SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
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OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-18301
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IROQUOIS BANCORP, INC.
----------------------
(Exact name of Registrant as specified in its charter)
NEW YORK 16-1351101
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
115 Genesee Street, Auburn, New York 13021
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (315) 252-9521
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_________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,404,480 shares of common
stock on September 30, 1998.
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Income -
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Item 3. Quantative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
ITEM 1. FINANCIAL INFORMATION
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1998 1997
-------- --------
ASSETS
Cash and due from banks $ 12,368 $ 12,778
Federal funds sold and interest-bearing
deposits with other financial institutions 3,901 705
Securities available for sale 61,830 51,944
Securities held to maturity 47,207 51,676
Loans receivable 398,279 373,269
Less allowance for loan losses 3,601 3,285
- ---------------------------------------------- -------- --------
Loans receivable, net 394,678 369,984
Premises and equipment, net 8,154 8,170
Federal Home Loan Bank stock, at cost 4,079 3,629
Accrued interest receivable 3,906 3,855
Other assets 6,055 7,037
- ---------------------------------------------- -------- --------
Total Assets $542,178 509,778
============================================== ======== ========
LIABILITIES
Savings and time deposits $414,675 $389,448
Demand deposits 29,156 27,563
Borrowings 53,638 50,164
Accrued expenses and other liabilities 5,195 3,574
- ---------------------------------------------- -------- --------
Total Liabilities $502,664 $470,749
- ---------------------------------------------- -------- --------
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, 3,000,000
shares authorized:
Series A - 29,999 shares issued and
outstanding in December 1997 -- 30
Series B - 17,957 and 18,632 shares issued
and outstanding in September 1998 and
December 1997 respectively, liquidation
value $1,796 18 19
Common Stock $1.00 par value; 6,000,000 shares
authorized; 2,404,480 and 2,388,936 shares
issued and outstanding at September 30, 1998
and December 31, 1997, respectively 2,404 2,389
Additional paid-in capital 11,302 13,793
Retained earnings 25,288 22,868
Accumulated other comprehensive income 785 213
Unallocated shares of Stock Ownership Plans (283) (283)
- ---------------------------------------------- -------- --------
Total Shareholders' Equity 39,514 39,029
- ---------------------------------------------- -------- --------
Total Liabilities and Shareholders' Equity $542,178 $509,778
============================================== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended
September 30,
1998 1997
------ -----
Interest Income:
Loans $8,180 7,713
Securities 1,605 1,677
Other 160 86
- ----------------------------------------------------- ------ -----
9,945 9,476
- ----------------------------------------------------- ------ -----
Interest Expense:
Deposits 4,148 3,974
Borrowings 767 432
- ----------------------------------------------------- ------ -----
4,915 4,406
- ----------------------------------------------------- ------ -----
Net Interest Income 5,030 5,070
Provision for loan losses 387 373
- ----------------------------------------------------- ------ -----
Net Interest Income after Provision for Loan Losses 4,643 4,697
- ----------------------------------------------------- ------ -----
Non-Interest Income:
Service charges, commissions and fees 882 752
Net gain on sales of securities and loans 70 52
Other 17 41
- ----------------------------------------------------- ------ -----
Total Non-Interest Income 969 845
- ----------------------------------------------------- ------ -----
Non-Interest Expense:
Salaries and employee benefits 1,952 1,875
Occupancy and equipment expenses 406 423
Computer and product service fees 429 361
Promotion and marketing expenses 87 82
Deposit insurance 23 24
Other 779 829
- ----------------------------------------------------- ------ -----
Total Non-Interest Expenses 3,676 3,594
- ----------------------------------------------------- ------ -----
Income Before Income Taxes 1,936 1,948
Income taxes 705 724
- ----------------------------------------------------- ------ -----
Net Income $1,231 1,224
Preferred stock dividend 38 111
- ----------------------------------------------------- ------ -----
Net income attributable to common stock $1,193 1,113
===================================================== ====== =====
Net income per common share:
Basic $0.50 0.47
====== =====
Diluted $0.49 0.46
====== =====
Cash dividends declared $0.10 0.10
See accompanying notes to condensed consolidated financial statements.
