statements of changes in net assets available for plan benefits, with fund information for the years 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 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 financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of Iroquois Bancorp, Inc. 401(k) Savings Plan as of December 31, 1997 and 1996, and the changes in net assets available for plan benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were made 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 fund information in the statements of net assets available for benefits and the statements of changes in net assets available for benefits is presented for purposes of additional analysis rather than to present the net assets available for plan benefits and changes in net assets available for plan benefits of each fund. The supplemental schedules and fund information 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. KPMG PEAT MARWICK LLP Syracuse, New York March 3, 1998 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Statement of Net Assets Available for Plan Benefits, with Fund Information December 31, 1997
Common Employee Income Equity Balanced Stock Loan Assets Fund Fund Fund Fund Fund Total ------ -------- ------ -------- ----- -------- ----- 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 plan benefits $366,404 1,246,365 468,892 2,963,482 186,187 5,231,330 ======= ========= ======= ========= ======= =========
See accompanying notes to financial statements. -2- IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Statement of Net Assets Available for Plan Benefits, with Fund Information December 31, 1996
Common Employee Income Equity Balanced Stock Loan Assets Fund Fund Fund Fund Fund Total ------ -------- ------- -------- --------- -------- ------- Investments, at fair value: Cash $ -- -- 300 -- -- 300 Money market funds 17,863 87,563 55,104 23,428 -- 183,958 U.S. Government securities -- -- 108,836 -- -- 108,836 Corporate bonds 324,457 -- 44,362 -- -- 368,819 Contracts with insurance companies 19,441 -- -- -- -- 19,441 Common stocks -- 841,613 176,856 1,979,140 -- 2,997,609 Preferred stock 10,600 -- -- -- -- 10,600 Employees' loans -- -- -- -- 204,552 204,552 ------- ------- ------- --------- ------- --------- 372,361 929,176 385,458 2,002,568 204,552 3,894,115 ------- ------- ------- --------- ------- --------- Receivables: Accrued interest and dividends 268 2,098 3,431 55 -- 5,852 Net assets available for plan benefits $372,629 931,274 388,889 2,002,623 204,552 3,899,967 ======= ======= ======= ========= ======= =========
See accompanying notes to financial statements. -3- IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Statement of Changes in Net Assets Available for Plan Benefits, with Fund Information Year ended December 31, 1997
Common Employee Income Equity Balanced Stock Loan Fund Fund Fund Fund Fund Total --------- -------- ---------- -------- --------- ------ 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 plan 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 ======= ========= ======= ========= ======= =========
See accompanying notes to financial statements. -4- IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Statement of Changes in Net Assets Available for Plan Benefits, with Fund Information Year ended December 31, 1996
