SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-KSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the six months ended December 31, 1996
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from June 30, 1996 to December 31, 1996
Commission File Number: 0-28934
EMPIRE FEDERAL BANCORP, INC.
- -----------------------------------------------------------------------------
(Exact name of small business issuer 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) (Zip Code)
Registrant's telephone number, including area code: (406) 222-1981
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
--- ----
Indicate by check mark whether disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of the Registrant's knowledge, in definitive proxy
or other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB.
YES x NO
----- -----
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant, based on the closing sales price of the registrant's Common
Stock as quoted on the Nasdaq National Market System under the symbol "EFBC"
on March 24, 1997, was $35,317,000 (2,592,100 shares at $13.625 per share).
It is assumed for purposes of this calculation that none of the registrant's
officers, directors and 5% stockholders are affiliates.
The registrant's revenues for the six months ended December 31, 1996
were $3,669,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one) Yes No X
---- ----
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PART I
Item 1. Business
Empire Federal Bancorp, Inc. (the "Corporation"), a Delaware corporation,
was incorporated on September 20, 1996 for the purpose of becoming the holding
company for Empire Federal Savings Bank ("Empire Federal" or the "Savings
Bank") (the Corporation and Empire Federal shall at times be referred to as
the "Corporation") upon Empire Federal's conversion from a federal mutual
stock savings and loan association to a federal stock savings bank
("Conversion"). The Conversion was completed on January 23, 1997. At
December 31, 1996, the Corporation had total assets of $116.0 million, total
deposits of $67.7 million and stockholders' equity of $39.6 million. The
Corporation has not engaged in any significant activity other than holding the
stock of Empire Federal. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
Empire Federal.
Empire Federal was organized in 1923 as a Montana-chartered mutual
building and loan association under the name "Empire Building and Loan
Association." In 1970, the Savings Bank converted to a federal charter and
adopted the name "Empire Federal Savings and Loan Association of Livingston."
The Savings Bank's deposits are federally insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF"). The Savings Bank is a member of the Federal Home Loan Bank ("FHLB")
System.
The Savings Bank is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four- family residential dwellings. Lending activities
also have included the origination of multi-family, commercial real estate and
home equity loans. The Savings Bank's primary business has been that of a
traditional thrift institution, originating loans in its primary market area
for its portfolio. At December 31, 1996, the Savings Bank's gross loan
portfolio totaled $43.8 million, of which 80.50% were one- to four-family
residential mortgage loans, 5.11% were construction loans (most of which
related to one- to four-family residences), 5.11% were multi-family loans, and
2.55% were commercial real estate loans. In addition, the Savings Bank has
maintained a significant portion of its assets in investment and
mortgage-backed securities. Similar to its lending activities, the Savings
Bank's investment portfolio has been weighted toward mortgage-backed
securities secured by one- to four- family residential properties. The
portfolio also includes U.S. Government agency securities. Investment
securities, including mortgage-backed securities, totaled $40.0 million, or
34.5% of total assets, at December 31, 1996. In addition to interest and
dividend income on loans and investments, the Savings Bank receives other
income from the sale of insurance products through its wholly-owned
subsidiary, Dime Service Corporation.
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Selected Consolidated Financial Information
The following tables set forth certain information concerning the consolidated financial position and
results of operation of the Corporation at the dates and for the periods indicated. This information is
qualified in its entirety by reference to the detailed information and Consolidated Financial Statements and
Notes thereto appearing in Item 7 of this Report. The Corporation changed its fiscal year end from June 30
to December 31 in connection with the Conversion.
At
December At June 30,
-------- ---------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In Thousands)
SELECTED FINANCIAL
CONDITION DATA:
<S> <C> <C> <C> <C> <C> <C>
Total assets $115,874 $86,810 $85,495 $86,143 $83,107 $78,586
Cash and interest-bearing
deposits 30,990 2,499 2,196 2,098 1,892 2,857
Investment and mortgage-backed
securities available-for-sale 13,768 13,877 1,192 1,081 -- --
Investment and mortgage-backed
securities held-to-maturity 26,188 25,196 39,441 38,805 38,010 36,222
Loans receivable, net 41,704 41,882 39,432 41,387 40,347 37,038
Deposits 67,698 68,548 67,064 68,336 65,234 62,835
Advances from FHLB -- 1,500 1,751 2,189 4,106 3,513
Total equity 39,610 15,876 15,500 14,475 12,792 11,534
2
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<TABLE>
Six Months Ended
December Year Ended June 30,
----------------- --------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In Thousands)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C>
Interest income $3,230 $6,304 $6,305 $6,272 $6,664 $6,627
Interest expense 1,626 3,310 2,938 2,641 2,955 3,562
------ ------ ------ ------ ------ ------
Net interest income 1,604 2,994 3,367 3,631 3,709 3,065
Provision for loan losses -- 55 -- -- 82 31
------- ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 1,604 2,939 3,367 3,631 3,627 3,034
------- ------ ------ ------ ------ ------
Non-interest income:
Insurance commission income 336 688 691 589 461 326
Customer service charges 86 145 130 149 141 145
Other income 17 45 36 37 25 57
------- ------ ------ ------ ------ ------
Total non-interest income 439 878 857 775 627 528
Non-interest expense:
Compensation and benefits 807 1,615 1,542 1,385 1,134 955
Occupancy and equipment 171 340 264 268 262 244
Deposit insurance premiums 56 185 226 177 139 152
SAIF special assessment 451 -- -- -- -- --
Other general and
administrative 355 646 651 674 542 477
Provision for losses on real
estate owned -- -- -- -- 61 406
----- ----- ----- ----- ----- -----
Total non-interest expense 1,840 2,786 2,683 2,504 2,138 2,234
----- ----- ----- ----- ----- -----
Income before income taxes 203 1,031 1,541 1,902 2,116 1,328
Income tax expense 61 399 589 713 857 498
----- ----- ----- ----- ----- -----
Income before cumulative effect of
change in accounting principle 142 632 952 1,189 1,259 830
Cumulative effect of change in
accounting for income taxes -- -- -- 56 -- --
----- ------ ------ ------- ------- ------
Net income $ 142 $ 632 $ 952 $ 1,245 $ 1,259 $ 830
===== ====== ====== ======= ======= =====
3
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<TABLE>
At of For
the Six
Months
Ended
December 31, At or For the Year Ended June 30,
------------ ----------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS:
<S> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets) 0.32%(1) 0.72% 1.12% 1.47% 1.55% 1.10%
Return on average equity (net income
divided by average equity) 1.74(1) 3.99 6.33 9.13 10.25 7.42
Average interest-earning assets
to average interest-bearing
liabilities 121.86 119.33 118.48 117.34 118.34 116.99
Net interest income after provision
for loan losses to total
non-interest expense 87.21(1) 105.49 125.49 145.02 169.63 135.84
Interest rate spread 2.90 2.80 3.33 3.87 3.96 3.31
Net yield on average interest-earning
assets 3.72 3.57 3.97 4.43 4.63 4.12
Efficiency ratio (non-interest
expense divided by the sum of net
interest income and non-interest
income) 90.05(1) 71.95 63.52 56.83 49.32 62.17
Equity Ratios:
Average equity to average assets
ratio (average equity divided
by average total assets) 18.19 18.11 17.07 16.08 15.16 14.80
Equity to assets at year end 34.18 18.29 18.13 16.80 15.39 14.68
Asset quality ratios:
Non-performing assets to
total assets -- -- -- 0.02 0.62 0.65
Non-performing loans to
total assets -- -- -- 0.02 0.06 0.06
Non-performing loans to
net loans -- -- -- 0.04 0.13 0.12
Allowance for loan losses, REO and
other repossessed assets to
non-performing assets * * * 966.67 117.57 91.36
Allowance for loan losses to total
loans outstanding 0.46 0.46 0.36 0.34 0.35 0.17
4
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<TABLE>
At
December 31, At June 30,
------------ -----------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
OTHER DATA:
Number of:
<S> <C> <C> <C> <C> <C> <C>
Real estate loans outstanding 731 744 765 824 853 864
Deposit accounts 10,598 10,632 10,623 10,692 10,540 10,613
Full-service offices 3 3 3 3 3 3
_______________________
* Not meaningful.
(1) Includes special SAIF assessment of $451,000.
5
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Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan as of the dates
indicated. The Savings Bank had no concentration of loans of a given category
exceeding 10% of total gross loans other than as set forth below.
At December 31, At June 30,
--------------------- ----------------------
1996 1996
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
One- to four-
family $35,287 80.50% $35,202 81.66%
Multi-family 2,241 5.11 2,333 5.41
Commercial real
estate 1,118 2.55 1,182 2.74
Consumer 2,321 5.30 2,112 4.90
Share loans 629 1.43 901 2.09
Construction 2,238 5.11 1,380 3.20
------ ------
Total 43,834 100.00% 43,110 100.00%
====== ======
Less:
Loans in process 1,657 770
Deferred loan
origination
fees and costs 274 258
Allowance for
loan losses 200 200
------- -------
Total loans,
net $41,703 $41,882
======= =======
Permanent Residential One- to Four-Family Mortgage Loans. The primary
lending activity of the Savings Bank is the origination for portfolio of
permanent residential one- to four-family first mortgage loans. Management
believes that this policy of focusing on single-family residential mortgage
loans has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. At December 31, 1996, $35.3 million,
or 80.50%, of the Savings Bank's total loan portfolio, before net items,
consisted of permanent residential one- to four-family mortgage loans, with an
average balance of $51,000.
The Savings Bank presently originates for portfolio fixed-rate mortgage
loans secured by one- to four-family properties with terms of up to 20 years.
At December 31, 1996, $32.7 million, or 74.60% of the total loans before net
items were fixed rate one- to four-family loans and $2.6 million, or 5.90%,
were adjustable rate mortgage ("ARM") loans. The Savings Bank has offered two
ARM products for portfolio which adjust annually subject to a limitation on
the annual increase of 1.5% to 2.0% and an overall limitation of 5.0% or to a
specific ceiling rate. These ARM products utilize either the OTS Monthly
Median Cost of Funds Index or the Semi-Annual Cost of Funds Index ("COFI").
Loans based on COFI constitute a majority of the Savings Bank's adjustable
rate loans. The COFI is a lagging model index which, together with the
periodic and overall interest rate caps, may cause the yield on such loans to
adjust more slowly than the cost of interest-bearing liabilities especially in
a rapidly rising rate environment. The Savings Bank's ARM loans do not
permit negative amortization of principal and carry no prepayment
restrictions. Borrower demand for ARM loans versus fixed-rate mortgage loans
is a function of the level of interest rates, the expectations of changes in
the level of interest rates and the difference between the initial interest
rates and fees charged for each type of loan. The relative amount of
fixed-rate mortgage loans and ARM loans that can be originated at any time is
largely determined by the demand for each in a competitive environment.
ARM loans help reduce the Savings Bank's exposure to changes in interest
rates. There are, however, unquantifiable credit risks resulting from the
potential of increased costs due to changed rates to be paid by the customer.
