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, 1999
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
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(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, 1999: 2,001,270
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 Balance Sheets at September 30, 1999
(unaudited) and December 31, 1998 ...................... 1
Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 1999 and 1998
(unaudited)............................................. 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998
(unaudited)............................................. 3
Notes to Unaudited Interim Consolidated Financial
Statements.............................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 14
Item 2. Changes in Securities...................................... 14
Item 3. Defaults upon Senior Securities............................ 14
Item 4. Submission of Matters to a Vote of Security Holders........ 14
Item 5. Other Information.......................................... 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
SIGNATURES............................................................. 15
Part I, Item 1 - Financial Statements
- -------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
September 30, December 31,
Assets 1999 1998
------ ------------ ------------
(unaudited)
Cash and due from banks $ 1,054,611 2,092,487
Interest-bearing deposits 743,673 3,061,310
------------ ------------
Cash and cash equivalents 1,798,284 5,153,797
Investment and mortgage-backed securities
available-for-sale 41,561,032 39,865,809
Investment and mortgage-backed securities
held-to-maturity (estimated market value of
$6,883,342 at September 30, 1999 and
$10,582,975 at December 31, 1998) 6,874,255 10,497,993
Loans receivable, net 56,234,919 49,499,156
Stock in Federal Home Loan Bank of Seattle, at
cost 1,437,300 1,360,600
Accrued interest receivable 421,708 353,145
Premises and equipment, net 2,809,233 2,140,807
Prepaid expenses and other assets 256,785 329,864
------------ ------------
Total assets $111,393,516 109,201,171
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Passbook Accounts $ 14,426,669 13,928,934
NOW Accounts 16,299,901 14,757,910
Certificates of Deposit 39,593,123 37,725,753
------------ ------------
Total Deposits 70,319,693 66,412,597
Advances from Federal Home Loan Bank 6,000,000 4,000,000
Note payable 606,098 647,443
Advances from borrowers for taxes and insurance 384,801 232,492
Accrued expenses and other liabilities 1,113,528 1,607,515
------------ ------------
Total liabilities 78,424,120 72,900,047
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 25,297,321 25,277,770
Unearned ESOP and MRDP compensation (2,387,501) (2,501,054)
MRDP shares acquired (302,011) (432,215)
Retained earnings, substantially restricted 17,732,616 17,327,635
Accumulated other comprehensive income, net 1,042,511 1,913,886
Treasury shares acquired, at cost, 590,830
and 369,698 shares at September 30, 1999
and December 31, 1998 respectively (8,439,461) (5,310,819)
------------ ------------
Total stockholders' equity 32,969,396 36,301,124
------------ -----------
Total liabilities and stockholders' equity $111,393,516 109,201,171
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
1
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1999 and 1998
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income:
Loans receivable $ 1,065,305 $ 1,041,486 $ 3,158,232 $ 3,006,795
Mortgage-backed securities 692,329 749,987 2,105,280 2,329,374
Investment securities 54,867 82,590 132,026 289,633
Other 46,022 44,268 169,097 170,540
----------- ----------- ----------- -----------
Total interest income 1,858,523 1,918,331 5,564,635 5,796,342
----------- ----------- ----------- -----------
Interest expense:
Deposits 728,321 732,890 2,117,152 2,211,511
Advances from Federal
Home Loan Bank and other 72,657 15,276 202,552 47,044
----------- ----------- ----------- -----------
Total interest expense 800,978 748,166 2,319,704 2,258,555
----------- ----------- ----------- -----------
Net interest income 1,057,545 1,170,165 3,244,931 3,537,787
Provision for loan losses - - - -