4
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine months ended
September 30,
1998 1997
------ -------
Interest Income:
Loans $24,170 $22,702
Securities 4,807 4,957
Other 400 252
- ----------------------------------------------------- ------- -------
29,377 27,911
- ----------------------------------------------------- ------- -------
Interest Expense:
Deposits 12,098 11,571
Borrowings 2,203 1,099
- ----------------------------------------------------- ------- -------
14,301 12,670
- ----------------------------------------------------- ------- -------
Net Interest Income 15,076 15,241
Provision for loan losses 1,107 1,118
- ----------------------------------------------------- ------- -------
Net Interest Income after provision for Loan Losses 13,969 14,123
- ----------------------------------------------------- ------- -------
Non-Interest Income:
Service charges, commissions and fees 2,578 2,200
Net gain (loss) on sales of securities and loans 88 89
Other 47 129
- ----------------------------------------------------- ------- -------
Total Non-Interest Income 2,713 2,418
- ----------------------------------------------------- ------- -------
Non-Interest Expense:
Salaries and employee benefits 5,702 5,503
Occupancy and equipment expenses 1,209 1,291
Computer and product service fees 1,260 987
Promotion and marketing expenses 279 244
Deposit insurance 69 73
Other 2,379 2,416
- ----------------------------------------------------- ------- -------
Total Non-Interest Expenses 10,898 10,514
- ----------------------------------------------------- ------- -------
Income Before Income Taxes 5,784 6,027
Income taxes 2,099 2,276
- ----------------------------------------------------- ------- -------
Net Income $ 3,685 3,751
Preferred stock dividend 187 330
- ----------------------------------------------------- ------- -------
Net income attributable to common stock $ 3,498 3,421
===================================================== ======= =======
Net income per common share:
Basic $1.47 1.45
======= =======
Diluted $1.43 1.42
======= =======
Cash dividends declared $0.30 0.26
See accompanying notes to condensed consolidated financial statements.
5
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Nine months ended
September 30,
1998 1997
-------- -------
Cash flows from operating activities:
Net income $ 3,685 3,751
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense, provision for
loan losses, deferred taxes and other 2,305 1,933
Net (gain) loss on sale of securities and loans (88) (89)
Increase in accrued interest receivable and other assets (259) (276)
Increase(decrease) in accrued expenses and other liabilities 1,792 641
- --------------------------------------------------------------------------- -------- -------
Net cash provided by operating activities 7,435 5,960
- --------------------------------------------------------------------------- -------- -------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 5,576 8,665
Proceeds from maturities and redemptions of securities available for sale 7,195 4,732
Proceeds from maturities and redemptions of
securities held to maturity 12,359 9,286
Purchases of securities available for sale (21,566) (16,933)
Purchases of securities held to maturity (8,040) (9,874)
Loans made to customers net of principal payments received (27,067) (16,436)
Proceeds from sales of loans 2,061 2,196
Capital expenditures (468) (1,260)
Purchase of FHLB stock (450) (721)
Other - net (772) (446)
- --------------------------------------------------------------------------- -------- -------
Net cash used by investing activities (31,172) (20,791)
- --------------------------------------------------------------------------- -------- -------
Cash flows from financing activities:
Net increase (decrease) in savings accounts and demand deposits 4,783 (3,097)
Net increase in time deposits 22,037 7,762
Net increase in borrowings and other liabilities 3,474 17,689
Proceeds from issuance of Common stock 209 346
Dividends paid (914) (942)
Redemption of Preferred stock (3,067) (139)
- --------------------------------------------------------------------------- -------- -------
Net cash provided by financing activities 26,522 21,619
- --------------------------------------------------------------------------- -------- -------
Net increase in cash and cash equivalents 2,785 6,788
Cash and cash equivalents at beginning of period 13,483 10,675
- --------------------------------------------------------------------------- -------- -------
Cash and cash equivalents at end of period $ 16,268 17,463
- --------------------------------------------------------------------------- -------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,187 12,716
Income taxes 790 916
Supplemental schedule of non-cash investing activities:
Loans to facilitate the sale of ORE 255 166
Additions to other real estate 971 638
6
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) Financial Statements
--------------------
The interim financial statements contained herein are unaudited, but in
the opinion of management of the Company, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for these periods. The results
of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
The data in the consolidated balance sheet for December 31, 1997 was
derived from the Company's 1997 Annual Report to Shareholders. That
data, along with the other interim financial information presented in
the consolidated balance sheets, statements of income, and statements of
cash flows should be read in conjunction with the consolidated financial
statements, including the notes thereto, contained in the 1997 Annual
Report to Shareholders.
