SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
For the transition period from _________ to _________
Commission File No. 0-28934
Empire Federal Bancorp, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 81-0512374
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 South Main Street, Livingston, Montana 59047
------------------------------------------------
(Address of principal executive offices)
(406) 222-1981
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Sections
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class: Common Stock, par value $.01 per share
Outstanding at October 31, 1997: 2,592,100
Transitional Small Business Disclosure Format (check one): YES [ ] NO [ X ]
EMPIRE FEDERAL BANCORP, INC.
INDEX TO FORM 10-QSB
Page
----
PART I FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1997 and December 31, 1996
(unaudited)............................................. 1
Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 1997 and 1996
(unaudited)............................................. 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996
(unaudited)............................................. 3
Notes to Unaudited Interim Consolidated Financial
Statements.............................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 8
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.......................................... 15
Item 2. Changes in Securities...................................... 15
Item 3. Defaults upon Senior Securities............................ 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 5. Other Information.......................................... 15
Item 6. Exhibits and Reports on Form 8-K........................... 15
SIGNATURES ........................................................... 16
PART I, ITEM 1 - FINANCIAL STATEMENTS
- -------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
September 30, December 31,
ASSETS 1997 1996
(unaudited) (unaudited)
----------- -----------
Cash and cash equivalents $ 945,048 1,165,164
Interest-bearing deposits 4,705,584 29,824,391
Investment and mortgage-backed securities
available-for-sale 33,714,412 13,767,773
Investment and mortgage-backed securities
held-to-maturity (estimated market value of
$23,109,067 at September 30, 1997 and
$26,385,527 at December 31, 1996) 22,863,339 26,187,821
Loans receivable, net 44,344,567 41,703,590
Stock in Federal Home Loan Bank of Seattle, at
cost 1,236,200 1,168,800
Accrued interest receivable 413,275 330,927
Premises and equipment, net 2,032,780 1,276,818
Prepaid expenses and other assets 284,524 448,473
------------ -----------
Total assets $ 110,539,729 115,873,757
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Passbook Accounts $ 13,933,290 14,521,391
NOW Accounts 15,598,679 14,629,406
Certificates of Deposit 38,613,979 38,547,069
------------ -----------
Total Deposits $ 68,145,948 67,697,866
Stock oversubscription funds - 6,987,070
Other borrowings 710,200 -
Advances from borrowers for taxes and insurance 385,075 169,872
Accrued expenses and other liabilities 1,098,757 1,409,312
----------- -----------
Total liabilities 70,339,980 76,264,120
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share,
250,000 shares authorized, none issued
and outstanding - -
Common stock, par value $.01 per share,
4,000,000 shares authorized, 2,592,100
issued 25,921 25,921
Additional paid-in capital 25,189,982 25,142,356
Unearned ESOP and MRDP compensation (2,761,418) (2,073,680)
Retained earnings, substantially restricted 16,608,848 15,762,582
Unrealized gain on securities
available-for-sale, net 1,136,416 752,458
------------ -----------
Total stockholders' equity 40,199,749 39,609,637
------------ -----------
Total liabilities and stockholders' equity $ 110,539,729 115,873,757
============ ===========
See accompanying notes to unaudited interim consolidated financial statements.