It is possible that during periods of rising interest rates the risk of
default on ARM loans may increase as a result of repricing with increased
costs to the borrower. Another consideration is that although ARM loans allow
the Savings Bank to increase the sensitivity of its asset base to changes in
the interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
6
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considerations, the Savings Bank has no assurance that yields on ARM loans
will be sufficient to offset increases in the Savings Bank's cost of funds.
The Savings Bank's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner occupied properties to
80% of the lesser of the appraised value or the purchase price, however, most
loans have loan-to-value ratios of 75% or less. Appraisals are obtained on
all properties and are made by independent fee appraisers approved by the
Board of Directors.
The Savings Bank offers fixed-rate, permanent residential one- to
four-family mortgage loans with terms of up to 30 years. Substantially all
permanent one- to four-family loans have original contractual terms to
maturity of 20 to 25 years and are primarily made for loan amounts of less
than $250,000. Such loans generally are amortized monthly with principal and
interest due each month and customarily include "due-on-sale" clauses. The
Savings Bank enforces due-on-sale clauses to the extent permitted under
applicable laws. Substantially all of the Savings Bank's mortgage loan
portfolio consists of conventional loans. The Savings Bank has not originated
significant amounts of mortgage loans on second residences.
The Savings Bank also originates residential mortgage loans secured by
non-owner occupied rental properties within its primary market area.
Generally, such loans are made at higher interest rates than owner occupied
residential mortgage loans, with a loan-to-value ratio of 70%, and with a debt
coverage ratio of 1.25x.
The Savings Bank requires title insurance on all real estate secured
loans. The Savings Bank also requires that fire and extended coverage
casualty insurance or homeowners insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the outstanding loan
balance.
Construction Loans. The Savings Bank makes construction loans primarily
to prospective home owners for the construction of their single-family
residences, which generally convert to a permanent loan upon the completion of
construction. Construction loans generally begin to amortize as permanent
residential one- to four- family mortgage loans after the construction period
(typically six months) is completed, unless extended. At December 31, 1996,
construction loans amounted to $2.2 million, or 5.11%, of the Savings Bank's
total loan portfolio, before net items. In connection with the recent
population growth experienced in Bozeman, Montana, the Savings Bank
experienced an increase in the origination of construction loans during fiscal
1996. The balance of the Savings Bank's construction loan portfolio increased
from $1.4 million at June 30, 1996 to $2.2 million at December 31, 1996.
Construction loans have rates and terms which generally match the
non-construction loans then offered by the Savings Bank, except that during
the construction phase, the borrower pays only interest on the loan. The
borrower is qualified at the interest rate for the permanent loan. The
Savings Bank's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Savings
Bank periodically reviews the progress of the underlying construction project.
Construction lending is generally limited to the Savings Bank's primary
lending areas and is underwritten pursuant to the same general guidelines used
for originating permanent one- to four-family loans.
Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction and the possibility of costs exceeding
the initial estimates. The Savings Bank has sought to minimize the risks
associated with permanent construction lending by limiting construction loans
to qualified owner occupied borrowers with construction performed by qualified
builders located primarily in the Savings Bank's market area.
Multi-Family and Commercial Real Estate Lending. The Savings Bank also
originates loans secured by multi-family and commercial real estate. At
December 31, 1996, the Savings Bank's loan portfolio included $2.2 million in
multi-family and $1.1 million in commercial real estate loans.
Multi-family and commercial real estate lending affords the Savings Bank
an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. However, loans
secured
7
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by such properties are generally greater in amount, more difficult to evaluate
and monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation and management of the properties, repayment of such loans
may be influenced by adverse conditions in the real estate market or the
economy.
Multi-family and commercial real estate loans originated by the Savings
Bank are predominately fixed-rate loans with terms to maturity of 15 to 20
years. The Savings Bank's commercial real estate portfolio consists of loans
on a variety of properties including office buildings and churches.
Multi-family loans generally are secured by small to medium sized apartment
buildings. Appraisals on properties which secure multi-family and commercial
real estate loans are performed by an independent appraiser engaged by the
Savings Bank before the loan is made. Underwriting of commercial and
multi-family loans includes a thorough analysis of the cash flows generated by
the real estate to support the debt service and the financial resources,
experience, and income level of the borrowers. The Savings Bank imposes a
debt coverage ratio of 1.25x to ensure that the property securing the loans
will generate sufficient cash flow to adequately cover operating expenses and
debt service payments plus provide an acceptable return to the investor.
Operating statements on each multi-family and commercial real estate loan are
required and reviewed by management on an annual basis.
At December 31, 1996, the average loan balance of the Savings Bank's
multi-family loans was $172,000. At December 31, 1996, the Savings Bank had
four multi-family loans with one borrower with an aggregate balance of $1.2
million. All of the properties securing multi-family loans are located in the
Savings Bank's primary market area with the exception of one participation
loan on a property located in California with a balance at December 31, 1996
of $322,000. At December 31, 1996, all multi-family and commercial real
estate loans were current.
Consumer Lending. The Savings Bank's consumer loan portfolio consists
primarily of home equity, home improvement, share loans (loans secured by
deposits) and, to a substantially lesser extent, mobile home and automobile
loans. At December 31, 1996, the Savings Bank's consumer loans totalled
approximately $3.0 million, or 6.73%, of the Savings Bank's gross loans of
which $2.2 million, or 5.11%, consisted of home equity and home improvement
loans.
Consumer loans are made at fixed interest rates and for varying terms.
Home equity and home improvement loans are made for terms up to 15 years for
owner occupied residences. In the case of the majority of home equity loans,
the Savings Bank holds a second mortgage behind another financial institution
that holds the first mortgage. When originating a home equity loan, the
Savings Bank accounts for both the first and second mortgage liens and
generally limits the loan-to-value ratio to 80%.
8
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Maturity of Loan Portfolio. The following table sets forth the maturity of the Savings Bank's loan
portfolio at December 31, 1996. The table does not include prepayments of scheduled principal repayments.
ARM loans are shown as maturing based on contractual maturities.
Commercial
1-4 Family Multi-family and Share Construction Consumer Total
---------- ------------ ---------- ------------ -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C> <C>
Within 3 months $ 4 $ -- $ -- $ 842 $ 267 $ 1,113
3 months to 1 year 70 159 6 1,396 246 1,877
After 1 year:
1 to 3 years 134 -- 27 -- 144 305
3 to 5 years 406 35 26 -- 250 717
5 to 10 years 2,767 838 195 -- 723 4,523
10 to 20 years 23,109 1,008 864 -- 1,224 26,205
Over 20 years 8,797 201 -- -- 96 9,094
------- ------ ------ ------ ------- ------
Total due after
one year . . . 35,213 2,082 1,112 -- 2,437 40,844
------- ------ ------ ------ ------ ------
Total amount due $35,287 $2,241 $1,118 $2,238 $2,950 43,834
======= ====== ====== ====== ======
Less:
Allowance for loan
loss 200
Loans in process 1,657
Deferred loan fees 274
-------
Loans receivable,
net $41,703
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1996, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed- Floating- or
Rates Adjustable-Rates Total
----- ---------------- -----
(In Thousands)
One- to four-family $32,702 $2,585 $35,287
Multi-family 625 1,616 2,241
Non-residential 1,118 -- 1,118
Construction 2,238 -- 2,238
Consumer and share 2,950 -- 2,950
------- ------ -------
Total $39,633 $4,201 $43,834
======= ====== =======
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Scheduled contractual principal repayments of loans as presented in the
preceding table do not reflect the actual life of such assets. The average
life of loans ordinarily is substantially less than their contractual terms
because of prepayments. In addition, due-on-sale clauses on loans generally
give the Savings Bank the right to declare loans immediately due and payable
in the event, among other things, that the borrower sells the real property
subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan market
rates are higher than rates on existing mortgage loans and, conversely,
decrease when rates on existing mortgage loans are higher than current
mortgage loan market rates.
Loan Solicitation and Processing. Loan customers are solicited through
advertising media and contacts with local real estate brokers. Upon receipt
of a loan application from a prospective borrower, a credit report and other
data are obtained to verify specific information relating to the loan
applicant's employment, income and credit standing. All of the Savings Bank's
lending is subject to its written nondiscriminatory underwriting standards,
loan origination procedures and lending policies prescribed by the Savings
Bank's Board of Directors.
All loans must be approved by the Savings Bank's Loan Committee, which
consists of any three members of the Board of Directors. Interest rates are
subject to change if the approved loan is not closed within the time of the
commitment. Because the Savings Bank originates loans for its own portfolio,
many of the loans do not comply with all secondary market documentation
criteria. This practice has enabled the Savings Bank to develop an expedited
loan application and approval process which management believes provides it
with a competitive advantage in its primary market area while continuing to
maintain its underwriting standards. Management of the Savings Bank also
believes its local decision-making capabilities is an attractive quality to
customers within its market area. The Savings Bank's loan approval process
allows loans to be approved and closed in approximately four weeks.
Loan Commitments. Loan commitments typically contain a termination date
of 30 days from the date of the commitment letter that is issued at the time
the loan is approved. The Savings Bank had outstanding loan commitments of
approximately $80,000 at December 31, 1996, all of which were for fixed rate
loans. See Note 14 of Notes to the Consolidated Financial Statements.
Loan Originations, Sales and Purchases. During the six months ended
December 31, 1996, the Savings Bank's total gross mortgage loan originations
were $5.2 million.
The Savings Bank has occasionally originated or participated in loans
secured by properties outside the State of Montana. These properties are
primarily located in Northern California but also include loans secured by
one- to four- family properties in Massachusetts, New Mexico, Arizona and
Colorado. At December 31, 1996, these loans amounted to $1.7 million and
consisted of (i) $855,000 in permanent residential one- to four-family
mortgage loans, (ii) $419,000 in multi-family loans, (iii) a participation
interest in a commercial real estate loan for $322,000, and (iv) two whole
loan purchases for $144,000. The Savings Bank has purchased loan
participation interests primarily during periods of reduced loan demand in its
market area. At December 31, 1996, the Savings Bank had four participations
in its primary market area with a balance of $165,000. Any such purchases are
made in conformance with the Savings Bank's underwriting standards. The
Savings Bank may decide to purchase additional loans outside its market area
in the future depending upon the demand for mortgage credit in its market
area, however, it has not purchased any participation interests outside of its
primary market area during the past five years.
Historically, the Savings Bank has been a portfolio lender, maintaining
the residential mortgage loans it originates in its portfolio rather than
selling them in the secondary market. The Savings Bank currently intends to
continue this practice.
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The following table sets forth the Savings Bank's originations and loan
sales and principal repayments during the periods indicated. Predominately
all mortgage loan originations during the periods indicated were fixed-rate
loans.