2) Earnings Per Share
------------------
At 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.
7
BASIC AND DILUTED EARNINGS PER SHARE WERE COMPUTED AS FOLLOWS:
(In Thousands, Except per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
BASIC EARNINGS PER SHARE:
Earnings available for common shares:
Earnings from operations $1,231 1,224 3,685 3,751
Provision for cash dividends on
preferred stock (38) (111) (187) (330)
- -----------------------------------------------------------------------------------------------------
Net earnings available for common
shareholders $1,193 1,113 3,498 3,421
- -----------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 2,385 2,360 2,378 2,352
Basic earnings per share $.5 .47 1.47 1.45
- -----------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Net earnings available for common
shares and common stock
equivalent shares deemed to have a
dilutive effect $1,193 1,113 3,498 3,421
- -----------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 2,385 2,360 2,378 2,352
Additional potentially dilutive
securities (equivalent in common
stock):
Stock options 65 66 75 60
- -----------------------------------------------------------------------------------------------------
Total 2,450 2,426 2,453 2,412
- -----------------------------------------------------------------------------------------------------
Diluted earnings per share $.49 .46 1.43 1.42
- -----------------------------------------------------------------------------------------------------
8
3) Other Accounting Issues
-----------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
is effective for financial statements for periods beginning after
December 15, 1997. The statement is effective for the Company in 1998.
In the initial year of application, comparative information for earlier
years is to be restated. SFAS No. 131 requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. Adoption of this statement will have no
effect on the Company's financial position or results of operation.
Effective January 1, 1998, the Company adopted the remaining provisions
of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which relate to the
accounting for securities lending, repurchase agreements, and other
secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, are not expected to have a material
impact on the Company.
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries to
equity, such as the mark to market adjustment on securities available
for sale, foreign currency items and minimum pension liability
adjustments. At the Company, comprehensive income represents net income
plus other comprehensive income net of taxes, which consists of the net
change in unrealized gains or losses on securities available for sale
for the period. Accumulated other comprehensive income represents the
net unrealized gains or losses on securities available for sale as of
the balance sheet dates. Comprehensive income for the three-month and
nine month periods ended September 30, 1998 and 1997 was $1,736,000 and
$4,258,000, and $1,299,000 and $3,870,000, respectively.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post Retirement Benefits" in February 1998. SFAS No. 132 revises
employers' disclosures about pension and other post retirement benefit
plans, it does not change the measurement or recognition of these plans.
SFAS No. 132 is effective for the Company in 1998 and will not impact
the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for gains and losses
resulting from changes in fair value of the derivative instrument,
depends on the intended use of the derivative and the type of risk being
hedged. This statement is effective for all fiscal quarters beginning
January 1, 2000 for calendar year companies. Earlier adoption, however,
is permitted. At the present time, the Company has not fully analyzed
the effect or timing of the adoption of SFAS No. 133 on the Company's
consolidated financial statements.
9
IROQUOIS BANCORP, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Iroquois Bancorp Inc. ("Iroquois" or the "Company") is a bank holding company
with two financial institutions: Cayuga Bank of Auburn, New York, a New York
state-chartered commercial bank and trust company, and The Homestead Savings
(FA) of Utica, New York, a federally-chartered savings association.
RESULTS OF OPERATIONS
- ---------------------
Three months ended September 30, 1998 compared to September 30, 1997
- --------------------------------------------------------------------
Net income for the three months ended September 30, 1998 was $1,231,000, or $.50
basic earnings per share, compared to net income of $1,224,000, or $.47 basic
earnings per share, for the three months ended September 30, 1997. Diluted
earnings per share were $.49 and $.46 for the three months ended September 30,
1998 and 1997, respectively.