1
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 1997 and 1996
Three Months Nine Months
Ended Ended
September 30 September 30
----------------------- -----------------------
1997 1996 1997 1996
Interest income: -------- -------- -------- --------
Loans receivable 921,616 907,001 2,748,973 $2,676,191
Mortgage-backed securities 787,957 596,320 2,165,067 1,856,246
Investment securities 181,504 51,364 454,137 136,615
Other 66,344 48,627 392,852 121,763
----------- ----------- ----------- -----------
Total interest income 1,957,421 1,603,312 5,761,029 4,790,815
----------- ----------- ----------- -----------
Interest expense:
Deposits 761,493 804,318 2,245,760 2,391,155
Advances from Federal Home
Loan Bank and other 17,285 6,610 81,638 53,259
----------- ----------- ----------- -----------
Total interest expense 778,778 810,928 2,327,398 2,444,414
Net interest income 1,178,643 792,384 3,433,631 2,346,401
Provision for loan losses - - 19,895 55,000
----------- ----------- ----------- -----------
Net interest income after 1,178,643 792,384 3,413,736 2,291,401
provision for loan losses
Non-interest income:
Insurance commission income 161,130 178,058 469,700 507,344
Customer service charges 50,623 43,786 135,727 120,531
Other 8,695 4,590 17,398 16,052
----------- ----------- ----------- -----------
Total non-interest income 220,448 226,434 622,825 643,927
Non-interest expense:
Compensation and benefits 432,674 421,252 1,187,636 1,139,746
Occupancy and equipment 125,663 111,239 322,070 354,905
Deposit insurance premiums 27,563 53,477 67,620 146,854
Special assessment by the SAIF - 450,728 - 450,728
Other 147,290 134,719 471,882 332,867
----------- ----------- ----------- -----------
Total non-interest expense 733,190 1,171,415 2,049,208 2,425,100
----------- ----------- ----------- -----------
Income (loss) before income taxes 665,901 (152,597) 1,987,353 510,228
Income taxes (benefit) 257,421 (57,562) 783,377 221,567
----------- ----------- ----------- -----------
Net income (loss) 408,480 (95,035) 1,203,976 288,661
=========== =========== =========== ===========
Earnings per share $ 0.17 N/A 0.50 N/A
=========== =========== =========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
2
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
Nine Months Ended
September 30,
1997 1996
(unaudited) (unaudited)
Cash flows from operating activities: --------- ---------
Net income $ 1,203,976 228,661
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 19,895 55,000
Depreciation 114,814 152,224
ESOP shares available for allocation 161,762 -
Stock dividends reinvested in Federal
Home Loan Bank stock (67,400) (63,900)
Decrease (increase) in accrued interest
receivable (82,348) 13,261
Decrease in prepaid expenses and other
assets 163,949 150,139
Increase (decrease) in accrued expenses
and other liabilities (508,352) 246,477
--------- ---------
Net cash provided by operating activities 1,006,296 781,862
--------- ---------
Cash flows from investing activities:
Net change in interest-bearing deposits 25,118,807 (636,281)
Net change in loans receivable (2,660,872) (1,722,503)
Purchases of investment securities
held-to-maturity - (2,272,368)
Proceeds from matured or called investment
securities held-to-maturity 248,750 3,023,568
Principal payments on mortgage-backed
securities held-to maturity 3,075,733 4,442,091
Purchases of investment securities
available-for-sale (8,864,495) -
Proceeds from called investment securities
available for sale 2,412,500 -
Principal payments on mortgage-backed
securities available-for sale 3,116,616 1,255,842
Purchases of mortgage-backed securities
available-for-sale (16,029,505) -
Purchases of premises and equipment (870,776) (35,816)
Purchase of mortgage-backed securities held to
maturity - (2,987,015)
--------- ---------
Net cash provided by investing activities 5,546,758 1,067,518
--------- -----------
Cash flows from financing activities:
Net change in deposits 448,082 (75,427)
Repayment of advances from FHLB and other
borrowings (1,039,800) (1,916,442)
Net change in advances from borrowers for
taxes and insurance 215,203 137,577
Refund of stock oversubscription (6,987,070) -
Dividends paid (357,710) -
Proceeds from advances from FHLB and other
borrowings 1,750,000 -
Funding of MRDP trust (801,875) -
--------- -----------
Net cash used in financing activities (6,773,170) (1,854,292)
--------- -----------
Net increase (decrease) in cash and cash equivalents (220,116) (4,912)
Cash and cash equivalents, beginning of period 1,165,164 1,196,354
--------- ---------
Cash and cash equivalents, end of period $ 945,048 1,191,442
========= =========
See accompanying notes to unaudited interim consolidated financial statements.