Six Months
Ended December 31, Year Ended June 30,
1996 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Total gross loans
receivable at
beginning of period $43,110 $40,124 $42,637 $41,344 $38,120
------- ------- ------- ------- -------
Loans originated:
One- to four-family 2,636 7,411 2,857 13,223 13,115
Multi-family -- 225 57 -- 311
Construction 2,096 2,631 641 1,937 1,592
Commercial -- 47 -- -- 18
Consumer 463 2,069 899 413 1,200
------ ------ ----- ------ -----
Total loans originated 5,195 12,383 4,454 15,578 16,236
Loans sold:
Whole loans -- -- -- -- --
Participations sold -- -- -- -- --
Total loans sold -- -- -- -- --
Loan principal repayments (4,471) (9,397) (6,967) (14,280) (13,012)
Net loan activity 724 2,986 (2,513) 1,293 3,224
------ ------ ------- ------- ------
Total gross loans
receivable at end of
period $43,834 $43,110 $40,124 $42,637 $41,344
======= ======= ======= ====== =======
Management of the Savings Bank attributes the reduced loan originations
during fiscal 1995 relative to fiscal 1996 to a general decline in the economy
of the Savings Bank's market area at that time. The relatively low interest
rate environment that prevailed during fiscal years 1994 and 1993 contributed
to high levels of mortgage loan refinancings during those periods.
Loan Origination and Other Fees. The Savings Bank charges loan
origination fees, which are a percentage of the principal amount of the
mortgage loan. The amount of fees charged by the Savings Bank is generally up
to 1% for mortgage loans and 2% for construction loans. The Savings Bank
generally does not charge fees for home equity loans. Current accounting
standards require that origination fees received (net of certain loan
origination costs) be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees or costs associated with
loans that are prepaid are recognized as income at the time of prepayment.
The Savings Bank had $274,000 in net deferred loan fees at December 31, 1996.
Non-Performing Assets and Delinquencies. When a mortgage loan borrower
fails to make a required loan payment when due, the Savings Bank institutes
collection procedures. All loan payments are due on the contractualdue date,
however, a loan is not considered delinquent and collection procedures are not
instituted until after the 30th day of the contractual due date. The Savings
Bank does not charge its borrowers late penalty fees on payments made after
the contractual due date because the Savings Bank charges daily interest on
the outstanding loan balance. The first notice is mailed to the borrower 30
days after the contractual due date and, if necessary, a second written notice
follows within 30 days thereafter giving the borrower 15 days to respond and
correct the delinquency. Attempts to contact the borrower by telephone
generally begin soon after the first notice is mailed to the borrower. If a
11
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satisfactory response is not obtained, continuous follow-up contacts are
attempted until the loan has been brought current or foreclosure is initiated.
Attempts to interview the borrower, preferably in person, are made to
establish (i) the cause of the delinquency, (ii) whether the cause is
temporary, (iii) the attitude of the borrower toward the debt, and (iv) a
mutually satisfactory arrangement for curing the default.
After such attempts have been made by the Savings Bank, or sooner if the
borrower is chronically delinquent and all reasonable means of obtaining
payment on time have been exhausted, foreclosure is initiated according to the
terms of the security instrument and applicable law. Interest income on loans
is then reduced by the full amount of accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Savings Bank institutes the same
collection procedures as for its mortgage loan borrowers.
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent more than 30
days, the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
At December 31 and June 30, 1996, the Savings Bank did not have any
nonaccrual loans, accruing loans contractually past due 90 days or more as to
principal or interest payments, or troubled debt restructurings within the
meaning of SFAS No. 15. Loans amounting to $52,000 and $290,000 were past due
(30-89 days) but still accruing at December 31 and June 30, 1996,
respectively.
Real Estate Owned. The Savings Bank had no real estate acquired through
foreclosure or in satisfaction of loans at December 31, 1996 or June 30, 1996.
See Note 1 of Notes to the Consolidated Financial Statements for a discussion
of the Savings Bank's procedures for accounting for real estate owned.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses may make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by the Savings Bank.
At December 31, 1996, the Savings Bank had two substandard loans totaling
$73,000 and at June 30, 1996 had two substandard loans totaling $75,000.
Allowance for Loan Losses. The Savings Bank has established a systematic
methodology for determining provisions for loan losses. The methodology is
set forth in a formal policy and considers the need for an overall general
valuation allowance as well as specific allowances for individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term
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of the loan, general economic conditions and, in the case of a secured loan,
the quality of the security for the loan. The Savings Bank may increase its
allowance for loan losses by charging provisions for loan losses against the
Savings Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. The amount of the allowance is based
on management's evaluation of the collectibility of the loan portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
peer group comparisons and economic conditions. Allowances for impaired loans
are generally determined based on collateral values or the present value of
estimated cash flow. Specific valuation allowances may be established to
absorb losses on loans for which full collectibility may not be reasonably
assured. The amount of the allowance is based on the estimated value of the
collateral securing the loan and other analyses pertinent to each situation.
At December 31, 1996, the Savings Bank had an allowance for loan losses
of $200,000, which management believed to be adequate to absorb losses
inherent in the portfolio at that date. Although management believes that it
uses the best information available to make such determinations in accordance
with GAAP, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, there can be no assurance that
regulators, in reviewing the Savings Bank's loan portfolio, will not request
the Savings Bank to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing
allowance for loan losses will continue to be adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as
a result of the factors discussed above. Any material increase in the
allowance for loan losses may adversely affect the Savings Bank's financial
condition and results of operations.
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated. As indicated by the
table, there has not been any fluctuations in the allowance for loan losses.
Six Months
Ended December 31, Year Ended June 30,
------------------ -------------------
1996 1996 1995
---- ---- ----
(Dollars in Thousands)
Total loans outstanding
before net items $43,834 $43,110 $40,124
======= ======= =======
Allowance balance at
beginning of year 200 145 145
------- ------- ------
Provision -- 55 --
Net charge-offs -- -- --
------- ------- -------
Allowance balance at
end of year $ 200 $ 200 $ 145
======= ======= =======
Allowance for loan losses
as a percent of total
loans outstanding 0.46% 0.46% 0.36%
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The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire
loan portfolio. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any other category.
At December 31, At June 30,
------------------ --------------------
1996 1996
------------------ --------------------
% of % of
Loans Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------- --------- ------ ---------
(Dollars in Thousands)
One- to four-family $120 80.50% 120 81.66%
Commercial real estate 40 5.11 40 2.74
Multi-family 25 2.55 25 5.41
Construction -- 5.11 -- 3.20
Consumer and share 15 6.73 15 6.99
---- ------ ---- ------
Total allowance $200 100.00% $200 100.00%
==== ====== ==== ======
Investment Activities
The Savings Bank is permitted under federal law to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, deposits at
the FHLB-Seattle, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, the Savings Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. The Savings Bank is also
required to maintain an investment in FHLB stock as a condition of membership
in the FHLB-Seattle.
The Savings Bank is required under federal regulations to maintain a
minimum amount of liquid assets. At December 31, 1996, the Savings Bank's
regulatory liquidity of 32.1% was significantly in excess of the 5% required
by OTS regulations. The securities in the Savings Bank's investment portfolio
provide it with liquidity for funding loan originations and enables the
Savings Bank to improve the match between the maturities and repricing of its
interest-rate sensitive assets and liabilities. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" contained in Item 6 of this Report and "REGULATION."
The President of the Savings Bank determines appropriate investments in
accordance with the Board of Directors' approved investment policies and
procedures. The Savings Bank's policies generally limit investments to U.S.
Government and agency securities and mortgage-backed securities issued and
guaranteed by FHLMC, FNMA and Government National Mortgage Association
("GNMA"). The Savings Bank's policies provide that investment purchases be
ratified at monthly Board of Directors meetings. Investments are made based
on certain considerations, which include the interest rate, yield, settlement
date and maturity of the investment, the Savings Bank's liquidity position,
and anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments). The effect that the proposed investment would
have on the Savings Bank's credit and interest rate risk, and risk-based
capital is also given consideration during the evaluation.
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At December 31, 1996, the Savings Bank's investment and mortgage-backed
securities portfolio totaled $40.0 million and consisted principally of U.S.
Government and agency obligations and mortgage-backed securities. At December
31, 1996, the Savings Bank had investment securities available-for-sale with
an estimated market value of $1.7 million which includes stock in the FHLMC
and two mutual funds, the assets of which consisted of ARM loans and U.S.
Government and agency securities. The FHLMC common and preferred stock at
December 31, 1996 had an amortized cost of $68,000 and an estimated market
value of $1.3 million. The market value of the FHLMC common and preferred
stock has increased significantly since their purchase in the mid-1980's.
From time to time, investment levels may be increased or decreased depending
upon the yields on investment alternatives and upon management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities and its expectation of the level of yield that will be available
in the future, as well as management's projections as to the short-term demand
for funds to be used in the Savings Bank's loan origination and other
activities.
U.S. Government and Agency Obligations. The Savings Bank's portfolio of
U.S. Government and agency obligations had a fair value and amortized cost of
$2.7 million at December 31, 1996. The portfolio consisted of FHLB bonds that
mature between 1998 and 2011, all of which were held in the Savings Bank's
held to maturity portfolio. At December 31, 1996, the interest rates on these
obligations ranged from 5.2% to 8.0%.
The Savings Bank's investment securities include structured notes in the
form of step-up bonds and bonds that are subject to call. The form of
structured notes in which the Savings Bank has invested provides for periodic
adjustments in coupon rates on specified dates or call prior to maturity. The
Savings Bank purchases these bonds as part of its investment strategy and will
only consider bonds issued by a governmental agency with maturities of no
longer than 15 years. Management of the Savings Bank acknowledges the
uncertainty that these instruments may be called before maturity with the
initial higher coupon offered by these bonds. Management of the Savings Bank
realizes that step-up bonds, or bonds subject to call, are not as liquid an
investment as traditional agency bonds and thus involve more risk than other
investments in the Savings Bank's portfolio. However, as the Savings Bank
intends to hold the instruments until their maturity or call, management does
not consider this as an obstacle to purchasing these instruments. At December
31, 1996, the Savings Bank had $250,000 in step-up bonds.
Mortgage-Backed Securities. The Savings Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads on large
principal balances with minimal administrative expense; (ii) lower the credit
risk of the Savings Bank as a result of the guarantees provided by FHLMC,
FMNA, and GNMA; (iii) enable the Savings Bank to use mortgage-backed
securities as collateral for financing; and (iv) invest excess funds during
periods of reduced loan demand. Included in the Savings Bank's
mortgage-backed securities portfolio are real estate mortgage investment
conduits ("REMICs"), which mature in 2023 and have adjusting interest rates
based primarily on the rate paid on U.S. Treasury securities and the COFI. At
December 31, 1996, net mortgage-backed securities totaled $35.6 million, or
30.7%, of total assets. At December 31, 1996, $7.7 million of the
mortgage-backed securities had adjustable rates of interest and $27.9 million
had fixed rates. The mortgage-backed securities portfolio had coupon rates
ranging from 4.50% to 14.75% and had a weighted average yield of 6.59% during
the six months ended December 31, 1996. At December 31, 1996, the amortized
cost of the Savings Bank's mortgage-backed securities held to maturity was
$23.5 million.
Mortgage-backed securities (which also are known as mortgage
participation certificates or pass-through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages.
The principal and interest payments on these mortgages are passed from the
mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and resell the
participation interests in the form of securities, to investors such as the
Savings Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the GNMA. Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest
rates that fall within a specific range and have varying maturities.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
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liabilities and obligations of the Savings Bank. These types of securities
also permit the Savings Bank to optimize its regulatory capital because they
have low risk weighting.
