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, 1999
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Commission File Number 0-18301
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IROQUOIS BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
NEW YORK 16-1351101
-------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
115 Genesee Street, Auburn, New York 13021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (315) 252-9521
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,426,880 shares of common
stock on November 5, 1999.
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Income -
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Shareholders' Equity
and Comprehensive Income
Nine Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands, except
share data) 9/30/99 12/31/98
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 11,151 $ 9,571
Interest-bearing deposits and Federal funds sold 3,800 6,393
Securities available for sale, at fair value 68,085 61,431
Securities held to maturity (fair value of $53,902 in 1999 and
$47,717 in 1998) 54,119 47,056
Loans 434,805 404,092
Less allowance for loan losses 3,392 3,815
-------- ---------
Loans, net 431,413 400,277
Other assets 29,506 22,692
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Total Assets $598,074 $ 547,420
======== =========
LIABILITIES
Savings and time deposits $432,192 $ 412,334
Demand deposits 34,643 30,905
Borrowings 86,871 61,591
Other liabilities 4,031 4,248
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Total Liabilities 557,737 509,078
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SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, 3,000,000 shares authorized;
none issued and outstanding -- --
Common Stock, $1.00 par value; 6,000,000 shares authorized;
2,426,880 and 2,409,980 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 2,427 2,410
Additional paid-in capital 9,590 9,303
Retained earnings 29,336 26,557
Accumulated other comprehensive income (loss) ( 598 ) 490
Unallocated shares of Stock Ownership Plan ( 418 ) ( 418 )
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Total Shareholders' Equity 40,337 38,342
-------- ---------
Total Liabilities and Shareholders' Equity $598,074 $ 547,420
======== =========
See accompanying notes to condensed consolidated financial statements
3
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited)
For the Three Months Ended
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(dollars in thousands, except
share data) 9/30/99 9/30/98
- -----------------------------------------------------------------------------------------------------
Interest Income:
Loans $ 8,394 $ 8,180
Securities 1,803 1,605
Other 137 160
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Total Interest Income 10,334 9,945
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Interest Expense:
Deposits 3,988 4,148
Borrowings 1,285 767
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Total Interest Expense 5,273 4,915
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Net interest income 5,061 5,030
Provision for loan losses 376 387
-------- --------
Net Interest Income after Provision
for Loan Losses 4,685 4,643
Net gain on sales of securities and loans 12 70
Noninterest income 963 899
Noninterest expense 3,913 3,676
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Net income before income taxes 1,747 1,936
Provision for income taxes 559 705
-------- --------
Net Income 1,188 1,231
Preferred stock dividend -- 38
-------- --------
Net income attributable to common stock $ 1,188 $ 1,193
======== ========
Earnings per share
Basic $0.50 $0.50
Diluted 0.49 0.49
Cash dividends declared per common share $0.12 $0.10
See accompanying notes to condensed consolidated financial statements
4
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited)
For the Nine Months Ended
- -----------------------------------------------------------------------------------------------------
(dollars in thousands, except
share data) 9/30/99 9/30/98
- -----------------------------------------------------------------------------------------------------
Interest Income:
Loans $ 24,643 $ 24,170
Securities 5,206 4,807
Other 399 400
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Total Interest Income 30,248 29,377
-------- --------
Interest Expense:
Deposits 11,878 12,098
Borrowings 3,212 2,203
-------- --------
Total Interest Expense 15,090 14,301
-------- --------
Net interest income 15,158 15,076
Provision for loan losses 1,100 1,107
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Net Interest Income after Provision
for Loan Losses 14,058 13,969
Net gain on sales of securities and loans 27 88
Noninterest income 2,668 2,625
Noninterest expense 11,395 10,898
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Net income before income taxes 5,358 5,784
Provision for income taxes 1,812 2,099
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Net Income 3,546 3,685
Preferred stock dividend -- 187
-------- --------
Net income attributable to common stock $ 3,546 $ 3,498