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,057,545 1,170,165 3,244,931 3,537,787
Non-interest income:
Insurance commission income 145,732 173,528 435,371 474,845
Customer service charges 84,051 53,884 226,874 150,789
Other 3,793 3,968 20,380 18,915
----------- ----------- ----------- -----------
Total non-interest
income 233,576 231,380 682,625 644,549
Non-interest expense:
Compensation and benefits 475,131 851,698 1,370,931 1,731,154
Occupancy and equipment 95,360 71,952 300,920 237,164
Deposit insurance premiums 25,883 26,995 60,763 61,949
Other 165,053 172,065 597,038 539,017
----------- ----------- ----------- -----------
Total non-interest
expense 761,427 1,122,710 2,329,652 2,569,284
----------- ----------- ----------- -----------
Income before
income taxes 529,694 278,835 1,597,904 1,613,052
Income taxes 206,605 148,176 624,404 687,223
----------- ----------- ----------- -----------
Net income $ 323,089 $ 130,659 $ 973,500 $ 925,829
=========== =========== =========== ===========
Basic earnings per share $ 0.19 $ 0.06 $ 0.54 $ 0.41
=========== =========== =========== ===========
Diluted earnings per share $ 0.19 $ 0.06 $ 0.54 $ 0.41
=========== =========== =========== ===========
Dividends declared per share $ 0.10 $ 0.08 $ 0.30 $ 0.235
=========== =========== =========== ===========
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, 1999 and 1998
Nine Months Ended
September 30,
-------------------------
1999 1998
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 973,500 $ 925,829
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - -
Depreciation 177,409 119,836
ESOP shares committed to be released 123,230 168,860
MRDP shares vested 140,078 545,854
Stock dividends reinvested in Federal Home
Loan Bank (76,700) (73,500)
Decrease (increase) in accrued interest
receivable (68,563) 72,616
Decrease in prepaid expenses and other assets 73,079 96,392
Increase (decrease) in accrued expenses and
other liabilities 63,122 (364,163)
----------- -----------
Net cash provided by operating
activities 1,405,155 1,491,724
Cash flows from investing activities:
Net change in loans receivable (6,735,763) (4,177,255)
Proceeds from matured or called investment
securities held-to-maturity - 1,500,200
Principal payments on mortgage-backed
securities held-to maturity 3,623,738 9,777,288
Purchases of investment securities
available-for-sale (1,000,000) (500,000)
Proceeds from matured or called investment
securities available for sale - 4,500,000
Principal payments on mortgage-backed securities
available-for sale 8,453,051 6,413,003
Purchases of mortgage-backed securities
available-for-sale (10,576,758) (11,006,709)
Purchases of premises and equipment (845,835) (121,648)
----------- -----------
Net cash provided by (used in)
investing activities (7,081,567) 6,384,879
Cash flows from financing activities:
Net change in deposits 3,907,096 (1,445,885)
Proceeds from advances from FHLB 2,000,000 -
Repayment of note payable (41,345) (37,675)
Net change in advances from borrowers for taxes
and insurance 152,309 194,313
Dividends paid (568,519) (553,293)
Funding of MRDP trust - (926,976)
Purchase of treasury stock (3,128,642) (3,646,919)
----------- -----------
Net cash provided by (used in)
financing activities 2,320,899 (6,416,435)
----------- -----------
Net increase (decrease) in cash and cash
equivalents (3,355,513) 1,460,168
Cash and cash equivalents, beginning of period 5,153,797 2,904,031
----------- -----------
Cash and cash equivalents, end of period $ 1,798,284 $ 4,364,199
=========== ===========
Cash paid during the period for:
Interest $ 2,139,000 $ 2,238,000
Income taxes 544,000 899,000
=========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
3
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1999
Note 1 Basis of Presentation
---------------------
The accompanying unaudited 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
or 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, 1998.
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 nine months ended September 30, 1999, and 1998
are not necessarily indicative of the results which may be expected for an
entire year or any other period.