REMICs are generally classified as derivative financial instruments
because they are created by redirecting the cash flows from the pool of
mortgages or mortgage-backed securities underlying these securities to create
two or more classes (or tranches) with different maturity or risk
characteristics designed to meet a variety of investor needs and preferences.
Management believes these securities may represent attractive alternatives
relative to other investments due to the wide variety of maturity, repayment
and interest rate options available. Investment practices of the Savings Bank
prohibit the purchase of high risk REMICs. The Savings Bank held REMICs with
a net carrying value of $1.9 million at December 31, 1996. REMICs may be
sponsored by private issuers, such as mortgage bankers or money center banks,
or by U.S. Government agencies and government sponsored entities. At December
31, 1996, the Savings Bank did not own any privately issued REMICs.
Thrift Bulletin Number 52 ("TB-52"), the OTS Policy Statement on
securities portfolio policies and unsuitable investment practices, requires
that institutions classify mortgage derivative products acquired, including
REMICs and certain tranches of CMOs, as "high-risk mortgage securities" if
such products exhibit greater price volatility than a benchmark fixed-rate
30-year mortgage-backed pass-through security. Institutions may only hold
high-risk mortgage securities to reduce interest-rate risk in accordance with
safe and sound practices and must also follow certain prudent safeguards in
the purchase and retention of such securities. At December 31, 1996, the
Savings Bank did not have any securities that would be identified under TB-52
as "high-risk mortgage securities." The Savings Bank also evaluates its
mortgage-backed securities portfolio annually for compliance with applicable
regulatory requirements, including testing for identification of high risk
investments pursuant to Federal Financial Institutions Examination Council
standards.
Derivatives also include "off balance sheet" financial products whose
value is dependent on the value of an underlying financial asset, such as a
stock, bond, foreign currency, or a reference rate or index. Such derivatives
include "forwards," "futures," "options" or "swaps." The Savings Bank's
investment policy does not permit investment in such "off balance sheet"
derivative instruments.
Of the Savings Bank's $35.6 million mortgage-backed securities portfolio
at December 31, 1996, $14.7 million had contractual maturities within six
years and $20.7 million had contractual maturities over six years. The actual
maturity of a mortgage-backed security may be less than its stated maturity
due to prepayments of the underlying mortgages. Prepayments that are faster
than anticipated may shorten the life of the security and may result in a loss
of any premiums paid and thereby reduce the net yield on such securities.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages and
general levels of market interest rates, the difference between the interest
rates on the underlying mortgages and the prevailing mortgage interest rates
generally is the most significant determinant of the rate of prepayments.
During periods of declining mortgage interest rates, if the coupon rate of the
underlying mortgages exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related security. Under such
circumstances, the Savings Bank may be subject to reinvestment risk because,
to the extent that the Savings Bank's mortgage-backed securities amortize or
prepay faster than anticipated, the Savings Bank may not be able to reinvest
the proceeds of such repayments and prepayments at a comparable rate. In
contrast to mortgage-backed securities in which cash flow is received (and
hence, prepayment risk is shared) pro rata by all securities holders, the cash
flow from the mortgages or mortgage-backed securities underlying REMICs are
segmented and paid in accordance with a predetermined priority to investors
holding various tranches of such securities or obligations. A particular
tranche of REMICs may therefore carry prepayment risk that differs from that
of both the underlying collateral and other tranches.
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The following table sets forth information regarding the Savings Bank's
mortgage-backed securities (including REMICs) activity for the periods
indicated.
Six Months Ended
December 31, Year Ended June 30,
---------------- -------------------
1996 1996
---- ----
(In Thousands)
Beginning balance $35,188 $36,943
------- -------
Mortgage-backed securities purchased 2,802 5,704
Amortization of premiums and discounts 8 (31)
Principal repayments (2,432) (7,428)
------- -------
Ending balance $35,566 $35,188
======= =======
The following table sets forth the composition of the Savings Bank's
mortgage-backed securities portfolio at the dates indicated.
At December 31, At June 30,
------------------- -----------------
1996 1996
---- ----
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
Mortgage-backed securities:
REMIC $ 1,865 5.26% $ 1,865 5.32%
GNMA 2,707 7.64 996 2.84
FNMA 11,925 33.64 9,042 25.78
FHLMC 18,948 53.46 23,167 66.06
------- ------ ------- ------
Total 35,445 100.00% 35,070 100.00%
====== ======
Net premiums 121 118
------- -------
Net mortgage-backed securities $35,566 $35,188
======= =======
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The following table sets forth the contractual maturities of the Savings
Bank's mortgage-backed securities portfolio as of December 31, 1996:
Contractual Maturities Due in Year(s) Ended December 31,
--------------------------------------------------------
2000 2003 2013
to to and
1997 1998 1999 2002 2012 Thereafter Total
---- ---- ----- ---- ---- ---------- -----
(In Thousands)
Mortgage-backed
securities $362 $3,031 $3,976 $7,344 $10,426 $10,306 $35,445
==== ====== ====== ====== ======= ======= =======
The following table sets forth the carrying value of the Savings Bank's
investment securities portfolio, securities available for sale portfolio,
short-term investments and FHLB stock at the dates indicated. At December 31,
1996, the market value of the Savings Bank's investment securities portfolio
was $2.7 million and securities available for sale portfolio was $1.7 million.
At December 31, At June 30,
--------------- -----------
1996 1996
---- ----
(In Thousands)
Investment securities held to maturity:
U.S. Government securities $ -- $ --
U.S. agency securities 2,699 2,499
------- ------
Total investment securities 2,699 2,499
Securities available-for-sale(1) 1,690 1,385
Interest-bearing deposits 29,824 1,338
FHLB stock 1,169 1,123
------- ------
Total $35,382 $6,345
======= ======
- -------------
(1) Excludes mortgage-backed securities.
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<TABLE>
The following table sets forth certain information regarding the carrying values, weighted average
yields and maturities of the Savings Bank's investment securities and securities available-for-sale
portfolios as of December 31, 1996.
More Than More Than Total
One Year or Less One to Five Years Five to Ten Years More Than Ten Years Investment Securities
----------------- ----------------- ----------------- -------------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------ -------- ------ --------- ------ -------- -------- --------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. agency
obliga-
tions $ -- -- $1,200 6.39% $500 6.00% $999 7.31% $2,699 6.66% $2,679
Securities
available
-for-sale 1,690 -- -- -- -- -- -- -- 1,690 -- 1,690
------ ------ ---- ---- ------ ------
Total $1,690 $1,200 $500 $999 $4,389 $4,369
====== ====== ==== ==== ====== ======
19
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Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Savings Bank's funds for lending and other investment purposes. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are influenced significantly by general
interest rates and money market conditions. Borrowings through the
FHLB-Seattle may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources. At December 31, 1996, the
Savings Bank had no other borrowing arrangements.
Deposit Accounts. Substantially all of the Savings Bank's depositors are
residents of South Central Montana. Deposits are attracted from within the
Savings Bank's market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the
time periods the funds must remain on deposit and the interest rate, among
other factors. In determining the terms of its deposit accounts, the Savings
Bank considers current market interest rates, profitability to the Savings
Bank, matching deposit and loan products and its customer preferences and
concerns. The Savings Bank reviews its deposit mix and pricing weekly.
The following table sets forth certain information concerning the Savings
Bank's time deposits and other interest-bearing deposits at December 31, 1996.
Weighted Percen-
Average tage
Interest Original Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- -------- -------- ---------------- ------- ------- --------
(In Thousands)
2.59% None NOW accounts $ 200 $ 9,886 14.58%
3.25% None Regular savings 5 14,522 21.42
3.50% None Money market 1,000 4,744 7.00
accounts
Certificates
of deposit:
-----------------
4.80% 1-3 months Fixed term, fixed rate 500 1,039 1.53
5.06% 4-6 months Fixed term, fixed rate 500 6,574 9.70
5.27% 7-12 months Fixed term, fixed rate 500 9,749 14.38
5.75% 13-24 Fixed term, fixed rate 500 7,841 11.57
months
5.95% 25-36 Fixed term, fixed rate 500 7,301 10.77
months
6.09% 36-48 Fixed term, fixed rate 500 951 1.40
months
6.43% 49-120 Fixed term, fixed rate 500 3,957 5.84
months
5.65% -- Jumbo certificates 100,000 1,134 1.67
------- ------
67,698 99.86
4.51% Accrued interest on deposits 98 0.14
------- ------
Total $67,796 100.00%
======= ======
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The following table indicates the amount of the Savings Bank's
certificates of deposit of $100,000 or more by time remaining until maturity
as of December 31, 1996.
Maturity Period Amount
----------------- ---------
(In Thousands)
Three months or less $1,160
Over three through six months 539
Over six through 12 months 1,004
Over 12 months 168
------
Total $2,871
======
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates at December 31, 1996.
Amount
-------------
(In Thousands)
3.00 - 6.00% $32,809
6.01 - 8.00% 5,618
8.01 - 9.00% 120
-------
Total $38,547
=======
The following table sets forth the amount and maturities of time deposits
at December 31, 1996.
Amount Due
-----------------------------------------
After
Decem- Decem- Decem- Decem-
ber 31, ber 31, ber 31, ber 31,
1997 1998 1999 1999 Total
------- -------- ------- ------- ------
(In Thousands)
Time deposits $27,273 $6,423 $2,155 $2,696 $38,547
======= ====== ====== ======
Accrued interest on
certificate
accounts 98
-------
Total $38,645
=======
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Savings Activities
The following table sets forth the deposit activities of the Savings Bank
for the periods indicated.
Six
Months
Ended
December 31, Year Ended June 30,
------------ -------------------
1996 1996
---- ----
(In Thousands)
Net decrease before interest
credited $(2,306) $(1,778)
Interest credited 1,456 3,262
------- -------
Net increase (decrease) in
savings deposits $(850) $1,484
===== ======
Borrowings
While savings deposits are the primary source of funds for the Savings
Bank's lending and investment activities and for its general business
purposes, the Savings Bank also relies upon advances from the FHLB-Seattle to
supplement its supply of lendable funds, to meet deposit withdrawal
requirements and to fund the purchase of investment and mortgage-backed
securities. At December 31, 1996, the Savings Bank did not have any
borrowings from the FHLB-Seattle.
The FHLB-Seattle functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Savings Bank is required to own capital stock in the
FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States
government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
The following table sets forth information concerning only short-term
borrowings (those maturing within one year or less) the Savings Bank had
during the periods indicated.
Six
Months
Ended
December 31, Year Ended June 30,
----------- -------------------
1996 1996
---- ----
(Dollars in Thousands)
Short-term FHLB advances:
Average balance outstanding $ 227 $1,595
Maximum amount outstanding at
any month-end during
the period 1,500 1,925
Weighted average interest rate
during the period 5.83% 6.02%
Total short-term borrowings at
end of period -- $1,500
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
22
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<PAGE>
development projects. The Savings Bank's investment in its service
corporation, Dime Service Corporation did not exceed these limits at December
31, 1996.