Common Employee Income Equity Balanced Stock Loan Fund Fund Fund Fund Fund Total --------- -------- ---------- ------- ---------- ------- Investment income: Dividends on Iroquois Bancorp, Inc. common stock $ -- -- -- 37,765 -- 37,765 Interest and dividends 2,911 21,144 16,383 271 17,713 58,422 Net appreciation in fair value of investments 23,853 155,362 30,446 459,858 -- 669,519 ------- ------- ------- ------- ------ ------- 26,764 176,506 46,829 497,894 17,713 765,706 ------- ------- ------- ------- ------ ------- Contributions: Employees 50,543 154,145 64,187 57,020 -- 325,895 Employer -- -- -- 126,309 -- 126,309 ------- ------- ------- ------- ------ ------- 50,543 154,145 64,187 183,329 -- 452,204 ------- ------- ------- ------- ------ ------- Total additions 77,307 330,651 111,016 681,223 17,713 1,217,910 ------- ------- ------- ------- ------ --------- Benefits paid to participants 142,677 158,524 40,900 180,414 -- 522,515 Administrative expenses 2,828 11,353 5,543 7,020 -- 26,744 ------- ------- ------- ------- ------ --------- Total deductions 145,505 169,877 46,443 187,434 -- 549,259 ------- ------- ------- ------- ------ --------- Transfers among funds 4,649 33,453 6,847 (2,677) (42,272) -- ------- ------- ------- ------- ------ ------- Net increase(decrease) (63,549) 194,227 71,420 491,112 (24,559) 668,651 Net assets available for plan benefits: Beginning of year 436,178 737,047 317,469 1,511,511 229,111 3,231,316 ------- ------- ------- --------- ------- --------- End of year $372,629 931,274 388,889 2,002,623 204,552 3,899,967 ======= ======= ======= ========= ======= =========
See accompanying notes to financial statements. -5- IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Notes to Financial Statements December 31, 1997 (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, Series B preferred stock of the Company, 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. The Company's contributions to the Plan must be allocated to the common stock fund, the purpose of which is to acquire common stock of the Company. -6- 2 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Notes to Financial Statements (1) Description of the Plan (continued) 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. 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 five 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. -7- 3 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, N.A. is Custodian and Trustee for the Plan. Clover Capital Management, Inc. manages the equity and balanced funds and Marine Midland Bank, N.A. 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. 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. -8- 4 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. December 31, 1997
Number of Shares or Principal Amount ---------- -------------------------------------------------------------------- Common Employee Income Equity Balanced Stock Loan Fund Fund Fund Fund Fund Total -------------------------------------------------------------------- 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 ======= ========= ======= ========= ======= =========
-9- 5 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Notes to Financial Statements (3) Investments (continued) December 31, 1996
Number of Shares or Principal Amount ------------ --------------------------------------------------------------- Common Employee Income Equity Balanced Stock Loan Fund Fund Fund Fund Fund Total --------------------------------------------------------------- Investments at Fair Value as Determined by Quoted Market Price: U.S. Government securities 103,207 -- -- 108,836 -- -- 108,836 Corporate bonds: Marine Midland Collective Trust 16,684 324,457 -- -- -- -- 324,457 Other 45,000 -- -- 44,362 -- -- 44,362 Common stocks: Iroquois Bancorp, Inc. 116,420 -- -- -- 1,979,140 -- 1,979,140 Other 46,106 -- 841,613 176,856 -- -- 1,018,469 Preferred stock 106 10,600 -- -- -- -- 10,600 --------------------------------------------------------------- 335,057 841,613 330,054 1,979,140 -- 3,485,864 Investments valued at cost plus interest earned which approximates fair value: Fixed rate interest contracts (6.64% maturing December 31, 1996) 19,441 19,441 -- -- -- -- 19,441 Investments valued at cost, which approximates fair value: Employee loans -- -- -- -- 204,552 204,552 Cash -- $ -- -- 300 -- -- 300 Money market funds 183,958 17,863 87,563 55,104 23,428 -- 183,958 --------------------------------------------------------------- 17,863 87,563 55,404 23,428 204,552 388,810 $372,361 929,176 385,458 2,002,568 204,552 3,894,115 ===============================================================