======== ========
Earnings per share
Basic $1.48 $1.47
Diluted 1.47 1.43
Cash dividends declared per common share $0.32 $0.30
See accompanying notes to condensed consolidated financial statements
5
IROQUOIS BANCORP, INC.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(unaudited)
Nine months ended September 30, 1999:
Unallocated
(dollars in thousands) Addi- Accumulated Shares of
tional Other Stock
Common Paid-In Retained Comprehensive Ownership
Stock Capital Earnings Income(Loss) Plan Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $2,410 9,303 26,557 490 (418) 38,342
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net Income -- -- 3,546 -- -- 3,546
Change in net unrealized gain
on securities available for
sale, net of taxes -- -- -- (1,088) -- (1,088)
Total comprehensive income 2,458
----------------
Stock Options Exercised 17 287 -- -- -- 304
Cash dividends declared
on common stock -- -- (767) -- -- (767)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1999 $2,427 9,590 29,336 (598) (418) 40,337
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1998:
Unallocated
(dollars in thousands, Addi- Accumulated Shares of
except share data) tional Other Stock
Preferred Common Paid-In Retained Comprehensive Ownership
Stock Stock Capital Earnings Income Plan Total
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 49 2,389 13,793 22,868 213 (283) 39,029
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net Income -- -- -- 3,685 -- -- 3,685
Change in net unrealized gain
on securities available for
sale, net of taxes -- -- -- -- 572 -- 572
Total comprehensive income 4,257
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Preferred Stock Redemption
(30,674 shares) (31) -- (3,037) -- -- -- ( 3,068)
Stock Options Exercised -- 15 194 -- -- -- 209
Cash dividends declared:
Common stock -- -- -- (726) -- -- (726)
Preferred stock -- -- -- (187) -- -- (187)
Balances at September 30, 1998 $ 18 2,404 10,950 25,640 785 (283) 39,514
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
6
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine months ended
September 30,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net Income $ 3,546 $ 3,685
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,100 1,107
Depreciation and amortization 972 1,198
Net gain on sale of securities and loans ( 27) ( 88)
Decrease in other assets 1,176 647
Increase (Decrease) in other liabilities ( 217) 1,621
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Net cash provided by operating activities 6,550 8,170
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Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 7,703 7,195
Proceeds from sales of available-for-sale securities 4,237 5,576
Proceeds from maturities of held-to-maturity securities 11,427 12,359
Purchases of available for sale securities ( 26,191 ) ( 21,566 )
Purchases of held to maturity securities ( 12,768 ) ( 8,040 )
Proceeds from sales of loans 1,905 2,061
Net increase in loans ( 35,464 ) ( 28,574 )
Purchases of bank premises and equipment (591 ) ( 468 )
Purchase of corporate owned life insurance ( 5,000 ) --
Purchase of FHLB stock ( 1,234 ) ( 450 )
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Net cash used by investing activities ( 55,976 ) ( 31,907 )
Cash flows from financing activities:
Net increase in demand deposits, money market
accounts, and savings accounts 1,231 4,783
Net increase in time deposits 22,365 22,037
Net increase(decrease) in other borrowings 8,292 (12,515 )
Proceeds of long-term borrowings 31,000 37,005
Repayment of long-term borrowings (14,012 ) ( 21,016 )
Cash dividends ( 767 ) ( 913 )
Net proceeds from exercise of stock options, and related tax 304 209
benefit
Redemption of Preferred stock -- ( 3,068 )
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Net cash provided by financing activities 48,413 26,522
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Net increase(decrease) in cash and cash equivalents ( 1,013 ) 2,785
Cash and cash equivalents at beginning of period 15,964 13,483
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Cash and cash equivalents at end of period $ 14,951 $ 16,268
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 15,210 $ 14,187
Income taxes 2,389 1,515
Supplemental schedule of non-cash investing activities:
Additions to other real estate 1,332 716
Transfer of AFS Securities to HTM Securities 5,744 --
See accompanying notes to condensed consolidated financial statements
7
IROQUOIS BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Unaudited 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 condensed balance sheet for December 31, 1998
was derived from the Company's 1998 Annual Report to Shareholders. That
data, along with the other interim financial information presented in the
consolidated condensed balance sheets, statements of income, shareholders'
equity and comprehensive income and statements of cash flows should be read
in conjunction with the consolidated financial statements, including the
notes thereto, contained in the 1998 Annual Report to Shareholders.