3
EMPIRE FEDERAL BANCORP, INC.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 1997
Note 1 Basis of Presentation
---------------------
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for audited financial statements. They
should be read in conjunction with the audited consolidated financial
statements filed as part of the Annual Report on Form 10-KSB for the
year ended December 31, 1996.
The accompanying consolidated financial statements include the accounts
of Empire Federal Bancorp, Inc. (the Holding Company) and its
wholly-owned subsidiary, Empire Federal Savings Bank (Empire) and Dime
Service Corporation (Dime), a wholly-owned subsidiary of Empire. The
Holding Company, Empire and Dime are herein referred to collectively as
"the Company." All significant intercompany balances and transactions
have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentations have
been included. The results of operations for the three and nine months
ended September 30, 1997 and 1996 are not necessarily indicative of the
results which may be expected for an entire year or any other period.
Note 2 Conversion to Stock Ownership
-----------------------------
The Holding Company was incorporated in September 1996 to acquire and
hold all of the outstanding capital stock of Empire to be issued as a
part of Empire's conversion from a federally-chartered mutual savings
and loan association to a federally-chartered capital stock savings
bank. In connection with the conversion, which was consummated on
January 23, 1997, the Company issued and sold 2,592,100 shares of
common stock (par value $.01 per share) at a price of $10 per share for
net offering proceeds of $25,168,277 after conversion and offering
expenses of $752,723. Net cash offering proceeds were $23,094,597 which
is net of $2,073,680 in stock issued to the Employee Stock Ownership
Plan (ESOP) as consideration for future charges to compensation expense
as ESOP shares are earned by employees. The Holding Company used
$9,501,000 of the net cash proceeds to purchase the newly issued
capital stock of Empire. Since the offering proceeds and all required
regulatory approvals to consummate the conversion were received prior
to December 31, 1996, the conversion has been accounted for as being
effective as of December 31, 1996, with the net offering proceeds shown
on the statement of stockholders' equity as proceeds from the sale of
common stock and the stock oversubscription funds recorded as a
liability. The oversubscription funds and accrued interest due were
refunded as of January 23, 1997. In connection with the conversion, the
Company adopted December 31 as its fiscal year end. Prior to
conversion, Empire's fiscal year ended June 30.
4
Note 3 New Accounting Pronouncements
-----------------------------
In October 1995, SFAS No. 123 was issued which establishes financial
accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 encourages all entities to adopt a new
method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at
the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value
based method of accounting, which generally results in compensation
expense only when the exercise price is less than the fair value of the
underlying stock at the date of grant. Companies that elect to remain
with the intrinsic value method are required to disclose in a footnote
to the financial statements pro forma net income and, if presented,
earnings per share, as if the fair value method of SFAS No. 123 had
been adopted. The accounting requirements of SFAS No. 123 are effective
for transactions entered into by the Company beginning July 1, 1996.
The Company expects to utilize the intrinsic value method of accounting
for stock based compensation awards.
SFAS No. 125 provides guidance on accounting for transfers and
servicing of financial assets, recognition and measurement of servicing
assets and liabilities, financial assets subject to prepayment, secured
borrowings and collateral, and extinguishment of liabilities. SFAS No.
125 generally requires that the Company recognize as separate assets
the rights to service mortgage loans for others, whether the servicing
rights are acquired through purchases or loan originations. Servicing
rights are initially recorded at fair value based upon the present
value of estimated future cash flows. Subsequently, the servicing
rights are assessed for impairment, which is recognized in the
statement of income in the period the impairment occurs. For purposes
of performing the impairment evaluation, the related portfolio must be
stratified on the basis of certain risk characteristics including loan
type and note rate. SFAS No. 125 also specifies that financial assets
subject to prepayment, including loans that can be contractually
prepaid or otherwise settled in such a way that the holder would not
recover substantially all of its recorded investment, be measured like
debt securities available-for-sale or trading securities under SFAS No.