Note 2 Comprehensive Income
--------------------
The Company's only component of comprehensive income is the net unrealized
gains or losses on securities available-for-sale. The following summarizes
total comprehensive income for the noted periods:
Nine Months Ended Three Months Ended
- ----------------- ------------------
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
- ------------------ ------------------ ------------------ ------------------
$102,125 $1,254,135 $209,663 $304,183
======== ========== ======== ========
4
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 3 Earnings Per Share
------------------
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. Additionally, ESOP shares which are unallocated
and not yet committed to be released (unallocated) and unvested MRDP shares
issued are excluded from the weighted-average common shares outstanding
calculation. At September 30, 1999, there were 21,713 allocated shares and
10,368 committed to be released ESOP shares. There were 43,851 vested MRDP
shares.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or resulted in the
issuance of common stock that would share in the earnings of the entity. At
September 30, 1999, outstanding stock options and unvested MRDP shares did not
result in dilution of EPS. Dilutive potential common shares are added to the
weighted-average shares used to compute basic EPS. The following information
provides a reconciliation of the numerators and denominators of the basic and
fully diluted EPS computation:
For the nine months ended September 30
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Net Net
Income Shares Per- Income Shares Per-
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount
------- -------- ------ ------- -------- ------
Basic EPS
Net income available
to common
stockholders $973,500 1,803,619 $0.54 $925,829 2,276,773 $0.41
======== ===== =====
Effect of Dilutive
Securities
Stock Options - 3,289
Unvested MRDP
shares - 2,095
--------- ---------
Diluted EPS
Income available
to common
stockholders
plus assumed
conversion $973,500 1,803,619 $0.54 $925,829 2,282,157 $0.41
======== ========= ===== ======== ========= =====
For the three months ended September 30
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Net Net
Income Shares Per- Income Shares Per-
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount
------- -------- ------ ------- -------- ------
Basic EPS
Net income available
to common
stockholders $323,089 1,731,840 $0.19 $ 130 2,171,346 $0.06
======== ===== =====
Effect of Dilutive
Securities
Stock Options - -
Unvested MRDP
shares - -
--------- ---------
Diluted EPS
Income available
to common
stockholders
plus assumed
conversion $323,089 1,731,840 $0.19 $130,659 2,171,346 $0.06
======== ========= ===== ======== ========= =====
5
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 4 Cash Dividend Declared
----------------------
On October 19, 1999, the Board of Directors declared a quarterly cash dividend
of $.010 per common share to stockholders of record on November 10, 1999,
payable on November 24, 1999.
Note 5 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory capital
requirements at September 30, 1999 (dollars in thousands):
Percentage
Amount of Assets
------ ---------
GAAP capital(1) $ 30,132 27.05%
======== ======
Tangible capital $ 28,653 26.25%
Tangible capital requirement 1,637 1.50%
-------- ------
Excess $ 27,016 24.75%
======== ======
Core capital $ 28,653 26.25%
Core capital requirement 3,275 3.00%
-------- ------
Excess $ 25,378 23.25%
======== ======
Total risk-based capital(2) $ 29,943 61.04%
Total risk-based capital requirement(2) 3,924 8.00%
-------- ------
Excess $ 26,019 53.04%
======== ======
(1) GAAP capital includes unrealized gains on certain available-
for-sale securities of $1,042,000 and $437,000 of investments
in Dime, which are excluded for purposes of calculating both
tangible and core capital.
(2) Based on risk-weighted assets of $49,056,000.
6
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 Empire 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 Bank also invests in
interest-bearing deposits, investment grade federal agency securities and
mortgage-backed securities. The Bank plans to continue to fund its assets
primarily with deposits, although FHLB advances may be used as a supplemental
source of funds.
The 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 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, and insurance commissions.
Other expenses include compensation and employee benefits, occupancy expenses,
deposit insurance premiums, equipment and data servicing expenses,
professional fees and other operating costs. The 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.
The Bank's strategy is to operate as a conservative, well-capitalized,
profitable institution dedicated to offering a full line of community banking
services and to providing quality service to all customers. The Bank believes
that it has successfully implemented its strategy by (i) maintaining strong
capital levels, (ii) maintaining effective control over operating expenses to
attempt to achieve profitability under differing interest rate scenarios,
(iii) emphasizing local loan originations, and (iv) emphasizing high-quality
customer service with a competitive fee structure.
Year 2000 Issues
As the Year 2000 approaches, significant concerns have been expressed
regarding the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the Year
2000 and thereafter. Many existing application software products were designed
to accommodate only a two digit year. The Bank's operating, processing and
accounting operations are computer reliant and could be affected by the Year
2000 issues. Both the Bank and the Company are reliant on third-party vendors
for most of their data processing needs as well as certain other significant
functions and services.
For nearly two years the Bank has been investigating and addressing potential
Year 2000 problems. In the course of this process Empire has examined its
computer systems, phone systems, mailing and fax capabilities, office
environmental systems, and servicer relationships related to daily business
processing, ATM processing, ACH processing, check processing, wire transfers
processing, travelers check processing, and all other relevant out-sourced
services. The general Y2K plan is currently on
7
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
schedule with respect to implementation. As of September 30, 1999 all areas of
potential impact directly addressable by the Bank appear to be Year 2000
compliant. Areas to be addressed by third-party vendors have been represented
as either fully compliant or on schedule for full compliance. The Company's
plan for a comprehensive second round of testing of third-party provided data
systems, was completed during April 1999. Both rounds of testing, focusing on
critical operational systems, were successful.