8
IROQUOIS BANCORP, INC.
AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
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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
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Three months ended September 30, 1999 compared to September 30, 1998
- --------------------------------------------------------------------
Net income for the three months ended September 30, 1999 was $1,188,000, or $.50
basic earnings per share, compared to net income of $1,193,000, or $.50 basic
earnings per share, for the three months ended September 30, 1998. Diluted
earnings per share were $.49 for the three months ended September 30, 1999 and
1998, respectively.
Net interest income was $5,061,000 for the third quarter of 1999 compared to
$5,030,000 for the third quarter of 1998. Net interest margin for the third
quarter of 1999 was 3.65%, compared to 3.98% in 1998. Growth in residential
mortgages and securities as a percentage of total assets combined with lower
overall asset yields compared to the same period for the prior year were the
primary reasons for the decline in net interest margin. Asset yields decreased
to 7.41% for the current quarter compared to 7.83% for the same quarter a year
earlier. Interest-bearing liability costs were 4.08% for the current quarter
compared to 4.18% the year earlier.
Interest income increased 3.9%, to $10,334,000, for the three months ended
September 30, 1999, compared to $9,945,000 for the same period the year earlier.
Average earning assets increased 9.2%, to $557.1 million in 1999, from $510.0
million in 1998. The average security portfolio increased $15.1 million, or
13.2%, while the yield on the portfolio decreased from 6.11% to 5.95% for the
three months ended September 30, 1999 from the same period the year earlier.
Average residential mortgage loans increased $36.0 million, or 14.9%, while the
yield on mortgages decreased from 7.63% in the third quarter of 1998 to 7.30% in
the current quarter. Average commercial mortgage loan balances increased $1.4
million, or 3.5%, while average commercial loans declined $2.1 million, or 2.7%,
in the same period. Residential mortgage loans represented 50.0% of average
earning assets for the three months ended September 30, 1999, compared to 47.5%
for the same three months in 1998.
Interest expense on deposits and borrowings increased 7.3%, to $5,273,000, for
the three months ended September 30, 1999, compared to $4,915,000 for the three
months ended September 30, 1998. The increase was due primarily to the growth
in average deposits and borrowings.
9
Average deposit balances increased 2.1%, from $442.6 million to $451.9 million,
while the average cost of deposits for the third quarter decreased from 3.72% in
1998 to 3.50% in 1999. Average borrowings, increased 79.0%, from $51.1 million
in 1998 to $91.5 million in 1999. The average cost of borrowings decreased from
5.96% for the three months ended September 30, 1998, to 5.57% for the three
months ended September 30, 1999.
The provision for loan losses decreased from $387,000 for the quarter ended
September 30, 1998, to $376,000 for the same period in 1999. The decrease in
the provision reflects an improvement in asset quality evidenced by declines in
delinquency rates and a lower level of nonperforming loans.
Total noninterest income was $975,000 for the quarter ended September 30, 1999,
compared to $969,000 for the quarter ended September 30, 1998. Net gains on
sales of securities and loans contributed $12,000 to noninterest income for the
three months ended September 30, 1999, compared to $70,000 for the third quarter
of 1998. The growth in noninterest income was largely due to increased deposit
service fee, debit card and trust service revenues.
Total noninterest expense was $3,913,000 for the quarter ended September 30,
1999, compared to $3,676,000 for the quarter ended September 30, 1998, an
increase of 6.4%. The increase was primarily due to higher legal and consulting
fees and other real estate expenses relating to the resolution of nonperforming
assets.