115, as amended by SFAS No. 125. The provisions of SFAS No. 125 apply
to transactions occurring after December 31, 1996 and is not expected
to have a material impact on the Company's consolidated financial
position or results of operations.
SFAS No. 128 was issued in February 1997 and will replace the
presentation of primary earnings per share ("EPS") with a presentation
of basic and diluted EPS on the face of the income statement for all
entities with complex capital structures. SFAS No. 128 also requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the equity.
This statement will be effective for the Company commencing February 1,
1998 and earlier application is not permitted. Once effective, this
statement requires restatement of all prior period EPS data.
5
In September 1997, the FASB issued SFAS No. 130 "Reporting
Comprehensive Income" (the "Statement"). The Statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
term "comprehensive income" is used in the Statement to describe the
total of all components of comprehensive income including net income.
The Statement requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be
reported in a financial statement that is displayed in equal prominence
with other financial statements. It does not require a specific format
for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that
financial statement. Enterprises are required to classify items of
"other comprehensive income" by their nature in the financial statement
and display the balance of other comprehensive income separately in the
equity section of a statement of financial position. "Other
comprehensive income' refers to revenues, expenses, gains and losses
that are included in comprehensive income but excluded from earnings
(net income) under current accounting standards (GAAP).
The statement is applicable to all entities that provide a full set of
financial statements consisting of a statement of financial position,
results of operations and cash flows. The Statement is effective for
both interim and annual periods beginning after December 15, 1997.
Earlier application is permitted. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect
the provisions of this Statement.
Note 4 Earnings Per Share
------------------
Earnings per common share is calculated by dividing net income by the
weighted average number of common shares and common stock equivalents
outstanding during the period. Shares sold in the conversion from
mutual to stock ownership are assumed to have been outstanding for the
three and nine months ended September 30, 1997, for purposes of
computing weighted average shares outstanding. Additionally,
unallocated ESOP and MDRP shares are excluded from the weighted average
common shares outstanding calculation, while allocated shares and
shares committed to be released are considered to be outstanding
6
Note 5 Cash Dividend Declared
----------------------
On October 24, 1997, the Board of Directors declared a quarterly cash
dividend of $.075 per common share to stockholders of record on
November 12, 1997, payable on November 26, 1997.
Note 6 Capital Compliance
------------------
The following table presents the Savings Bank's compliance with its
regulatory capital requirements of September 30, 1997 (dollars in
thousands):
Percentage
Amount of Assets
GAAP capital(1) $ 27,429 24.79%
====== ======
Tangible capital $ 25,867 23.83%
Tangible capital requirement 1,600 1.50%
------ ------
Excess $ 24,267 22.33%
====== ======
Core capital $ 25,867 23.83%
Core capital requirements 3,200 3.00%
------ ------
Excess $ 22,667 20.83%
====== ======
Total risk-based capital(2) $ 26,045 65.78%
Total risk-based capital requirement(2) 3,167 8.00%
------ ------
Excess(1) $ 22,878 57.78%
====== ======
(1) GAAP capital includes unrealized gains on certain
available-for-sale securities of $1,136,000 and $426,000 of
investments in Dime, which are excluded for purposes of
calculating both tangible and core capital.
(2) Based on risk-weighted assets of $39,589.
Note 7 Related Party Transaction
-------------------------
The Savings Bank's main office was owned by the president, her sister,
who is married to the executive vice president and their brother and
was leased by the Savings Bank through June 30, 1997. As previously
disclosed, the Board of Directors negotiated the purchase of the
building, which has been approved by the OTS. Effective July 1, 1997,
the property was purchased for $750,000. The negotiated price was based
on independent appraisals. The sellers accepted a 10-year 9% note as
payment.
7
EMPIRE FEDERAL BANCORP, INC.
Notes to Unaudited Interim Consolidated Financial Statements
PART I, ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company.