Net interest income was $5,030,000 for the third quarter of 1998 compared to
$5,070,000 for the third quarter of 1997. The decline in net interest income
continues to reflect the narrowing of net interest spreads caused by a flatter
yield curve and changes in the Company's balance sheet mix. Asset yields fell to
7.83% for the current quarter compared to 8.09% the year earlier. Interest-
bearing liability costs were 4.19% for the current quarter compared to 4.10% the
year earlier. Net interest spread contracted to 3.64% for the three months
ended September 30, 1998 compared to 4.00% for the three months ended September
30, 1997.
Interest income increased 5.0%, to $9,945,000, for the three months ended
September 30, 1998, compared to $9,476,000 for the same period the year earlier.
Average earning assets increased 9.0%, to $511.5 million in 1998 from $458.5
million in 1997. Residential mortgage loans, yielding 7.63% in the current
quarter compared to 7.94% in the third quarter of 1997, increased $40.4 million,
or 20.0%. Higher yielding commercial mortgage loans and commercial loans
declined $2.1 million and $2.0 million, respectively. Residential mortgage
loans represented 47.4% of average earning assets for the three months ended
September 30, 1998, compared to 43.0% for the same three months in 1997.
Interest expense on deposits and borrowings increased 11.6%, to $4,915,000, for
the three months ended September 30, 1998, compared to $4,406,000 for the three
months ended September 30, 1997. The increase was due primarily to the growth in
average deposits and borrowings. Average deposit balances increased 4.1%, from
$425.3 million to $442.6 million. The average cost of interest-bearing deposits
increased slightly from 3.71% in 1997 to 3.72% in 1998. Average borrowings
increased from $28.7 million in 1997 to $51.1 million in 1998. The average cost
of borrowings remained relatively constant at 5.96%.
10
The provision for loan losses increased 3.8%, to $387,000, for the quarter ended
September 30, 1998, compared to $373,000 for the same period in 1997. The
increase in the provision reflects adjustments to the allowance for loan losses
to reflect management's current assessment of the loan portfolio.
Total non-interest income was $969,000 for the quarter ended September 30, 1998
compared to $845,000 for the quarter ended September 30, 1997, an increase of
14.7%. Increases in loan and deposit service fees accounted for most of the
change with additional income also being generated from trust and investment
services. In addition, the net gain on sales of securities and loans increased
$18,000, to $70,000, for the three months ended September 30, 1998 compared to
$52,000 in net gains for the same period in 1997.
Total non-interest expense was $3,676,000 for the quarter ended September 30,
1998, compared to $3,594,000 for the quarter ended September 30, 1997, an
increase of 2.3%. Salaries and benefits increased $77,000, or 4.1%, primarily
due to wage increases. Computer and product servicing fees increased 18.8%, to
$429,000, for the third quarter of 1998, compared to $361,000 for the third
quarter of 1997, a reflection of increased volumes relating to both processing
levels and new product sales.
The provision for income taxes for the three months ended September 30, 1998 was
$705,000, for an effective tax rate of 36.42%, compared to $724,000, or an
effective tax rate of 37.17%, for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
- -------------------------------------------------------------------
Net income for the nine months ended September 30, 1998 was $3,685,000, or $1.47
basic earnings per share, compared to $3,751,000, or $1.45 basic earnings per
share for the nine months ended September 30, 1997. Diluted earnings per share
were $1.43 and $1.42 for the nine months ended September 30, 1998 and 1997,
respectively.
Net interest income was $15,076,000 for the first nine months of 1998 compared
to $15,241,000 for the first nine months of 1997. The yield on earning assets
decreased to 7.91% for the nine months ended September 30, 1998, compared to
8.10% for the nine months ended September 30, 1997. The cost of interest-
bearing liabilities increased during the same time period from 4.03%, to 4.21%.
Net interest spread contracted from 4.07% in 1997 to 3.70% in 1998. Net
interest margin declined from 4.44% in 1997 to 4.05% in 1998.