-10- 6 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 in value by $1,248,423 and $669,519 during 1997 and 1996, respectively, as follows: Year ended December 31, 1997
Common Employee Income Equity Balanced Stock Loan Fund Fund Fund Fund Fund Total --------- -------- --------- ------- -------- -------- 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 ================================================================= Year ended December 31, 1996 Common Employee Income Equity Balanced Stock Loan Fund Fund Fund Fund Fund Total --------- -------- --------- ------- -------- -------- U.S. Government securities $ -- -- (2,325) -- -- (2,325) Corporate bonds 23,853 -- (635) -- -- 23,218 Common stock -- 155,362 33,406 459,858 -- 648,626 --------------------------------------------------------------- $ 23,853 155,362 30,446 459,858 -- 669,519 ================================================================
-11- Schedule 1 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Item 27a - Schedule of Assets Held for Investment Purposes - Income Fund December 31, 1997
Number of Shares or Par Value Description Cost Fair Value - ------------ ----------- ---- ---------- Corporate Bonds --------------- 16,881 * Marine Midland Collective Trust Managed Guaranteed Investment Contract $296,210 $350,206 ------- ------- Preferred Stock 106 * Iroquois Bancorp, Inc. - Series B 10,600 10,600 ------ ------ $306,810 $360,806 ------- ------- * Party in interest
-12- Schedule 2 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Item 27a - Schedule of Assets Held for Investment Purposes - Equity Fund December 31, 1997 Number of Shares or Par Value Description Cost Fair Value - ------------ ----------- ---- ---------- Money Market Funds ------------------ 53,448 Provident Institutional Funds $ 53,448 $ 53,448 ------- ------- Common Stocks ------------- 3,800 Agrium Inc. 43,029 46,314 450 Arco Chem Co. 21,339 20,925 684 Ascent Entmt Group Inc. 5,863 7,097 750 Avnet Inc. 36,458 49,500 750 BCE Inc. 21,789 24,985 700 California Microwave Inc. 18,638 13,562 1,100 Canadian Natl Ry Co. 26,206 51,975 729 Chateau Cmntgs Inc. 15,951 22,964 3,300 Comcast Corp. Cl A 61,087 104,158 2,000 Comcast UK Cable Partners LTD Cl A 20,000 18,876 1,400 Comsat Corp. Ser 1 31,318 33,950 400 Crown Cork & Seal Inc. 22,295 20,050 500 Dow Jones & Co. Inc. 20,577 26,844 1,400 Echlin Inc. 45,565 50,663 3,000 Frontier Corp. 62,108 72,000 800 Harmon Intl Inds Inc. New 32,248 34,200 400 King World Productions Inc. 13,922 23,100 1,600 Komag Inc. 29,454 23,800 2,000 Kroger Co. 25,993 73,500 1,500 Mapics Inc. 12,691 16,313 750 Marcam Solutions Inc. 4,231 5,437 720 Meditrust 13,349 26,370 3,425 Medpartners Inc. New 57,353 76,634 700 Morton Intl Inc. Ind New 21,890 24,063 800 Occidental Pet. Corp. 20,452 23,450 1,300 Pall Corp. 33,228 26,894 600 Policy Mgmt Sys Corp. 18,291 41,738 1,000 RJR Nabisco Holdings Corp. New 33,362 37,500 900 Storage Tr Rlty Sh Ben Int 18,225 23,682 1,400 Sungard Data Sys Inc. 29,423 43,225 700 Ucar Intl Inc. 26,316 27,957 1,800 Union Tex Pete Holdings Inc. 34,065 37,463 6,500 United Biscuits Group 31,882 23,959 1,200 Wheelabrator Technologies Inc. 18,660 19,276 ------- ------- 927,258 1,172,424 ------- --------- $980,706 $1,225,872 ======== ========== -13- Schedule 3 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Item 27a - Schedule of Assets Held for Investment Purposes - Balanced Fund December 31, 1997