OPERATING STRATEGY
The business of the Savings Bank consists principally of attracting deposits
from the general public and using such deposits to originate mortgage loans
secured primarily by one- to four-family residences. The Savings Bank also
invests in interest-bearing deposits, investment grade federal agency securities
and mortgage-backed securities. The Savings Bank plans to continue to fund its
assets primarily with deposits, although FHLB advances may be used as a
supplemental source of funds.
The Savings Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Savings Bank's profitability is
also affected by the level of other income and expenses. Other income consists
of service charges on NOW accounts and other fees, proceeds from the sale of
available-for-sale securities, insurance commissions and net real estate owned
income. Other expenses include compensation and employee benefits, occupancy
expenses, deposit insurance premiums, equipment and data servicing expenses,
professional fees and other operating costs. The Savings Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation, and policies concerning monetary and fiscal affairs, housing, and
financial institutions and the attendant actions of the regulatory authorities.
FINANCIAL CONDITION
Consolidated assets decreased by approximately $5.4 million, or 4.7%, from
$115.9 million at December 31, 1996 to $110.5 million at September 30, 1997.
This decrease was primarily attributable to the refund of $8.5 million of excess
subscription funds from the sale of Company Stock.
8
The comparison of the consolidated balance sheet was not materially affected by
market conditions between December 31, 1996 and September 30, 1997. The
investment of the net proceeds from the sale of Company stock during the nine
month ended September 30, 1997, resulted in significant changes in
interest-bearing deposits and investment and mortgage-backed securities
available-for-sale. Interest-bearing deposits at the FHLB decreased from $29.8
million at December 31, 1996 to $4.6 million at September 30, 1997, primarily as
the result of the net reinvestment of $21.6 million of the stock sales proceeds
in mortgage-backed securities and U.S. Government agency bonds
available-for-sale, coupled with the previously noted refund of excess
subscription funds. Subsequent maturities of certain mortgage-backed securities
and U. S. Government Agency bonds during the quarter ended September 30, 1997,
have been reinvested in FHLB interest-bearing deposits. Investment and
mortgage-backed securities held-to-maturity decreased $3.3 million from $26.2
million at December 31, 1996, to $22.9 million at September 30, 1997, as the
result of payments and maturities. Net loans increased by $2.6 million, or 6.3%,
and consisted primarily of permanent and construction loans of 1-4 dwelling
units.
Premises and equipment increased from $1.3 million at December 31, 1996, to $2.0
million at September 30, 1997, primarily as the result of the purchase of the
main office building in Livingston for $750,000. Other borrowings also increased
$710,000 at September 30, 1997, as compared to December 31, 1996, as a result of
this transaction.
Deposits increased by $448,000, or .7%, to $68.1 million at September 30, 1997,
from $67.7 million at December 31, 1996. Stock oversubscriptions at December 31,
1996 amounted to $7.0 million and were refunded to subscribers as part of the
$8.5 million payment made in January 1997.
Stockholders' equity increased from $39.6 million at December 31, 1996, to $40.2
million at September 30, 1997. The increase is the result of net income of $1.2
million, the release of ESOP shares in the amount of $162,000 and an increase of
$383,000 related to the increase in market value of securities
available-for-sale. In addition, during the third quarter of 1997 the Management
Recognition and Development Plan purchased, through a trust funded by the
Company, 50,000 shares of company shares for a total cost of $802,000.
Allocation of shares under the Plan will be made in 1998. Shareholders' equity
was also decreased by the payments of $358,000 in dividends.
ASSET QUALITY
At September 30, 1997, and December 31, 1996, the Savings Bank did not have any
nonaccrual loans or troubled debt restructuring. At September 30, 1997, the
Savings Bank had eleven loans delinquent over 30 days amounting to $431,000 of
which $56,000 were delinquent over 90 days. The Savings Bank has no real estate
acquired through foreclosure.