Interest income increased 5.3%, to $29,377,000, for the nine months ended
September 30, 1998, compared to $27,911,000 for the nine months ended September
30, 1997. The increase came primarily from higher volumes of residential
mortgages, with an increase in average balances from $194.4 million for the
first nine months of 1997 to $231.3 million for the same period in 1998. The
increase in residential mortgage loans as a percentage of total interest-bearing
assets contributed to the reduction year over year in overall asset yields.
11
Interest expense related to deposits and borrowings increased from $12,670,000
for the nine months ended September 30, 1997, to $14,301,000, for the nine
months ended September 30, 1998. Average deposit balances increased $10.6
million, from $421.4 million to $432.0 million. The average cost of interest-
bearing deposits increased from 3.67% in 1997 to 3.74% in 1998, reflecting
growth in higher cost money market and time deposits. Average borrowings
increased $24.6 million in 1998 compared to 1997. The average cost of
borrowings increased from 5.94% to 5.97% reflecting a greater use of term
advances in 1998 compared to 1997.
The provision for loan losses for the first nine months of 1998 was $1,107,000
compared to $1,118,000 for the first nine months of 1997. The allowance for
loan losses as a percentage of loans increased from .84% at September 30, 1997
to .90% at September 30, 1998. Net charge-offs for the nine months ended
September 30, 1998 were $791,000 compared to $1,476,000 for the same time period
in 1997.
Total non-interest income was $2,713,000 for the nine months ended September 30,
1998, compared to $2,418,000 for the nine months ended September 30, 1997, an
increase of 12.20%. The increase primarily reflected growth in income generated
from fees for loan and deposit services, as well as trust and investment
services.
Total non-interest expense was $10,898,000 for the nine months ended September
30, 1998, compared to $10,514,000 for the nine months ended September 30, 1997,
an increase of 3.65%. The increase primarily reflected a higher level of
computer and product service fees, and a 3.62% increase in salaries and
benefits.
The provision for income taxes was $2,099,000 for the first nine months of 1998,
an effective rate of 36.29%. For the first nine months of 1997 the provision
for income taxes was $2,276,000, an effective rate of 37.76%
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Consolidated assets were $542.2 million at September 30, 1998 compared to $509.8
million at December 31, 1997, an increase of $32.4 million, or 6.4%.
Loans receivable, net increased $24.7 million, or 6.7%, to $394.7 million at
September 30, 1998, compared to $370.0 million at year end 1997. Within the
loan portfolio, residential mortgage loans increased $30.3 million, to $245.6
million, as a result of increases in new originations. Commercial mortgage
loans decreased $2.3 million, to $39.4 million. Commercial loans decreased $3.2
million from December 31, 1997 to September 30, 1998, ending the period at $38.6
million. The decline in commercial mortgages and commercial loans reflects
increased prepayments, lower loan demand and increased competition in the small
business market.
The allowance for loan losses increased from $3.3 million at December 31, 1997,
to $3.6 million at September 30, 1998. Non-performing loans increased slightly
from $6.2 million at year end 1997 to
12
$6.3 million at September 30, 1998. The percentage of non-performing loans to
total loans decreased from 1.65% at December 31, 1997, to 1.57% at September 30,
1998. Residential mortgage loans represented 38.3% of total non-performing
loans at September 30, 1998, while commercial mortgages represented 37.0% and
consumer and commercial loans represented 24.7%. The allowance for loan losses
as a percentage of total loans increased from .88% at December 31, 1997 to .90%
at September 30, 1998.
Total securities increased 5.2%, from $103.6 million at year end 1997 to $109.0
million at September 30, 1998. Securities available for sale increased to $61.8
million at September 30, 1998, from $51.9 million at December 31, 1997, while in
the same period securities held to maturity declined $4.5 million to $47.2
million at September 30, 1998. The growth in securities came primarily from a
net increase in U.S. Government Agency securities and state and municipal
obligations. The net investment in mortgage-backed securities and corporate
bonds declined due to increased prepayments and to maturities of existing
securities.
Total deposits increased 6.43%, to $443.8 million at September 30, 1998,
compared to $417.0 million at December 31, 1997. Personal and business deposits
increased a combined $8.8 million while public deposits increased $19.0 million.