The provision for income taxes for the three months ended September 30, 1999 was
$559,000, or an effective tax rate of 32.0%, compared to $705,000, or an
effective tax rate of 36.4%, for the three months ended September 30, 1998. The
decline in the effective tax rate reflects the Company's increase in holdings of
tax exempt securities and corporate-owned life insurance.
Nine months ended September 30, 1999 compared to September 30, 1998
- -------------------------------------------------------------------
Net income for the nine months ended September 30, 1999 was $3,546,000 or $1.48
basic earnings per share, compared to $3,685,000, or $1.47 basic earnings per
share, for the nine months ended September 30, 1998. Diluted earnings per share
were $1.47 and $1.43 for the nine months ended September 30, 1999 and 1998,
respectively.
Net interest income was $15,158,000 for the first nine months of 1999, compared
to $15,076,000 for the first nine months of 1998. The yield on interest earning
assets decreased from 7.91% for the nine months ended September 30, 1998, to
7.44% for the nine months ended September 30, 1999. The cost of interest
bearing liabilities decreased from 4.20% to 4.05% for the same periods,
respectively. The net interest margin for the first three quarters declined
from 4.05% in 1998 to 3.72% in 1999.
Interest income was $30,248,000 for the nine months ended September 30, 1999,
compared to $29,377,000 for the nine months ended September 30, 1998, an
increase of 3.0%. The increase was primarily due to the 9.2% increase in
average earning assets, from $497.5 million for the nine months ended September
30, 1998 to $543.4 million for the nine months ended September 30, 1999.
Average residential mortgages increased 16.0%, from $231.3 million for the first
nine months of 1998, to $268.3 million for the same period in 1999. The average
securities portfolio
10
increased 13.4%, or $15.0 million, while average commercial mortgages and
commercial loans combined declined $3.8, million or 4.7%.
Interest expense on deposits and borrowings decreased 1.8%, from $12,098,000 for
the nine months ended September 30, 1998 to $11,878,000 for the nine months
ended September 30, 1999, primarily due to a decline in the average cost of
funding and continued growth in the level of noninterest bearing demand
deposits. Combined increases in savings and time deposits of $19.8 million, and
demand deposits of $3.8 million, resulted in a 4.6% increase in average deposits
for the first nine months of 1999 compared to the same period the year earlier.
The average cost of deposits decreased from 3.74% in 1998 to 3.51% in 1999.
Average borrowings increased 56.2%, from $49.3 million for the nine months ended
September 30, 1998, to $77.1 million for the nine months ended September 30,
1999. The average cost of borrowings was 5.57% for the first nine months of
1999 compared to 5.97% in 1998.
The provision for loan losses remained relatively constant for the period at
$1,100,000 for the nine months ended September 30, 1999 compared to $1,107,000
for the same period in 1998. This provision expense represents additions to the
allowance for loan losses to maintain sufficient coverage levels given portfolio
composition and levels of net chargeoffs and nonperforming loans.
Total noninterest income was $2,695,000 for the first nine months of 1999,
compared to $2,713,000 for the first nine months of 1998. A decline in
commercial lending related fees in 1999 compared to 1998 offset noninterest
income growth generated by increased fees from deposit and trust services and
earnings from the Company's investment in corporate owned life insurance.
Noninterest expense increased 4.6%, from $10,898,000 for the nine months ended
September 30, 1998 to $11,395,000 for the nine months ended September 30, 1999.
The increase was attributable primarily to increased occupancy and equipment
costs, as well as increased expense relating to other real estate.
The provision for income taxes was $1,812,000, for an effective tax rate of
33.8% for the nine months ended September 30, 1999, compared to $2,099,000, or
an effective tax rate of 36.3%, for the nine months ended September 30, 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Consolidated assets were $598.1 million at September 30, 1999, compared to
$547.4 million at December 31, 1998, an increase of $50.7 million, or 9.3%.