Dime Service Corporation is a wholly owned subsidiary of the Savings
Bank. It was established in 1985 to purchase and operate an insurance agency
business. In 1992 and 1993, Dime Service Corporation purchased the insurance
business of two local insurance agencies. Dime Service Corporation presently
engages in full service property and casualty insurance activities under the
name "Dime Insurance Agency." At December 31, 1996, the Savings Bank's
investment in Dime Service Corporation was $376,000. Dime Service Corporation
had total assets of approximately $588,000 at December 31, 1996 and net income
of approximately $32,000 for the six months ended December 31, 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" contained in Item 6 of this Report.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act of 1933, as amended ("HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA"), and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. Lending activities and other investments
must comply with various statutory and regulatory capital requirements. In
addition, the Savings Bank's relationship with its depositors and borrowers is
also regulated to a great extent, especially in such matters as the ownership
of deposit accounts and the form and content of the Savings Bank's mortgage
documents. The Savings Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Savings Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Corporation, the Savings Bank and their
operations. The Corporation, as a savings and loan holding company, will also
be required to file certain reports with, and otherwise comply with the rules
and regulations of, the OTS.
Federal Regulation of Savings Banks
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Savings Bank, as a member of the FHLB-Seattle, is required to acquire
and hold shares of capital stock in the FHLB-Seattle in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20
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of its advances (borrowings) from the FHLB-Seattle. The Savings Bank is in
compliance with this requirement with an investment in FHLB-Seattle stock of
$1.2 million at December 31, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. The FDIC currently maintains two separate
insurance funds: the BIF and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Savings Bank's accounts are insured by the SAIF up to the maximum
extent permitted by law. The Savings Bank pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for
all SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of
an institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
Savings Bank's assessments for the six months ended December 31, 1996 were
$507,000, including a $451,000 one time assessment.
Pursuant to the Deposit Insurance Funds Act of 1996 ("DIF Act"), which
was enacted on September 30, 1996, the FDIC imposed a special one-time
assessment on each depository institution with SAIF-assessable deposits so
that the SAIF may achieve its designated reserve ratio. Beginning January 1,
1997, the assessment schedule for SAIF members is the same as that for BIF
members. In addition, beginning January 1, 1997, SAIF members will be charged
an assessment of 0.064% of SAIF-assessable deposits for the purpose of paying
interest on the obligations issued by the Financing Corporation ("FICO") in
the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits
will be charged an assessment to help pay interest on the FICO bonds at a rate
of approximately 0.013% until the earlier of December 31, 1999 or the date
upon which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
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borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide that
a federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1996, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies have
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness
standards required by the FDIA. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The agencies also proposed asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. Under the final
regulations, if the OTS determines that the Savings Bank fails to meet any
standard prescribed by the Guidelines, the agency may require the Savings Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard, as required by the FDIA. The final regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.
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Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in the HOLA and
regulations of the OTS thereunder to avoid certain operating restrictions. A
savings institution that fails to become or remain a QTL shall either become a
national bank or be subject to the following restrictions on its operations:
(i) the association may not make any new investment or engage in activities
that would not be permissible for national banks; (ii) the association may not
establish any new branch office where a national bank located in the savings
institution's home state would not be able to establish a branch office; (iii)
the association shall be ineligible to obtain new advances from any FHLB; and
(iv) the payment of dividends by the association shall be subject to the rules
regarding the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the
savings institution ceases to be a QTL, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any outstanding
advances to any FHLB. In addition, within one year of the date on which a
savings association controlled by a company ceases to be a QTL, the company
must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution quality as a
domestic building and loan association under the Internal Revenue Code
("Code") or that 65% of an institution's "portfolio assets" (as defined)
consist of certain housing and consumer-related assets on a monthly average
basis in nine out of every 12 months. Assets that qualify without limit for
inclusion as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities (where the
mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; direct or indirect obligations of the FDIC; and loans
for educational purposes, loan to small businesses and loan made through
credit cards. In addition, the following assets, among others, may be
included in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated
and sold within 90 days of origination; 100% of consumer loans; and stock
issued by the FHLMC or the FNMA. Portfolio assets consist of total assets
minus the sum of (i) goodwill and other intangible assets, (ii) property used
by the savings institution to conduct its business, and (iii) liquid assets up
to 20% of the institution's total assets. At December 31, 1996, the Savings
Bank's qualified thrift investments significantly exceeded 65% of its
portfolio assets as required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Banks -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
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rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, and (iii) general valuation loan and lease loss allowances up to 1.25%
of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighting factor (from
0% to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in
lieu of the OTS-calculated amount. The OTS has
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postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with
the process for requesting an adjustment to its interest rate risk component.
At December 31, 1996, Empire Federal's core capital of approximately
$24.9 million, or 21.7% of adjusted total assets, was $21.5 million in excess
of the OTS requirement of $3.4 million, or 3% of adjusted total assets. As of
such date, the Savings Bank's tangible capital of approximately $24.9 million,
or 21.7% of adjusted total assets, was $23.2 million in excess of the OTS
requirement of $1.7 million, or 1.5% of adjusted total assets. Finally, at
December 31, 1996, the Savings Bank had risk-based capital of approximately
$25.1 million or 65.4% of total risk-weighted assets, which was $22.0 million
in excess of the OTS risk-based capital requirement of $3.1 million or 8% of
risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier
3 associations may not make any capital distributions without prior approval
from the OTS.
The Savings Bank is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At December 31, 1996, the
Savings Bank's limit on loans to one borrower was $2.5 million. At December
31, 1996, the Savings Bank's largest aggregate amount of loans to one borrower
was $1.2 million, all of which were performing according to their original
terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
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The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guaranty and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Savings Bank has not been
significantly affected by the rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Savings Bank may
make to such persons based, in part, on the Savings Bank's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), a federal statute, all federally-insured financial institutions have
a continuing and affirmative obligation consistent with safe and sound
operations to help meet all the credit needs of its delineated community. The
CRA does not establish specific lending requirements or programs nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to meet all the credit needs of its
delineated community. The CRA requires the federal banking agencies, in
connection with regulatory examinations, to assess an institution's record of
meeting the credit needs of its delineated community and to take such record
into account in evaluating certain regulatory applications filed by an
institution. The CRA requires public disclosure of an institution's CRA
rating. The Savings Bank received a "satisfactory" rating as a result of its
latest evaluation.
Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal
of officers or directors, receivership,
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conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1.0 million
per day in especially egregious cases. Under the FDIA, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Savings and Loan Holding Company Regulations
General. The Corporation is a savings and loan holding company within
the meaning of HOLA. As such, the Corporation is registered with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. The Corporation is also subject to the information, proxy
solicitation, insider trading restrictions, and other requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act").
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25 percent of the voting shares of such holding company,
from acquiring control of any savings association not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the
OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions.
If the Corporation acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company. There generally are more restrictions on the activities of a
multiple savings and loan holding company than a unitary savings and loan
holding company. Specifically, if either federally insured subsidiary savings
association fails to meet the QTL test, the activities of the Corporation and
any of its subsidiaries (other than the Corporation or other federally insured
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not an insured
association shall commence or continue for more than two years after becoming
a multiple savings and loan association holding company or subsidiary thereof,
any business activity other than: (i) furnishing or performing management
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires that any savings and
loan holding company that controls a savings association that fails the
qualified thrift lender test, as explained under "-- Federal Regulation of
Savings Banks -- Qualified Thrift Lender Test," must, within one year after
the date on which the association ceases to be a qualified thrift lender,
register as and be deemed a bank holding company subject to all applicable
laws and regulations.
TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their income on a
calendar year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The
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following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Savings Bank or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Savings Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Savings Bank's actual loss
experience, or a percentage equal to 8% of the Savings Bank's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve. The Savings Bank's deduction with
respect to nonqualifying loans was computed under the experience method, which
essentially allows a deduction based on the Savings Bank's actual loss
experience over a period of several years. Each year the Savings Bank
selected the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve.
Recently enacted federal legislation repeals the reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As a result, savings associations are no longer able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations are required to compute their deduction based on
specific charge-offs during the taxable year or, if the savings association or
its controlled group had assets of less than $500 million, based on actual
loss experience over a period of years. This legislation also requires
savings associations to recapture into income over a six-year period their
post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At December 31, 1996, the Savings Bank's post-1987
reserves were a negligible amount of approximately $1,000. The recapture may
be suspended for up to two years if, during those years, the institution
satisfies a residential loan requirement. The Savings Bank met the
residential loan requirement for the taxable year ending December 31, 1996.
Under prior law, if the Savings Bank failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Savings Bank would be
required to deduct bad debts as they occur and would additionally be required
to recapture its bad debt reserve deductions ratably over a multi-year period.
At December 31, 1996, the Savings Bank's total bad debt reserve for tax
purposes was approximately $3.3 million. Among other things, the qualifying
thrift definitional tests required the Savings Bank to hold at least 60% of
its assets as "qualifying assets." Qualifying assets generally include cash,
obligations of the United States or any agency or instrumentality thereof,
certain obligations of a state or political subdivision thereof, loans secured
by interests in improved residential real property or by savings accounts,
student loans and property used by the Savings Bank in the conduct of its
banking business. Under current law, a savings association will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Savings Bank's taxable income. Nondividend
distributions include distributions in excess of the Savings Bank's current
and accumulated earnings and profits, distributions in redemption of stock,
and distributions in partial or complete liquidation. However, dividends paid
out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Savings Bank's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to the
Savings Bank's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Savings Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION -- Federal Regulation of Savings
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Banks -- Limitations on Capital Distributions" for limits on the payment of
dividends by the Savings Bank. The Savings Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Savings Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Savings Bank as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Savings Bank will not file a consolidated tax return, except that if the
Corporation or the Savings Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
There have not been any IRS audits of the Savings Bank's federal income
tax returns during the past five years.
State Taxation
Empire Federal is subject to the Montana Corporation License Tax, which
is imposed at the rate of 6.75% of Montana taxable income. There have not
been any audits of the Savings Bank's state tax returns during the past five
years.
Competition
The Savings Bank operates in a very competitive market for the attraction
of savings deposits (its primary source of lendable funds) and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from commercial banks, thrift institutions and credit unions
operating in its market area. Some of these commercial banks are subsidiaries
of large regional holding companies having vastly greater resources than the
Savings Bank at their disposal. At December 31, 1996, there were 14
commercial banks, two thrift institutions (in addition to the Savings Bank)
and two credit unions in Park, Gallatin and Sweet Grass Counties.
Particularly in times of high market interest rates, the Savings Bank has
faced competition for investors' funds from short-term money market securities
and corporate and U.S. Government securities. The Savings Bank competes for
loan originations with mortgage bankers, thrift institutions, credit unions
and commercial banks. Such competition for deposits and loans may limit the
Savings Bank's future growth and earnings prospects.
Personnel
As of December 31, 1996, the Savings Bank had 33 full-time employees (ten
of which are employed by the Service Corporation) and seven part-time
employees, none of whom were represented by a collective bargaining unit. The
Savings Bank believes its relationship with its employees is good.