9
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
Net Income. Net income increased by $915,000, or 316.61%, to $1.2 million for
the nine months ended September 30, 1997, from $289,000 for the same period in
1996 This increase can be attributed to several factors: In September 1996 the
FDIC imposed a special assessment intended to recapitalize the SAIF, which
lowered 1996 income. Empire's assessment was $451,000 on a pre-tax basis
($268,000 on an after-tax basis). In addition, interest income increased by
$970,000 for the nine months ended September 30, 1997, as compared to the same
period in 1996 from the investment of approximately $23.1 million in net
proceeds from the sale of stock. Net income for the nine months ended September
30, 1997, also increased because of the reduced cost of interest-bearing
deposits and a reduction in deposit insurance premiums. Dime incurred a
reduction in profit sharing contingencies from insurance companies for the
period ended September 30, 1997, coupled with an increase in other non-interest
expense partially offset the aforementioned increases in net income.
Net Interest Income. Net interest income increased $1.1 million, or 46.33%, to
$3.4 million for the nine months ended September 30, 1997, from $2.3 million for
the same period in 1996. The increase in net interest income primarily reflected
an increase in the volume of average interest earning assets attributed to the
$23.1 million of net proceeds from the sale of stock.
Interest Income. Total interest income increased by $970,000, or 20.25%, to $5.8
million for the nine months ended September 30, 1997, from $4.8 million for the
same period in 1996. The increase was primarily attributable to the net
investment of $20.0 million in investments and mortgage-backed securities
available-for-sale with stated rates ranging from 5.5% to 7.375% and maturities
ranging from 1998 to 2024. These investments represent a majority of the
proceeds from the sale of the Company stock, most of which were received in late
December 1996.
Interest income on loans increased $73,000, or 2.72%, from $2.7 million for the
period ended September 30, 1996, to $2.8 million for the same period in 1997.
The increase is partially attributable to the increase in the average balance of
loans outstanding from $41.2 million for the period ended September 30, 1996, to
$43.1 million for the same period in 1997. This increase in volume was offset by
a decrease in average yield from 8.65% for the nine months ended September 30,
1996, to 8.50% for the same period in 1997.
Interest Expense. Total interest expense was $2.3 million for the nine months
ended September 30, 1997, as compared to $2.4 million for the same period in
1996. The $117,000, or 4.8%, decrease was the result of a $145,000 decrease in
interest on deposits offset by an increase of $28,000 in other interest expense.
The decline in deposit interest is caused by a reduction of $2.0 million in
average outstanding deposits for the nine months ended September 30, 1996, of
$69.1 million to $67.1 million for the same period in 1997. In addition to the
decline in average deposits, the average cost of deposits for
10
the period ended September 30, 1996, was 4.61% and for the same period in 1997,
the average cost declined to 4.46%.
Other interest expense of $53,000 for the period ended September 30, 1996,
related primarily to short-term borrowings from the FHLB. There were only
nominal borrowings from the FHLB during the period ended September 30, 1997;
however, during this period, $63,000 in interest was paid to subscribers of the
stock sale on stock issuance date of January 23, 1997. Also included in other
interest expense for 1997 is $16,000 related to the debt associated with the
purchase of the main office building in July 1997.
Provision for Loan Losses. The provision for loan losses was $20,000 for the
nine month period ended September 30, 1997, as compared to a $55,000 provision
in the same period in 1996. During the nine months ended September 30, 1997,
Empire charged off $20,000 of mortgage loans. Management's analysis of the loan
portfolio determined that the reserve would be restored to $200,000. At the end
of both periods, the level of reserves was deemed to be adequate by management.
Loan loss reserves as a percentage of loans was .45% at September 30, 1997, and
.48% at September 30, 1996.
Non-Interest Income. Non-interest income decreased $21,000 for the nine months
ended September 30, 1997, as compared to the same period in 1996 primarily as
the result of a $37,000 decrease in commissions and profit sharing contingencies
from insurance companies. This decrease was partially offset by an increase in
customer service charges of $15,000.