Number of Shares or Par Value Description Cost Fair Value - ------------ ----------- ---- ---------- -- Cash $ 300 $ 300 ---- ------ ------ Money Market Funds ------------------ 38,730 Provident Institutional Funds 38,730 38,730 ------ ------ U.S. Government Securities -------------------------- 10,000 U.S. Treasury Note 9.25% 8/15/98 10,103 10,217 20,000 U.S. Treasury Note 5.50% 4/15/00 19,954 19,919 10,000 U.S. Treasury Note 7.25% 8/15/04 10,483 10,808 15,000 U.S. Treasury Note 7.50% 2/15/05 15,293 16,486 10,000 U.S. Treasury Note 9.375% 2/15/06 10,557 12,295 25,000 U.S. Treasury Note 7.50% 11/15/16 26,109 29,180 15,000 FNMA Med Term Notes 6.48% 2/18/04 14,833 14,915 6,721 GNMA Gtd Pass thru Ctf Pool #212177 6,967 7,061 ------- ------- 114,299 120,881 Corporate Bonds --------------- 10,000 Abbott Labs NT 5.60% 10/01/03 9,323 9,754 15,000 Canandaigua Wine Inc. SR NT 8.75% 12/15/03 14,606 15,113 15,000 Meditrust NT 7.00% 8/15/07 14,854 15,214 15,000 Private Export Fdg Corp Secd NT 6.62% 10/01/05 15,578 15,518 15,000 Tenet Healthcare Corp SR NT 8.00% 1/15/05 15,081 15,263 10,000 Zeneca Wilmington Inc. GTD NT 6.30% 6/15/03 9,650 10,012 ------- ------- 79,092 80,874 Common Stocks ------------- 900 Agrium Inc. 10,191 10,969 195 Ascent Entmt Group Inc. 1,672 2,023 200 Avnet Inc. 9,722 13,200 300 California Microwave Inc. 7,987 5,813 312 Chateau Comntys Inc. 6,602 9,828 700 Comcast Corp. Cl A 13,194 22,094 400 Comsat Corp. Ser 1 8,948 9,700 300 Echlin Inc. 9,380 10,856 700 Frontier Corp. 13,629 16,800 200 Harman Intl Inds Inc. New 8,062 8,550 200 King World Productions Inc. 6,930 11,550 500 Komag Inc. 9,188 7,438 600 Kroger Co. 7,798 22,050 726 Medpartners Inc. New 11,436 16,244 400 Pall Corp. 10,224 8,275 300 RJR Nabisco Hldgs Corp. New 10,009 11,250 300 Storage Tr Rlty Sh Ben Int 6,590 7,894 500 Union Tex Pete Hldgs Inc. 9,461 10,406 2,500 United Biscuits Group 11,307 9,215 ------- ------- 172,330 214,155 ------- ------- $404,751 $454,940 ======== ========
-14- Schedule 4 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Item 27a - Schedule of Assets Held for Investment Purposes - Common Stock Fund December 31, 1997
Number of Shares Description Cost Fair Value - --------- ----------- ---- ---------- Money Market Funds ------------------ 17 * Marine Midland Collective Trust $ 17 $ 17 Short Term Investment Fund Common Stocks ------------- 114,526 * Iroquois Bancorp, Inc. 1,239,950 2,949,044 --------- --------- $1,239,967 $2,949,061 ========== ========== * Party In Interest
-15- Schedule 5 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Item 27a - Schedule of Assets Held for Investment Purposes - Employee Loan Fund December 31, 1997 Par Value Description Cost Fair Value - ------- ----------- ---- ---------- Employees' Loans ---------------- 186,187 Loans to Employees at various rates $186,187 $186,187 ======== ======== ranging from 6.0% to 9.0% with maturities ranging from 2 years to 5 years -16-
Schedule 6 IROQUOIS BANCORP, INC. 401(K) SAVINGS PLAN Item 27d - Schedule of Reportable (5%) Transactions Year ended December 31, 1997 Value of Asset on Purchase Selling Expenses Transaction Date Party/Description Price Price Incurred Cost Date Net Gain - ---- ----------------- -------- ------- -------- ---- ----------- -------- Various Marine Midland Bank Collective Trust Short Term Investment Fund Directed 592,685 -- -- 592,685 592,685 -- Various Marine Midland Bank Collective Trust Short Term Investment Fund Directed -- 633,963 -- 633,963 633,963 -- Various Iroquois Bancorp, Inc. Common Stock 288,452 -- -- 288,452 288,452 -- Various Iroquois Bancorp, Inc. Common Stock -- 236,490 -- 112,718 112,718 123,772 Various Marine Midland Bank Provident Institutional Funds 771,113 -- -- 771,113 771,113 -- Various Marine Midland Bank Provident Institutional Funds -- 821,601 -- 821,601 821,601 --
-17- -----END PRIVACY-ENHANCED MESSAGE-----