The primary negative impact of the potential Year 2000 problem existed in the
Bank's Olivetti-America 8-window teller hardware/software system previously
used in all three offices. This system had known Year 2000 problems as well as
other inadequacies relevant to current needs on the working teller line.
During December 1998 the Bank replaced the existing teller system with a
PC-based teller system working internally at each office with a Local Area
Network (LAN) and tied together to the central office and our primary servicer
by a Wide Area Network (WAN). This conversion solved the potential Year 2000
problem in the teller system, and also positioned the Bank to take maximum
advantage of current technology in banking as it enters the 21st Century. The
cost of conversion and re-training and implementation of the new PC-based
system was approximately $225,000. Most of the estimated cost was for the new
teller system and will be depreciated over five years.
Because the Bank's operations are dependent on its computer systems and those
of third parties, the failure of these systems to be Year 2000 compliant could
cause substantial disruption of the Bank's business and could have a material
adverse financial impact. Factors that might have material adverse effects
include, but are not limited to: (1) loss of customers to other financial
institutions, resulting in a loss of revenue, if the Bank's third party
vendors are unable to properly process customer transactions; (2) the failure
of governmental agencies such as the Federal Home Loan Bank of Seattle to
provide funds to the Bank which could impair the Bank's ability to fund loans
and deposit withdrawals; (3) concern on the part of depositors that Year 2000
issues could impair access to their deposit account balances could result in
the Bank experiencing deposit outflows prior to December 31, 1999; and (4)
increased personnel costs could be incurred if additional staff is required to
manually perform functions that inoperative systems would have otherwise
performed. At the present time, it is not possible to determine whether any
such events are likely to occur, or to quantify any potential negative impact
they may have on the Bank's future results of operations and financial
condition. Because substantially all of the Bank's loan portfolio consists of
loans to individuals rather than to commercial enterprises, management
believes that Year 2000 issues will not impair the ability of the Bank's
borrowers to repay their debt.
While the Company currently has no reason to believe that the cost of
addressing such issues will materially affect Bank's products, services or
ability to compete effectively, no assurance can be made that the Company or
the third-party vendors on which it relies will become Year 2000 compliant in
a successful and timely fashion. Nevertheless, the Company does not believe
that the cost of addressing the Year 2000 issues will be a material event or
uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions,
nor does it believe that the costs or the consequences of incomplete or
untimely resolutions of its Year 2000 issues represent a known material event
or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be indicative of
future financial condition.
8
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
In our continuing preparation for the Year 2000 the Bank has developed a
Contingency Plan to meet possible failure in our critical systems of data
processing, power, and communications. The basic Y2K Contingency Plan was
approved by the Board of Directors in the second quarter of 1999, but will
continue to be updated through the remainder of 1999.
Financial Condition
Consolidated assets increased by approximately $2.2 million, or 2.0%, from
$109.2 million at December 31, 1998 to $111.4 million at September 30, 1999.
Except for the $1.4 million decrease in the market value of investments and
mortgage-backed securities available-for-sale, the consolidated balance sheet
was not materially affected by market conditions between December 31, 1998 and
September 30, 1999. Net maturities and payments of $3.6 million reduced
investment and mortgage-backed securities held-to-maturity from $10.5 million
at December 31, 1998, to $6.9 million at September 30, 1999. Net loans
increased $6.7 million or 13.6%.
Deposits increased from $66.4 million at December 31, 1998 to $70.3 million,
or 5.9% at September 30, 1999.
Premises and equipment increased by $668,000, or 31.2% from $2.1 million at
December 31, 1998 to $2.8 million at September 30, 1999 primarily as the
result of the purchase of property in Billings, Montana for a new branch
facility.
Stockholders' equity decreased from $36.3 million at December 31, 1998, to
$33.0 million at September 30, 1999. The change is the result of net income of
$974,000, the release of ESOP shares in the amount of $123,000 and a decrease
of $871,000 related to the decrease in market value of securities
available-for-sale. In addition, 8,166 shares of the MRDP vested and unearned
MRDP compensation was reduced by $140,000. Shareholders' equity was also
decreased by the payments of $569,000 in dividends. During the nine-month
period ended September 30, 1999, the Company repurchased 221,132 shares of its
common stock in the open market for an average price of $14.15 per share for a
total of $3.1 million. There were 590,830 shares held in the treasury at
September 30, 1999, and 369,698 shares at December 31, 1998.