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $470,000 and $507,000 were
received for the nine months ended September 30, 1997, and 1996, respectively.
The decrease in commission income resulted primarily from increases in
competition and reduced premiums and commissions from key companies represented
by Dime.
Non-Interest Expense. Total non-interest expense decreased $376,000 for the nine
months ended September 30, 1997, compared to the nine months ended September 30,
1996. This net change was the result of several factors:
* On September 30, 1996, the FDIC imposed a one-time special assessment to
all thrift institutions intended to recapitalize the SAIF. Empire's
assessment was $451,000.
* Compensation and benefits, while remaining relatively stable for the
periods ending September 30, 1997, and 1996, did include a $162,000 charge
for 1997 related to the newly adopted ESOP. For the same period in 1996, a
bonus accrual of $123,000 and a pension accrual of $89,000 was recorded.
For the period ending September 30, 1997, no provision for the pension was
made because of the fully funded status of the plan and the ESOP accrual
was in lieu of the previous bonus accrual.
11
* Occupancy and equipment expense decreased $33,000 from the period ended
September 30, 1996, to the same period in 1997 primarily because of the
fully depreciated status of certain assets.
* Deposit insurance premiums decreased by $79,000, or 53.74%, from $147,000
for the nine months ended September 30, 1996, to $68,000 for the same
period in 1997 because of the recapitalization of SAIF in 1996.
* Other non-interest expense increased $139,000, or 41.76%, from the nine
months ended September 30, 1996, to the same period in 1997. The increase
includes a $27,000 increase in accounting expense caused by the additional
audit required for the change in fiscal year, increased advertising and
stationery costs of $30,000 and legal costs of $47,000 associated with
being a public company.
Income Taxes. Income taxes increased $562,000 from the nine month period ended
September 30, 1996, as compared to the same period in 1997 as the result of the
increase in income before income taxes. The effective combined federal and state
tax rate was 39.42% and 43.43% for the nine months ended September 30, 1997, and
1996, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
Net Income. Net income increased by $503,000 to $408,000 for the three months
ended September 30, 1997, as compared to a $95,000 loss for the same period in
1996. The primary cause for this change was the special assessment imposed by
the FDIC to recapitalize the SAIF on September 30, 1996. Empire's assessment was
$451,000 on a pre-tax basis ($268,000 on an after-tax basis). In addition,
interest income increased by $354,000 for the three months ended September 30,
1997, as compared to the same period in 1996 from the investment of the net
proceeds from the sale of stock. Net income for the three months ended September
30, 1997, also increased because of the reduced cost of interest-bearing
deposits.
Net Interest Income. Net interest income increased $386,000, or 48.74%, to $1.2
million for the three months ended September 30, 1997, from $792,000 for the
same period in 1996. The increase in net interest income primarily reflected an
increase in the volume of average interest earning assets attributed to the
$23.1 million of net proceeds from the sale of stock while average
interest-bearing deposits declined by $2.2 million for the comparable periods.
Interest Income. Total interest income increased by $354,000, or 22.09%, to $2.0
million for the three months ended September 30, 1997, from $1.6 million for the
same period in 1996. The increase was primarily attributable to the net
investment of approximately $20.0 million in investments and mortgage-backed
securities available-for-sale with stated rates ranging from 5.5% to 7.375% and
maturities ranging from 1998 to 2024. These investments represent a majority of
the proceeds from the sale of the Company stock, most of which were received in
late December 1996.
12
Interest income on loans increased $15,000, or 1.65%, from $907,000 for the
three months ended September 30, 1996, to $922,000 for the same period in 1997.
The increase is partially attributable to the increase in the average balance of
loans outstanding from $41.6 million for the three months ended September 30,
1996, to $43.6 million for the same period in 1997. The average yield was 8.72%
for the three months ended September 30, 1996, and 8.46% for the same period in
1997.