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Item 2. Description of Property
- --------------------------------
The Savings Bank has three offices, two of which are owned by the Savings
Bank. The Savings Bank's main office is located at 123 South Main Street,
Livingston, Montana 59047. The main office was opened in 1923 and the present
square footage is approximately 15,000 feet. Beginning in September 1995, the
Savings Bank subleased part of this building to the Human Resource Development
Counsel, District IX. This office is leased by the Savings Bank through
March 1997. Mrs. Beverly D. Harris, the Savings Bank's President, Mrs. Jean
E. Sandberg, the wife of the Savings Bank's Executive Vice President and Chief
Financial Officer, and Mr. Joseph T. Swindlehurst, the Savings Bank's general
counsel, are the owners of this building. Mrs. Harris, Mrs. Sandberg and Mr.
Swindlehurst are sister and brother. For information regarding this
relationship, see Item 12 of this Report. The Savings Bank has negotiated
with the owners to purchase the building, which has been approved by the OTS.
If the Savings Bank determines not to purchase the building, it will negotiate
and enter into a lease with the owners for the rental of the building prior to
the expiration of the current lease term. At December 31, 1996, the net book
value of the leasehold improvements was $16,000.
The Savings Bank has branch offices located at 101 McLeod Street, Big
Timber, Montana 59011 and at 5 West Mendenhall Street, Bozeman, Montana 59715.
The Big Timber branch office consists of approximately 2,000 square feet, was
opened in 1980 in connection with the merger of the Big Timber Building and
Loan Association, and relocated to its current facility in 1984. At December
31, 1996, the net book value of the property and equipment was $190,000. The
Bozeman branch office consists of approximately 7,000 square feet, was opened
in 1958 in connection with the merger with Pioneer Building and Loan
Association and relocated to its current facility in 1971. At December 31,
1996, the net book value of the property and equipment was $906,000. The net
book value of the Savings Bank's premises and equipment at December 31, 1996
was $1.3 million.
The Savings Bank's subsidiary, Dime Service Corporation, leases offices
in Livingston and Big Timber, Montana. The Livingston office is 2,500 square
feet and the Big Timber office is 365 square feet. There are no written lease
agreements for these two offices.
Item 3. Legal Proceedings
- --------------------------
From time to time, the Savings Bank is involved in routine legal
proceedings occurring in the ordinary course of business. At December 31,
1996, the Savings Bank was not a party to any legal proceedings that
management of the Savings Bank believed would be materially adverse to the
financial condition, results of operations, cash flows or capital ratios of
the Savings Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The common stock of the Corporation is traded on the Nasdaq Stock Market
under the symbol "EFBC." As of March 4, 1997, there were approximately 531
stockholders of record.
The Board of Directors of the Corporation has not formulated a dividend
policy, but intends to consider a policy of paying cash dividends in the
future. Future declarations or payments of dividends will be subject to
determination by the Corporation's Board of Directors, which will take into
account the Corporation's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and other factors, including the regulatory restrictions which affect the
payment of dividends by the Savings Bank to the
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Corporation. Under Delaware law, dividends may be paid either out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year. No assurances can
be given that any dividends will be declared or, if declared, what the amount
of dividends will be or whether such dividends, once declared, will continue.
The Corporation's common stock was sold in its initial public offering at
$10.00 per share and commenced trading on January 26, 1997. The high and low
stock sales prices for the common stock from January 26, 1997 through March 4,
1997 were $12-1/2 and $14-1/2, respectively.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
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 Corporation. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto contained in Item 7 of this Report.
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 have been
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 (expense). 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.
The Savings Bank's strategy is to operate as a conservative,
well-capitalized, profitable institution dedicated to financing home ownership
and other consumer needs and to provide quality service to all customers. The
Savings 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.
Financial Condition
Total assets increased by approximately $29.1 million, or 33.6%, from
$86.8 million at June 30, 1996 to $115.9 million at December 31, 1996. This
increase was primarily attributable to the receipt of $27.7 million related to
the sale of Company stock.
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The composition of the consolidated balance sheet was not materially
affected by market conditions between December 31, 1996 and June 30, 1996.
The increase of $28.5 million in interest bearing deposits was due in large
part to the receipt of $27.7 million related to the sale of Company stock.
Mortgage backed securities increased by $378,000 during this period primarily
as the result of purchases of $2.8 million that were partially offset with
maturities of $2.4 million. Investment securities increased $505,000 for the
period as the result of an increase in the market value of FHLMC stock of
$303,000 and a purchase of a $200,000 U.S. agency bond. Net loans decreased
slightly by $179,000 or .04%.
Deposits decreased $850,000, or 1.24%, to $67.7 million at December 31,
1996 from $68.5 million at June 30, 1996. The decline can be attributed to
$3.2 million in withdrawals to purchase Company stock, offset by $2.3 million
in net new deposits. Advances from the FHLB amounting to $1.5 million at June
30, 1996, matured during the period.
Stockholders' equity increased from $15.9 million at June 30, 1996 to
$39.6 million at December 31, 1996. This increase is the result of the
conversion and sale of stock with net proceeds of $23.1 million (net of $2.1
million of ESOP stock) to the Company. Net income of $142,000 and an increase
in market values of securities available for sale of $497,000 also contributed
the increase.
Results of Operations
The operating results of the Savings Bank depend primarily on its net
interest income. The Savings 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 Savings
Bank's net earnings 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.
Comparison of Results of Operations for the Six Months Ended December 31, 1996
and 1995
Net Income. Net income declined by $147,000, or 51.0%, to $142,000 for
the six months ended December 31, 1996 from $289,000 for the same period in
1995. The primary cause for this significant decline was a one-time special
assessment to recapitalize the Savings Association Insurance Fund (SAIF).
This special assessment was $451,000, with an after-tax effect of $268,000.
Offsetting this decrease in net income in 1996 were increases in interest
income from mortgage loans and interest bearing deposits.
Net Interest Income. Net interest income increased $150,000, or 10.33%,
to $1.6 million for the six months ended December 31, 1996 from $1.5 million
for the same period in 1995. The increase in net interest income primarily
reflected a 10 basis point increase in the interest rate spread to 2.90% for
the six month period ended December 31, 1996 from 2.80% for the comparative
period in 1995 and a $3.0 million increase in the average balance of interest
earning assets.
Interest Income. Total interest income increased by $108,000, or 3.46%,
to $3.2 million for the six months ended December 31, 1996 from $3.1 million
for the same period in 1995. The increase was primarily attributable to the
increase in the average balance of loans receivable from $39.8 million for the
six months ended December 31, 1995 to $41.7 million for the same period in
1996 coupled with an increase in the average yield from 8.40% to 8.62% for the
same periods. The average balance of mortgage backed securities declined for
the six month periods from $38.2 million to $35.5 million due to maturities.
This decline in the average balance of mortgage backed securities was the
primary cause of the decline in the related interest income from $1.3 million
to $1.2 for the six month periods.
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Interest income from interest-bearing deposits at the FHLB increased
$51,000 for the six month period ended December 31, 1996 to $101,000 from
$50,000 for the same period in 1995 primarily because of the receipt of $27.7
million related to the conversion and sale of stock.
Interest Expense. Total interest expense was $1.6 million for both six
month periods ending December 31, 1996 and 1995. Average outstanding deposits
increased by $1.4 million during the six month period ended December 31, 1996
compared to the same period in 1995. During the same comparable period, the
average cost of deposits dropped from 4.69% to 4.59%. Interest expense on
FHLB deposits was $49,000 for the six months ended December 31, 1995 as
compared to $7,000 for the comparative period in 1996. This decrease was the
result of all FHLB advances maturing in July and September, 1996.
Provision for Loan Losses. No provision for loan losses was recorded for
either the six months ended December 31, 1996 or 1995. AT the end of both
periods, the level of loan loss reserves was deemed to be adequate by
management. Loan loss reserves as a percentage of loans was 0.46% at December
31, 1996 and 1995.
Non-Interest Income. Non-interest income decreased $9,000 for the six
months ended December 31, 1996 as compared to the same period in 1995
primarily as the result of a $16,000 decrease in commission income and a
$10,000 decrease in other income. These decreases were partially offset by an
increase in customer service charges of $17,000.
Insurance commissions received by Dime Service Corporation, a wholly
owned subsidiary of the Savings Bank, are the largest component of
non-interest income. Insurance commissions of $336,000 and $352,000, were
received for the six months ended December 31, 1996 and 1995, respectively.
Non-Interest Expense. Total non-interest expense increased $387,000, or
26.6%, for the six months ended December 31, 1996 compared to the six months
ended December 31, 1995. This increase was primarily the result of the
$451,000 special FDIC insurance assessment. This increase was partially
offset by a decrease of $36,000 in other FDIC insurance premiums for the
comparable periods. Compensation and benefits decreased by $23,000 for the
six months ended December 31, 1996 as compared with the same period in 1995
primarily as the result of the fully funded status of the pension plan for
1996. Other non-interest expense items remained relatively stable.
Included in non-interest expense are direct costs (compensation and
benefits, occupancy and equipment and other expense) attributable to the
operations of Dime Service Corporation. Such direct costs totaled $305,000
and $339,000 for the six months ended December 31, 1996 and 1995,
respectively.
The Company expects to incur increased expenses following the Conversion
as a result of the costs associated with being a public company and the ESOP
and other stock benefit plans, if adopted.
Income Taxes. Income taxes declined $98,000 from the six month period
ended December 31, 1995 as compared to the same period in 1996 as the result
of the decline in income before income taxes. The effective combined federal
and state tax rate was 30.25% and 35.61% for the six months ended December 31,
1996 and 1995, respectively.
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
General. Market interest rates are generally measured by the yields on
U.S. Treasury obligations. The yields on the one-year U.S. Treasury Bill and
the 30-year U.S. Treasury Bond are the respective benchmarks for short-term
and long-term market interest rates. During the fiscal year ended June 30,
1995, the yield curve flattened (i.e., short-term and long-term rates
converged) as the yield on the one-year U.S. Treasury Bill increased from
4.22% at June 30, 1994 to 5.57% at June 30, 1995, while the yield on the
30-year U.S. Treasury Bond decreased from 7.61% at June 30, 1994 to 6.63% at
June 30, 1995. During the fiscal year ended June 30, 1996, the yield curve
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steepened (i.e., short-term and long-term rates diverged) as the yield on the
one-year U.S. Treasury Bill decreased to 5.16% at June 30, 1996, while the
yield on the 30-year U.S. Treasury Bond increased to 6.87% at June 30, 1996.
Net Income. Net income decreased $320,000, or 33.6%, to $632,000 for
fiscal 1996 from $952,000 for fiscal 1995. The decline in income was
primarily attributable to an increase in the Savings Bank's cost of funds from
4.10% during the year ended June 30, 1995 to 4.71% for the year ended June 30,
1996. The average balance of interest-bearing liabilities decreased slightly
during this period from $71.6 million during fiscal 1995 to $70.3 million
during fiscal 1996.
Net Interest Income. Net interest income decreased $373,000, or 11.7%,
to $2.9 million for 1996 from $3.4 million for 1995. The decrease in net
interest income primarily reflected a 53 basis point decrease in the interest
rate spread to 2.80% for fiscal 1996 from 3.33% for fiscal 1995.