Asset Quality
At September 30, 1999, the Bank had no nonaccrual loans. At September 30,
1999, the Bank had seven loans delinquent over 30 days amounting to $226,000
of which one loan amounting to $10,000 was delinquent over 90 days. The Bank
has no real estate acquired through foreclosure.
Results of Operations
The operating results of the Bank depend primarily on its net interest income.
The Bank's net interest income is determined by its interest rate spread,
which is the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities and the degree
of mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities. The Bank's net
earning are also affected by the establishment of provisions for loan losses
and the level of its other non-interest income, including insurance commission
income and deposit service charges, as well as its other expenses and income
tax provisions.
9
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Nine Months Ended September 30,
1999 and 1998
Net Income. Net income increased by $48,000 to $974,000 for the nine months
ended September 30, 1999, as compared to $926,000 for the same period in 1998.
There are several factors related to the increase in net income. Net Income
for the period ended September 30, 1998 included a $395,000 charge to
compensation expense related to the accelerated vesting of shares under the
Management Recognition and Development Plan which was not a recurring event in
1999. Further, net interest income decreased from $3.5 million for the nine
months ended September 30, 1998 to $3.2 million for the same period in 1999
due primarily to a reduction in interest rate spread from 3.02% to 2.89%.
Offsetting this decline is a $38,000 increase in non-interest income.
Interest Income. Total interest income decreased by $232,000, or 4.0%, for the
nine months ended September 30, 1999 as compared to the same period in 1998.
The decline was primarily attributable to a decrease in the average yield on
interest earning assets from 7.49% for the nine months ended September 30,
1998 to 7.09% for the same period in 1999 while overall average earning assets
increased by approximately $1.5 million. The reduction in average yield
reflects a general decrease in interest rates on loans and investments for the
comparable periods.
Interest Expense. Total interest expense was $2.3 million for the nine months
ended September 30, 1999 and 1998.
Average deposits for the nine month period ended September 30, 1999 amounted
to $68.3 million as compared to $66.6 million for the same period in 1998.
Interest on deposits decreased $94,000 for the nine months ended September 30,
1998 as compared to the same period in 1999. The decline in deposit interest
is primarily the result of a reduction in the average cost of deposits from
4.47% to 4.13% for the nine months ended September 30, 1998 as compared to the
same period for 1999.
Other interest expense of $47,000 for the nine months ended September 30, 1998
related primarily to the debt associated with the purchase of the main office
building. Interest expense of $203,000 for the comparable period in 1999
includes, in addition to the interest on the building debt, interest on
advances from the Federal Home Loan Bank.
Provision for Loan Losses. There was no provision for loan losses during the
nine month periods ended September 30, 1999 and 1998, and 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 .39% at September 30, 1999 and .40%
at September 30, 1998.
Non-Interest Income. Non-interest income increased $38,000 for the nine months
ended September 30, 1999, as compared to the same period in 1998 primarily as
the result of a $77,000 increase in customer service charges and other
non-interest income offset by a decrease in commissions and profit sharing
contingencies from insurance companies of $39,000.
Insurance commissions received by Dime are the largest component of
non-interest income. Insurance commissions of $435,000 and $474,000 were
received for the nine months ended September 30, 1999, and 1998, respectively.
Non-Interest Expense. Total non-interest expense decreased $240,000 or 9.3%
from the nine months ended September 30, 1998, compared to the nine months
ended September 30, 1999.
10
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Included in this decrease is a reduction in compensation expense of $360,000
related to the previously mentioned $395,000 accelerated vesting of the MRDP
shares for the period ended September 30, 1998. Offsetting this decrease is a
$64,000 or 26.9% increase in occupancy and equipment expense caused by
additional depreciation related to new teller equipment purchased in late
1998. Other non-interest expense increased from $539,000 for the nine months
ended September 30, 1998 to $597,000 or 10.8% for the comparable period in
1999. Included in this increase were increases in marketing, legal and
internal auditing costs.