Interest Expense. Total interest expense was $779,000 for the three months ended
September 30, 1997, as compared to $811,000 for the same period in 1996. The
$32,000, or 3.95%, decrease was the result of a $43,000 decrease in interest on
deposits and an increase of $11,000 in other interest expense.
The decline in deposit interest is caused by a reduction of $2.2 million in
average outstanding deposits for the three months ending September 30, 1996, of
$69.1 million to $66.9 million for the same period in 1997. In addition to the
decline in average deposits, the average cost of deposits for the three months
ended September 30, 1996, was 4.65% and for the same period in 1997, the average
cost declined to 4.55%.
Other interest expense of $17,000 for the three months ended September 30, 1997,
related primarily to the debt associated with the purchase of the main office
building in July 1997. There were only nominal borrowings during the period
ended September 30, 1996.
Provision for Loan Losses. There was no provision for loan losses for the three
month periods ended September 30, 1997, and 1996. At the end of both periods,
the level of reserves was deemed to be adequate by management. Loan loss
reserves as a percentage of loans was .45% at September 30, 1997, and .48% at
September 30, 1996.
Non-Interest Income. Non-interest income decreased $6,000 for the three months
ended September 30, 1997, as compared to the same period in 1996 primarily as
the result of a $17,000 decrease in insurance commission income offset by an
increase of $11,000 in customer service charges and other non-interest income.
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $161,000 and $178,000 were
received for the three months ended September 30, 1997, and 1996, respectively.
The decrease in commission income resulted primarily from increases in
competition and reduced premiums and profit sharing contingencies from insurance
companies represented by Dime.
Non-Interest Expense. Total non-interest expense decreased $438,000 for the
three months ended September 30, 1997 compared to the three months ended
September 30, 1996. This net change was the result of several factors:
* On September 30, 1996, the FDIC imposed a one-time special assessment to
all thrift institutions intended to recapitalize the SAIF. Empire's
assessment was $451,000.
13
* Compensation and benefits, while remaining relatively stable for the
three months ending September 30, 1997 and 1996, did include a $56,000
charge for 1997 related to the newly adopted ESOP. For the same period in
1996, a bonus accrual of $35,000 and a pension accrual of $27,000 was
recorded. For the period ending September 30, 1997, no provision for the
pension was made because of the fully funded status of the plan and the
ESOP accrual was in lieu of the previous bonus accrual.
* Deposit insurance premiums decreased by $26,000, or 49.06%, from $53,000
for the three months ended September 30, 1996, to $27,000 for the same
period in 1997 because of the recapitalization of SAIF in 1996.
* Other non-interest expense increased $13,000, or 9.33%, from the three
months ended September 30, 1996, to the same period in 1997. The primary
reason for the increase is additional auditing, legal, advertising and
stationery costs associated with being a public company.
Income Taxes. Income taxes increased $315,000 from the three month period ended
September 30, 1996, as compared to the same period in 1997 as the result of the
increase in income before income taxes. The effective combined federal and state
tax rate was 38.66% and 37.72% (benefit) for the three months ended September
30, 1997 and 1996, respectively.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the registrant
or its subsidiaries are a party.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Empire Federal Bancorp, Inc. (1)
3.2 Bylaws of Empire Federal Bancorp, Inc. (1)
10.1 Employment Agreement with Beverly D. Harris (2)
10.2 Employment Agreement with Ernest A. Sandberg (2)
10.3 Employee Stock Ownership Plan (1)
21 Subsidiaries of the Registrant (2)
27 Financial Data Schedule
- ------------------------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, as amended (File No. 333-12653).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996.
15
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.
Empire Federal Bancorp, Inc.
By /s/ Beverly D. Harris November 14, 1997
--------------------- -----------------
Beverly D. Harris Date
President & Chief Executive Officer
(Principal Executive Officer)
By /s/ Ernest A. Sandberg November 14, 1997
---------------------- ------------------
Ernest A. Sandberg Date
Executive Vice President & Secretary
(Principal Financial and Accounting Officer)
16