Loans increased $30.7 million, or 7.6%, to $434.8 million at September 30, 1999,
compared to $404.1 million at year end 1998. Residential mortgage loans
increased $29.2 million, from $254.8 million at year end 1998, to $284.0 million
at September 30, 1999. Commercial mortgage loans increased $.9 million from
year end, to $40.4 million at September 30, 1999. Commercial loans decreased
$1.1 million from December 31, 1998 to September 30, 1999, ending the third
quarter at $36.3 million. The decline in commercial loans continues to reflect
lower loan demand and increased competition in the small business market.
11
The allowance for loan losses decreased from $3.8 million at December 31, 1998,
to $3.4 million at September 30, 1999, as year to date net chargeoffs exceeded
the loan loss provision. The increase in net chargeoffs reflects the
disposition through chargeoff and/or foreclosure of several loans previously
identified as impaired, as well as an increase in net chargeoffs relative to
residential mortgages. Management believes that the allowance for loan losses
at September 30, 1999 sufficiently reflects the risk diversification of the
portfolio and is adequate based on all currently available information.
Nonperforming assets decreased $2.6 million, to $4.1 million at September 30,
1999. Nonperforming loans decreased from $6.0 million at year end 1998 to $3.2
million at September 30, 1999. The percentage of nonperforming loans to total
loans decreased from 1.49% at December 31, 1998, to .74% at September 30, 1999.
Residential mortgage loans represented 51.7% of total nonperforming loans at
September 30, 1999, compared to 41.0% at year end 1998. Commercial mortgages
represented 11.5% at September 30, 1999, compared to 38.6% at December 31, 1998.
Consumer and commercial loans represented 18.7% and 18.1%, respectively, at
September 30, 1999 compared to 11.6% and 8.8% at year end 1998. The decline in
nonperforming loans represents the resolution through foreclosure or workout of
loans primarily within the commercial and residential mortgage portfolios.
Total securities increased 12.6%, from $108.5 million at year end 1998, to
$122.2 million at September 30, 1999. Securities available for sale increased
from $61.4 million at December 31, 1998 to $68.1 million at September 30, 1999,
while in the same period securities held to maturity increased from $47.1
million to $54.1 million. Holdings of U.S. Government Agency securities, state
and municipal obligations, and mortgage-backed securities increased, while
holdings of U.S. Government securities declined compared to year end 1998.
Other assets increased $6.8 million, or 30.0%, from $22.7 million at December
31, 1998 to $29.5 million at September 30, 1999. The increase is primarily
attributable to the Company's first quarter purchase of $5.0 million in
corporate owned life insurance.
Total deposits increased $23.6 million, or 5.3%, to $466.8 million at September
30, 1999, compared to $443.2 million at December 31, 1998. The increase was
primarily attributable to the $22.4 million increase in time deposits from
$219.1 million at December 31, 1998, to $241.5 million at September 30, 1999.
Continued growth in public and personal time deposits contributed $13.6 million
and $9.5 million, respectively, in additional deposits at September 30, 1999
compared to year end 1998. Money market, interest checking and demand deposits
increased $2.4 million, $.4 million and $3.7 million, respectively, while
savings deposit balances decreased by $5.4 million in the same period.
Borrowings at September 30, 1999 were $86.9 million, compared to $61.6 million
at December 31, 1998, an increase of 41.0%. Term advances from the Federal Home
Loan Bank ("FHLB") and advances against overnight lines of credit with the FHLB
increased $17.0 million and $6.2 million, respectively. Borrowings represented
14.5% of total assets at September 30, 1999, compared to 11.3% at year end 1998.
The increase in borrowings supplemented with deposit growth was used to fund the
increase in assets.
12
At September 30, 1999, Iroquois had total shareholders' equity of $40.3 million,
compared to $38.3 million at December 31, 1998. The Company's regulatory Tier 1
capital to average assets ratio decreased slightly, from 6.70% at December 31,
1998, to 6.69% at September 30, 1999, and the ratio of Tier 1 capital to risk
weighted assets increased from 10.55% to 10.90%. As of September 30, 1999, the
capital ratios of Iroquois and both of its banking subsidiaries continued to
exceed the respective capital requirements for classification as "well
capitalized" under applicable regulatory provisions.