The growth in deposits occurred primarily in time deposits and money market
accounts.
Borrowings at September 30, 1998 were $53.6 million compared to $50.2 million at
December 31, 1997. Term advances from the Federal Home Loan Bank ("FHLB")
increased $16.0 million, while advances against overnight lines of credit with
the FHLB decreased $12.4 million. FHLB borrowings continue to be used to manage
the Company's overall cost of funds and interest rate sensitivity while
providing an additional source of funds for asset growth.
At September 30, 1998, Iroquois had total shareholders' equity of $39.5 million,
compared to $39.0 million at December 31, 1997. The decrease in shareholders
equity reflects the $3.0 million redemption as of April 1, 1998, of the
Company's outstanding Series A Preferred Stock. The reduction in shareholders'
equity combined with the growth in average assets caused the Company's
regulatory Tier 1 capital to average assets ratio to decrease from 7.20% at
December 31, 1997 to 6.88% at September 30, 1998. The ratio of Tier 1 Capital
to risk weighted assets increased, however, from 10.75% to 10.82%, reflecting
the growth in lower risk-weighted assets, particularly U.S. government
securities and residential mortgages. During the third quarter of 1998, the
Company announced the full redemption of its $1.8 million in outstanding Series
B Preferred Stock effective October 1, 1998.
As of September 30, 1998, the capital ratios of Iroquois and both of its banking
subsidiaries continued to exceed the capital requirements for classification as
"well capitalized" under applicable regulatory provisions.
The Company held short-term liquid assets of $30.8 million at September 30,
1998, compared to $22.3 million at December 31, 1997. The Company considers its
current level of liquidity coupled with other available sources of funds as both
sufficient and within acceptable ranges.
13
YEAR 2000 COMPLIANCE
- --------------------
The Company's Year 2000 (or "Y2K") activities are continuing on schedule under
the framework of the FFIEC's Five Step program. Senior management and the
Company's Board of Directors are actively involved in managing efforts in
support of these activities, monitoring the Company's progress, and evaluating
risks of the process to the Company's Strategic Plan.
Step 1 Awareness Phase
- ----------------------
The Company's Y2K Committee is following a comprehensive reporting and
communication plan designed to increase awareness of the issues surrounding the
century date change and report on the Company's progress in preparing for the
Year 2000. The communication plan includes ongoing progress reports to Senior
Management, the Company's Board of Directors and Audit Committee. In addition,
the Company will be focusing on building awareness and increasing the
understanding of its banking customers on the Company's readiness for the Year
2000.
Step 2 Assessment Phase
- -----------------------
The Company has completed an inventory and assessment of its software, hardware
and other systems applications (e.g. communications systems; environmental
systems; credit card and ATM processing systems). As part of the assessment
phase, critical applications were identified. Critical applications are those
believed by the Company to be key to the accuracy of recording customer banking
transactions, to have a risk involving the safety of individuals, or affect the
Company's revenues and/or liquidity.
During the assessment phase, the Company also identified and prioritized for
further evaluation and testing, as appropriate, its exposure to third party
risks of non-compliance. Electronic data exchange service bureaus and business
customers with relationships in excess of $150,000 were identified. As part of
our assessment, we are collecting and analyzing information from third parties
regarding their Year 2000 readiness.
Step 3 Renovation Phase
- -----------------------
The renovation phase includes the installation of all necessary software
upgrades, the removal of non-compliant applications, the development of
application-specific contingency plans as necessary, and the testing of
currently compliant systems. The Company estimates that it has completed
approximately 40% of the renovation phase. Close monitoring of the progress of
its third party vendors, in particular, Fiserv Inc., the Company's data services
and item processing provider, is ongoing. Fiserv has advised the Company that
it anticipates its systems will be completely upgraded to Year 2000 compliance,
tested and implemented no later than March 31, 1999.