Interest Income. Total interest income was $6.3 million for both fiscal
1996 and 1995. Interest income from loans receivable increased $33,000, or
9.6%. The increase was primarily attributable to the increase in the average
balance of loans receivable from $40.1 million during fiscal 1995 to $40.8
million during fiscal 1996 as loan originations increased to $12.4 million
during fiscal 1996 compared to loan originations of $4.5 million during fiscal
1995. The increase in the average balance of loans receivable in fiscal 1996
resulted primarily from an increase in construction loans and consumer loans,
particularly home improvement loans, as the economy of the Savings Bank's
primary market area improved from fiscal 1995. See Item 1, Business --
Lending Activities -- Loan Originations, Sales and Purchases." The increase
in interest income was partially offset by the decline in the average yield on
loans receivable from 8.51% during fiscal 1995 to 8.44% during fiscal 1996.
Interest income from mortgage-backed securities was $2.5 million during
both periods. The average balance of mortgage-backed securities declined from
$38.1 million during fiscal 1995 to $37.1 million during fiscal 1996 as
principal repayments exceeded purchases. This decline was offset, however, by
an increase in the yield on mortgage-backed securities from 6.65% during
fiscal 1995 to 6.78% during fiscal 1996.
Interest Expense. Interest expense on deposits increased $421,000 to
$3.2 million for 1996 from $2.8 million for 1995. The increase is primarily
attributable to an increase in the average cost of deposits which increased
from 4.05% during fiscal 1995 to 4.68% during fiscal 1996 which more than
offset the decline in the average balance of deposits. The increase in the
cost of deposits was primarily attributable to an increase in rates paid on
certificates of deposit to meet local competition.
The Savings Bank utilized FHLB advances to purchase mortgage-backed
securities and to provide an additional source of funds for its lending
activities. During this period the average balance of short-term borrowings
decreased $1.1 million from $2.7 million during fiscal 1995 to $1.6 million
during 1996 as traditional deposits were utilized to fund lending activities
and mortgage-backed securities purchases. As a result, the cost of FHLB
advances decreased 34.1% from $145,000 during fiscal 1995 to $95,000 during
fiscal 1996.
Provision for Loan Losses. The provision for loan losses for 1996 was
$55,000 compared to no provision for 1995. The increase in the provision for
loan losses resulted primarily from the increased size of the loan portfolio,
particularly with respect to construction and consumer loans which involve
greater risk than residential mortgage loans, and management's desire to
increase its allowance for loan losses as a percentage of loans receivable
to levels comparable with its peers in the Pacific Northwest. Management's
periodic evaluation of the adequacy of the allowance is based on factors such
as the Savings Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, current and prospective
economic conditions, peer group comparisons, and independent appraisals. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for loan
losses. Such agencies may require the Savings Bank to provide additions to
the allowance based upon judgments different from management. Assessment of
the adequacy of the allowance for credit losses involves subjective judgements
regarding future events, and thus, there can be no assurance that additional
provisions
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for credit losses will not be required in future periods. Although management
uses the best information available, future adjustments to the allowance may
be necessary due to economic, operating, regulatory and other conditions that
may be beyond the Savings Bank's control. Any increase or decrease in the
provision for loan losses has a corresponding negative or positive effect on
net income. At June 30, 1996, the allowance represented 0.46% of loans
receivable as compared to 0.36% of loans receivable at June 30, 1995.
Non-Interest Income. Non-interest income increased $21,000, or 2.6%, in
fiscal 1996 as compared to fiscal 1995 primarily as the result of a $15,000,
or 12.4%, increase in customer service charges.
Insurance commissions that the Savings Bank receives from its
wholly-owned subsidiary, Dime Service Corporation, are the largest component
of its non-interest income. The Savings Bank received income from insurance
commissions of $688,000 and $691,000 during fiscal 1996 and 1995,
respectively.
Non-Interest Expense. Total non-interest expense increased $103,000, or
3.8%, for 1996 compared to 1995. This increase was primarily the result of a
$72,000, or 4.7%, increase in compensation and benefits and a $76,000, or
28.7%, increase in occupancy and equipment expense caused primarily by
additional depreciation expense on new equipment and furniture related to the
remodeling of the Bozeman branch, repairs to an elevator and other maintenance
costs. Data processing expenses increased $20,000, or 23.1%. Other
non-interest expense items remained relatively stable.
Included in non-interest expense are direct costs (compensation and
benefits, occupancy and equipment, and other expenses) attributable to the
operations of the Savings Bank's wholly-owned subsidiary, Dime Service
Corporation. Such direct costs totalled $638,000 and $617,000 for the fiscal
years ended June 30, 1996 and 1995, respectively.
Income Taxes. Income taxes declined $189,000 from 1995 to 1996 as a
result of the decline in income before income taxes. The effective combined
Federal and state tax rate was 38.74% during 1996 and 38.21% during 1995.
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<TABLE>
Average Balances, Interest and Average Yields/Cost
The following tables set forth certain information for the periods indicated regarding average balances
of assets and liabilities as well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the
average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances
are derived from month-end balances. Management does not believe that the use of month-end balances instead
of daily balances has caused any material difference in the information presented.
Six Months Ended
At December 31, December 31, Year Ended June 30,
------------------------------- -------------------------------
1996 1996 1996
------ ------------------------------- ------------------------------
Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost(5) Balance Interest Cost
------ ------- -------- ------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) 8.14% $41,677 1,796 8.62% $40,766 $3,441 8.44%
Mortgage-backed
securities 6.80 35,526 1,170 6.59 37,097 2,517 6.78
Investment securities 6.34 4,462 104 4.67 4,020 214 5.32
Other interest-earning
assets(2) 5.32(6) 4,523 160 7.07 2,044 132 6.46
---- ------- ------ ---- ------- ------ ----
Total interest-earning
assets 6.89 86,188 3,230 7.50 83,927 6,304 7.51
Non-interest-earning assets 3,466 3,567
------- -------
Total assets $89,654 $87,494
======= =======
Interest-bearing liabilities:
NOW accounts 2.59 $ 9,824 136 2.78 $ 8,874 228 2.57
Money market accounts 3.50 5,120 93 3.63 5,228 184 3.52
Regular savings 3.25 15,130 240 3.18 14,799 476 3.22
Certificates of deposit 5.61 40,425 1,150 5.76 39,838 2,326 5.84
---- ------ ----- ---- ------ ----- ----
Total deposits 4.51 70,499 1,619 4.59 68,739 3,214 4.68
Other liabilities -- 227 7 5.83 1,595 96 6.02
---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities 4.51 70,726 1,626 4.60 70,334 3,310 4.71
---- ----- ---- ----- ----
Non-interest-bearing
liabilities 2,618 1,318
------ ------
Total liabilities 73,344 71,652
Retained earnings 16,310 15,842
------- -------
Total liabilities and
retained earnings 2.38% $89,654 $87,494
==== ======= =======
Net interest income $1,604 $2,994
====== ======
Interest rate spread(3) 2.90% 2.80%
==== ====
Net yield on interest-
earning assets(4) 3.72% 3.57%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 121.86% 119.33%
====== ======
______________________
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and dividends on FHLB stock.
(3) Interest-rate spread represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a percentage of average
interest-earning assets.
(5) Annualized.
(6) Includes $29.9 million interest-bearing deposits at FHLB.
39
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income
of the Savings Bank. Information is provided with respect to (i) effects on net interest income
attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on net interest
income attributable to changes in rate (changes in rate multiplied by prior volume); (iii) changes in
rate/volume (change in rate multiplied by change in volume); and (iv) the net change.
Six Months Ended
December 31, 1996 Compared Year Ended June 30,
to six Months Ended 1996 Compared to Year
December 31, 1995 Ended June 30, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------- -------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable $ 79 $44 $ 2 $125 $ 59 $ (28) $ 2 $ 33
Mortgage-backed
securities (89) -- 2 (87) (64) 49 1 (14)
Investment
securities 40 (22) (9) 9 12 55 5 72
Other interest-earning
assets 141 (33) (47) 61 (74) (27) 9 (92)
----- ---- ------ ------ ------ ------ ----- ------
Total interest-earning
assets 171 (11) (52) 108 (67) 49 17 (1)
----- ---- ------ ------ ----- ------ ----- -----
Interest expense:
Savings accounts 34 (34) -- -- (10) 435 (4) 421
Other liabilities (42) -- -- (42) (58) 15 (6) (49)
----- ---- ------ ------ ----- ------ ----- -----
Total interest-
bearing
liabilities (8) (34) -- (42) (68) 450 (10) 372
---- --- ----- ----- ----- ------ ----- -----
Net change in net
interest income $179 $23 $(52) $150 $ 1 $(401) $ 27 $(373)
==== === ==== ==== ===== ===== ===== =====
40
</TABLE>
<PAGE>
<PAGE>
Asset and Liability Management and Interest Rate Risk
General. The ability to maximize net interest income depends largely
upon achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities, and is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would result in a decrease in
net interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
The Savings Bank has perceived its market niche to be that of a
traditional thrift lender that originates fixed rate residential loans for its
portfolio and purchases fixed rate U.S. Government and agency investment
securities and mortgage-backed securities to supplement its lending
activities. The Savings Bank uses its capital position to absorb the adverse
consequences of the increased interest rate risk associated with this
strategy. As an integral part of this strategy, the Savings Bank has
historically concentrated its lending activity on the origination of
long-term, fixed-rate, residential one- to four-family mortgage loans and
commercial real estate and multi-family loans. As of December 31, 1996,
90.42% of the Savings Bank's total loans, were fixed rate loans and 80.79% of
its investments and mortgage-backed securities had fixed interest rates.
The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk. The Savings Bank has a
high level of interest rate risk as a result of its policies to make
fixed-rate, residential one- to four-family real estate loans and to purchase
fixed rate investment and mortgage-backed securities, which are longer term in
nature than the short-term characteristics of its liabilities for customer
deposit accounts. Because of its capital position, the Savings Bank has
accepted the above average interest rate risk associated with fixed-rate loans
and fixed-rate investment and mortgage-backed securities in an effort to
maximize yield. See "-- Liquidity and Capital Resources."
Interest Rate Sensitivity of Net Portfolio Value
The following table is provided to the Savings Bank by the OTS and
illustrates the change in NPV at December 31, 1996 based on OTS assumptions.
No effect has been given to any steps that management of the Savings Bank may
take to counter the effect of the interest rate movements presented in the
table.
Net Portfolio as %
Basis of Portfolio Value
Point ("bp") Net Portfolio Value of Assets
Change ---------------------------- -------------------
in Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+400 bp $19,402 -4,514 -19% 17.59 -262 bp
+300 bp 20,607 -3,309 -14% 18.35 -186 bp
+200 bp 21,841 -2,075 -9% 19.09 -112 bp
+100 bp 23,001 -915 -4% 19.75 -40 bp
0 23,916 20.31
-100 bp 24,302 386 +2% 20.30 +9
-200 bp 23,983 67 0% 19.90 -31 bp
-300 bp 23,399 -517 -2% 19.33 -88 bp
-400 bp 23,187 -729 -3% 18.99 -122 bp
41
<PAGE>
<PAGE>
Under the OTS interest rate risk capital rule (implementation of which
has been postponed), those institutions with greater than "normal" levels of
interest rate risk will be subject to an interest rate risk component in
calculating their risk-based capital ratio. An institution with a "normal"
level of interest rate risk is defined as one whose "Measured Interest Rate
Risk" is less than 2.0%.