At September 30, 1999, the Company held securities maturing in one year or less
(excluding estimated payments from amortizing securities) of $27.4 million,
compared to $21.8 million at December 31, 1998. The Company considers its
current level of liquidity along with other available sources of funds as both
sufficient and within acceptable ranges.
YEAR 2000
- ---------
The Company's Year 2000 (or "Y2K") activities continue on schedule and remain a
top priority. Senior management and the Company's Board of Directors are
actively involved in managing efforts in support of these activities, monitoring
the Company's progress, and evaluating risks of the process to the Company's
strategic plan.
The Company has looked closely at its software, hardware and environmental
systems, and has substantially completed the necessary replacement or
modification of the systems and components that are vital to the successful
continuance of its core business activities. Y2K-compliant versions of the
primary software applications which support the subsidiary banks' deposit and
loan products are presently in use. The company evaluates the Y2K readiness of
its commercial loan applicants as part of the loan underwriting process and has
called upon major existing borrowers to assess their readiness and identify
potential problems.
Business resumption contingency plans have been completed and tested for all of
the Company's critical business processes. These plans address the actions that
would be taken if key business processes could not be performed in the normal
manner. An Event Management Plan has also been completed detailing
responsibilities and activities relative to the century rollover--before, during
and after the actual event.
The Company's Year 2000 readiness efforts will continue, with an emphasis on
quality assurance, through the remainder of 1999 and into the Year 2000 for as
long as necessary.
Risk Factors
- ------------
Significant Year 2000 failures in the Company's systems or in the systems of
third parties (or third parties upon whom they depend) would have a material
adverse effect on the Company's financial condition and results of operation.
Although the Company believes that it has taken adequate measures to assure its
systems will be Year 2000 compliant, the Company does not have control of
external systems and conditions with which its systems interact, or by which its
systems are affected. In the event of external conditions relating to Year
2000, it is possible that the Company could experience (i) a material increase
in the Company's credit losses due to Year 2000 problems for the Company's
borrowers and obligors and (ii) liquidity stress caused by disruption in
financial markets. The magnitude of such potential credit losses or disruption
cannot be determined at this time.
13
FORWARD-LOOKING STATEMENTS
- --------------------------
In addition to historical information, this discussion and analysis includes
certain forward-looking statements based on current management expectations.
These statements relate to, among other things, sources of loan and deposit
growth, loan loss reserve adequacy, simulation changes in interest rates, and
Year 2000 activities. The Company's actual results could differ materially from
these management expectations. Factors that could cause future results to vary
from current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state, and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental, and technological
factors affecting the Company's operations, markets, products, services, and
prices.
14
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES 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 banking subsidiary 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, 1999, 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, 1999 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 1998 Annual Report, adjusted to reflect
current market conditions, were used.
NET PORTFOLIO VALUE ANALYSIS at September 30, 1999
($ in thousands)
Changes in interest Estimated Change in NPV
rate (basis points) NPV Amount %
----------------------- --------------- ------------------------
+200 $45,266 (14,737) (24.6)
+100 53,288 (6,715) (11.2)
0 60,003 --
-100 66,978 6,975 11.6
-200 72,590 12,587 21.0
15
IROQUOIS BANCORP, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, various unresolved legal
proceedings remained during the period covered by this report. In the
opinion of management based on review with counsel, the proceedings
should not have a material effect on the financial condition,
liquidity or results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds - 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
(a) Exhibits
Number Description
------ -----------
11 Statement Regarding Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K - None
16
SIGNATURES
----------
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, 1999 /s/Richard D. Callahan
-------------------------
Richard D. Callahan
President & CEO
Date: November 10, 1999 /s/Marianne R. O'Connor
-----------------------
Marianne R. O'Connor
Treasurer & CFO
17
EXHIBIT INDEX
-------------
Number Description
- ------ -----------
11 Statement Regarding Computation of Earnings per Common Share
27 Financial Data Schedule
18