As of September 30, 1998, the Company had completed the identification of
systems requiring upgrades, had installed Y2K compliant versions as received,
and continues close monitoring of vendor progress to ensure timely delivery of
upgrades. A general contingency plan has been outlined. System-specific
contingency plans will be implemented for critical systems which fail their Y2K
test within 30 days of test, but no later than March 31, 1999. To date, the
Company has no reason to believe that its critical applications will not be Year
2000 compliant in all material respects.
14
Step 4 Validation Phase
- -----------------------
During the validation phase, critical data flows both internally and with third
parties will be tested with both the sender and receiver simulating Year 2000
conditions. Testing is presently underway both internally and with third
parties, including Fiserv. The validation phase is expected to continue through
the first quarter of 1999.
Step 5 Implementation Phase
- ---------------------------
The implementation phase will primarily occur during 1999. This phase will
focus on monitoring the progress of service providers and vendors as they
install fully renovated and tested Y2K compliant systems into the normal daily
operating environment. In addition, the Company expects to complete by first
quarter of 1999 a Business Resumption Contingency Plan addressing various Year
2000 business case scenarios.
Costs
- -----
The Company presently expects to meet its Year 2000 compliance commitment using
existing resources and without incurring significant incremental expenses. The
Company has provided for the additional costs of the Year 2000 project,
primarily additional hardware, software, and service fees in its operational
budget for information on technology.
Risk Factors
- ------------
Significant Year 2000 failures in the Company's systems or in the systems of
third parties (or third parties upon whom they depend) would have a material
adverse effect on the Company's financial condition and results of operation.
Although the Company believes that it has taken adequate measures to assure its
systems will be Year 2000 compliant, the Company does not have control of
external systems and conditions with which its systems interact or by which its
systems are affected. In the event of external conditions relating to Year 2000,
it is possible that the Company could experience (i) a material increase in the
Company's credit losses due to Year 2000 problems for the Company's borrowers
and obligors and (ii) liquidity stress caused by disruption in financial
markets. The magnitude of these potential credit losses or disruption cannot be
determined at this time.
The information set forth above relating to the Company's Year 2000 activities
contains forward-looking statements. Specifically, such statements are
contained in sentences including the words "expect" or "anticipate" or "could"
or "should." Such forward-looking statements are subject to inherent risks and
uncertainties that may cause actual results to differ materially from those
contemplated by such forward-looking statements. The factors that may cause
actual results to differ materially include the failure of third parties to
remediate Year 2000 issues adequately or the inability of the Company to
complete the project phases on the time schedules currently expected.
15
IROQUOIS BANCORP, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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. The Company also uses a net
portfolio value ("NPV") analysis as another means of measuring and
monitoring its interest rate risk, and in addition also uses a cumulative
gap analysis to measure interest rate sensitivity. The Company establishes
guidelines to monitor the results to ensure interest rate risk is limited
within acceptable levels. At September 30, 1998, the Company's interest
rate risk as measured by the above mentioned analyses was within
established guidelines.
The following table sets forth at September 30, 1998, the analysis of the
Company's interest rate risk as measured by the estimated changes in NPV
resulting from instantaneous and sustained parallel shifts in the interest
rate yield curve. The NPV represents the difference between the present
value of the Company's liabilities and the present value of the expected
cash flows from its assets. For purposes of the NPV table, assumptions
similar to those used in the 1997 Annual Report, adjusted to reflect
current market conditions, were used.
NET PORTFOLIO VALUE ANALYSIS at September 30, 1998
($ in thousands)
CHANGES IN INTEREST ESTIMATED CHANGE IN NPV
RATE (BASIS POINTS) NPV AMOUNT %
-----------------------------------------------------------------------------------------
+200 $52,323 (9,382) (15.2)
+100 56,743 (4,962)
0 61,705 -- (8.0)
-100 66,758 5,053 8.2
-200 70,187 8,482 13.7
16
IROQUOIS BANCORP, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
17
IROQUOIS BANCORP, INC.
AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Iroquois Bancorp, Inc.
(Registrant)
Date: November 10, 1998 /s/Richard D. Callahan
---------------------------
Richard D. Callahan
President & CEO
Date: November 10, 1998 /s/Marianne R. O'Connor
---------------------------
Marianne R. O'Connor
Treasurer & CFO
18