Income Taxes. Income taxes decreased $63,000 from the nine month period ended
September 30, 1998, as compared to the same period in 1999 as the result of
the decrease in income before income taxes. The effective combined federal and
state tax rate was 39.08% and 42.60% for the nine months ended September 30,
1999 and 1998, respectively. The federal and state tax rate for the nine
months ended September 30, 1998 is higher than the comparable period in 1999
due to a portion of the MRDP charge in 1998 not being deductible.
11
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended September 30,
1999 and 1998
Net Income. Net income increased by 192,000 to $323,000 for the three months
ended September 30, 1999, as compared to $131,000 for the same period in 1998.
There are several factors related to the increase in net income. Net income
for the period ended September 30, 1998 included a $395,000 charge to
compensation expense related to the accelerated vesting of shares under the
Management Recognition and Development Plan which was not a recurring event in
1999. Further, net interest income decreased $113,000 to $1.1 million at
September 30, 1999 from $1.2 million for the comparable period in 1998 due
primarily to a reduction in interest spread.
Interest Income. Total interest income decreased by $60,000, or 3.1%, for the
three months ended September 30, 1999 as compared to the same period in 1998.
The decline was primarily attributable to a decrease in the average yield on
interest earning assets from 7.47% for the three months ended September 30,
1998 to 6.98% for the same period in 1999 while overall average earning assets
increased by $3.2 million. The reduction in average yield reflects a general
decrease in interest rates on loans and investments for the comparable period.
Interest Expense. Total interest expense was $801,000 for the three months
ended September 30, 1999, as compared to $748,000 for the same period in 1998.
The $53,000 increase was the result of a $5,000 decrease in interest on
deposits offset by a $58,000 increase in other interest expense.
Average deposits for the three month period ended September 30, 1999 amounted
to $70.1 million as compared to $66.7 million for the same period in 1998. The
decline in deposit interest is the result of a reduction in the average cost
of deposits from 4.43% to 4.16% for the three months ended September 30, 1998
as compared to the same period for 1999.
Other interest expense of $15,000 for the three months ended September 30,
1998 related primarily to the debt associated with the purchase of the main
office building. Interest expense of $73,000 for the comparable period in 1999
includes, in addition to the interest on the building debt, interest on
advances from the Federal Home Loan Bank.
Provision for Loan Losses. There was no provision for loan losses during the
three month periods ended September 30, 1999 and 1998, and 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 .39% at September 30, 1999 and .40%
at September 30, 1998.
Non-Interest Income. Non-interest income increased $2,000 for the three months
ended September 30, 1999, as compared to the same period in 1998 primarily as
the result of a $30,000 increase in customer service charges and other
non-interest income offset by a decrease in commissions and profit sharing
contingencies from insurance companies of $28,000.
Insurance commissions received by Dime are the largest component of
non-interest income. Insurance commissions of $146,000 and $174,000 were
received for the three months ended September 30, 1999, and 1998,
respectively.
Non-Interest Expense. Total non-interest expense decreased $361,000 or 32.2%
from the three months ended September 30, 1998, as compared to the three
months ended September 30, 1999. Included in this decrease is a reduction in
compensation expense of $377,000 related to the
12
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
previously mentioned $395,000 accelerated vesting of the MRDP shares for the
three months ended September 30, 1998.
Income Taxes. Income taxes increased $58,000 from the three month period ended
September 30, 1998, as compared to the same period in 1999 as the result of
the increase in income before income taxes. The effective combined federal and
state tax rate was 39.0% and 53.1% for the three months ended September 30,
1999 and 1998, respectively. The federal and state tax rate for the three
months ended September 30, 1998 is higher than the comparable period in 1999
due to a portion of the MRDP charge in 1998 not being deductible.
13
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 William H. Ruegamer (4)
10.3 Employee Stock Ownership Plan (1)
10.4 Management Recognition and Development Plan (3)
10.5 Stock Option Plan (3)
21 Subsidiaries of the Registrant (4)
27 Financial Data Schedule
- ---------------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-1, 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, 1997.
(3) Incorporated by reference to the Company's Annual Meeting Proxy Statement
dated March 16, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
(b) Report on Form 8-K
No forms 8-K were filed during the quarter ended September 30,
1999.
14
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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/ William H. Ruegamer November 12, 1999
------------------------------------ --------------------
William H. Ruegamer Date
President & Chief Executive Officer
(Principal Executive Officer)
By /s/ Linda M. Alkire November 12, 1999
------------------------------------ --------------------
Linda M. Alkire Date
Chief Financial Officer
15