The following table is provided by the OTS and is based on the
calculations in the previous table.
December 31, September 30, June 30,
1996 1996 1996
------------ ------------- --------
RISK MEASURES:
200 BP RATE SHOCK
Pre-Shock NPV Ratio:
NPV as % of PV of
Assets 20.21% 20.76% 20.49%
Exposure Measure:
Post-Shock NPV Ratio 19.09 18.03 17.72
Sensitivity Measure:
Change in NPV Ratio -112 bp -273 bp (277) bp
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as substantially all of the Savings Bank's
ARM loans, have features that restrict changes in interest rates on a
short-term basis (1.5% to 2.0% per adjustment period) and over the life of the
asset (generally 5% over the life). Furthermore, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could likely deviate significantly from those assumed in
calculating the table. Therefore, the data presented in the table should not
be relied upon as indicative of actual results.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are proceeds from principal
and interest payments on loans, maturing securities and certificates of
deposit. The proceeds from the sale of available-for-sale securities and FHLB
advances are additional sources of liquidity. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The primary investing activity of the Savings Bank is the origination of
one- to four-family mortgage loans. During the six months ended December 31,
1996, the Savings Bank originated mortgage loans in the amounts of $5.2
million. During this period, the Savings Bank purchased mortgage-backed
securities of $2.8 million. Other investing activities include activity in
investment grade federal agency and mortgage-backed securities.
The Savings Bank must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. During fiscal years ending June 30, 1996 and 1995,
and the six months ended December 31, 1996, the Savings Bank used its sources
of funds primarily to fund loan commitments and to pay deposit withdrawals.
The Savings Bank uses cash flows generated from operating, investing and
financing activities to meet its liquidity requirements. See Consolidated
Statements of Cash Flows included as part of the Consolidated Financial
Statements appearing in Item 7 of this Report.
Like most thrift institutions, deposits, particularly certificates of
deposit, have been the primary source of external funds for the Savings Bank.
By offering interest rates that are competitive with or at a slight premium to
the average rate paid by local competitors, the Savings Bank has had limited
success in lengthening the maturity of its certificate of deposit portfolio.
At December 31, 1996, certificates of deposit amounted to $38.5 million, or
42
<PAGE>
<PAGE>
56.7% of total deposits, including $11.3 million which were scheduled to
mature in more than one year after December 31, 1996. At December 31, 1996,
$27.2 million of certificates of deposit were scheduled to mature within one
year. Historically, the Savings Bank has been able to retain a significant
amount of maturing deposits. Management of the Savings Bank believes it has
adequate resources to fund all loan commitments by deposits and, if necessary,
FHLB-Seattle advances and that it can adjust the offering rates of savings
certificates to retain deposits in changing interest rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
5.0% of the average daily balance of its net withdrawable deposits and short-
term borrowings. In addition, short-term liquid assets currently must
constitute 1.0% of the sum of net withdrawable deposit accounts plus
short-term borrowings. The Savings Bank's actual short- and long-term
liquidity ratios at December 31, 1996 were 43.9% and 21.6%, respectively. The
Savings Bank consistently maintains liquidity levels in excess of regulatory
requirements, and believes this is an appropriate strategy for proper asset
and liability management.
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of December 31, 1996, the Savings Bank was
in compliance with all regulatory capital requirements which were effective as
of such date with tangible, core and risk-based capital ratios of 21.7%, 21.7%
and 65.4%, respectively. For a detailed discussion of regulatory capital
requirements and a numerical presentation of the Savings Bank's capital levels
relative to regulatory requirements, see "REGULATION -- Federal Regulation of
Savings Banks -- Capital Requirements" contained in Item 1 of this Report.
Impact of New Accounting Pronouncements and Regulatory Policies
Disclosure of Fair Value of Financial Instruments. See Note 16 of Notes
to the Consolidated Financial Statements for a discussion of Statement of
Financial Accounting Standards ("SFAS") No. 107.
Accounting for Impairment of Long-Lived Assets. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recognized if the sum of the expected future cash flows is less than the
carrying amount of the asset. SFAS No. 121 was adopted July 1, 1996 and did
not have a material impact on the Savings Bank's consolidated financial
position or results of operations.
Accounting for Stock-Based Compensation. 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 does not result 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 had been adopted. The accounting requirements of SFAS
No. 123 are effective for transactions entered into by the Corporation
beginning July 1, 1996. The Corporation expects to utilize the intrinsic
value method of accounting for stock based compensation awards.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. 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 Savings Bank 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
43
<PAGE>
<PAGE>
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 are
not expected to have a material impact on the Corporation's consolidated
financial position or results of operations.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with GAAP, which generally
require the measurement of financial position and operating results in terms
of historical dollars, without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Savings Bank's operations.
Unlike most industrial companies, virtually all the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Item 7. Financial Statements
- -----------------------------
Index To Consolidated Financial Statements
Empire Federal Bancorp, Inc. and Subsidiaries
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . 45
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 46
Consolidated Statements of Income for
the Six Months Ended December 31, 1996 and
the Years Ended June 30, 1996 and 1995. . . . . . . . . . . . . 47
Consolidated Statements of Stockholders' Equity for
the Six Months Ended December 31, 1996 and
the Years Ended June 30, 1996 and 1995. . . . . . . . . . . . . 48
Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1996 and
the Years Ended June 30, 1996 and 1995. . . . . . . . . . . . . 49
Notes to Consolidated Financial Statements . . . . . . . . . . . 50
* * *
44
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Empire Federal Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Empire Federal
Bancorp, Inc. and subsidiaries as of December 31, 1996 and June 30, 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for the six months ended December 31, 1996 and the years ended June 30,
1996 and 1995. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Empire
Federal Bancorp, Inc. as subsidiaries as of December 31, 1996 and June 30,
1996, and the results of their operations and their cash flows for the six
months ended December 31, 1996 and the years ended June 30, 1996 and 1995, in
conformity with generally accepted accounting principles.
Billings, Montana
February 21, 1997
45
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and June 30, 1996
December 31, June 30,
Assets 1996 1996
------ ------------ --------
Cash and cash equivalents $ 1,165,164 1,160,760
Interest-bearing deposits 29,824,391 1,337,948
Investment and mortgage-backed securities
available-for-sale 13,767,773 13,876,659
Investment and mortgage-backed securities
held-to-maturity (estimated market value
of $26,385,527 at December 31, 1996 and
$25,005,118 at June 30, 1996) 26,187,821 25,195,531
Loans receivable, net 41,703,590 41,882,298
Stock in Federal Home Loan Bank of Seattle,
at cost 1,168,800 1,123,300
Accrued interest receivable 330,927 327,994
Income tax receivable 40,000 65,817
Premises and equipment, net 1,276,818 1,337,731
Prepaid expenses and other assets 408,473 502,333
------------ ----------
Total assets $115,873,757 86,810,371
============ ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 67,697,866 68,547,802
Stock over subscription 6,987,070 -
Advances from Federal Home Loan Bank - 1,500,000
Advances from borrowers for taxes and
insurance 169,872 205,876
Accrued expenses and other liabilities 974,939 449,060
Deferred income taxes 434,373 231,234
Total liabilities 76,264,120 70,933,972
------------ ----------
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 -
Additional paid-in capital 25,142,356 -
Unearned ESOP compensation (2,073,680) -
Retained earnings, substantially restricted 15,762,582 15,620,702
Unrealized gain on securities available-
for-sale, net 752,458 255,697
------------ ----------
Total stockholders' equity 39,609,637 15,876,399
------------ ----------
Commitments and contingencies
Total liabilities and stockholders'
equity $115,873,757 86,810,371
============ ==========
See accompanying notes to consolidated financial statements.
46
PAGE
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended December 31, 1996 and Years Ended June 30, 1996 and 1995
Six Months Ended Years Ended June 30,
--------------------
December 31, 1996 1996 1995
----------------- --------- ---------
Interest income:
Loans receivable $ 1,796,344 3,440,793 3,408,170
Mortgage-backed securities 1,170,112 2,516,854 2,530,329
Investment securities 104,077 214,363 142,388
Other 159,780 131,543 223,905
---------- --------- ---------
Total interest income 3,230,313 6,303,553 6,304,792
---------- --------- ---------
Interest expense:
Passbook accounts 240,485 476,408 596,155
NOW accounts 229,349 412,096 406,074
Certificates of deposit 1,149,333 2,325,755 1,791,064
Advances from Federal Home
Loan Bank 6,610 95,444 144,768
---------- --------- ---------
Total interest expense 1,625,777 3,309,703 2,938,061
---------- --------- ---------
Net interest income 1,604,536 2,993,850 3,366,731
Provision for loan losses - 55,000 -
---------- --------- ---------
Net interest income after
provision for loan losses 1,604,536 2,938,850 3,366,731
Non-interest income:
Insurance commission income 336,298 688,166 691,196
Customer service charges 86,125 145,456 129,425
Other 16,347 45,100 36,247
---------- --------- ---------
Total non-interest income 438,770 878,722 856,868
Non-interest expense:
Compensation and benefits 806,607 1,614,601 1,542,123
Occupancy and equipment 171,166 340,114 264,333
Special assessment by the SAIF 450,728 - -
Deposit insurance premiums 56,220 185,287 225,663
Data processing services 48,643 105,986 86,125
Other 306,540 540,427 564,794
---------- --------- ---------
Total non-interest expense 1,839,904 2,786,415 2,683,038
---------- --------- ---------
Income before income taxes 203,402 1,031,157 1,540,561
Income taxes 61,522 399,480 588,623
---------- --------- ---------
Net income $ 141,880 631,677 951,938
========== ========= =========
See accompanying notes to consolidated financial statements.
47
<PAGE>
<PAGE>
<TABLE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Six Months Ended December 31, 1996 and Years Ended June 30, 1996 and 1995
Unrealized
gain on Total
Additional Unearned securities stock-
Common paid-in ESOP Retained available- holders'
stock capital compensation earnings for-sale, net equity
----- ------- ------------ -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at June
30, 1994 $ - - - 14,037,087 437,589 14,474,676
Net income - - - 951,938 - 951,938
Change in un-
realized gain
on securities
available-for-sale - - - - 73,345 73,345
-------- ---------- ---------- ---------- -------- ----------
Balances at June
30, 1995 - - - 14,989,025 510,934 15,499,959
Net income - - - 631,677 - 631,677
Change in un-
realized gain
on securities
available-for-sale - - - - (255,237) (255,237)
-------- ---------- ---------- ---------- -------- ----------
Balances at June
30, 1996 - - - 15,620,702 255,697 15,876,399
Net proceeds from
issuance of common
stock 25,921 25,142,356 (2,073,680) - - 23,094,597
Net income - - - 141,880 - 141,880
Change in un-
realized gain
on securities
available-for-sale - - - - 496,761 496,761
-------- ---------- ---------- ---------- -------- ----------
Balances at December
31, 1996 $ 25,921 25,142,356 (2,073,680) 15,762,582 752,458 39,609,637
======== ========== ========== ========== ======== ==========
See accompanying notes to consolidated financial statements.
48
</TABLE>
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1996 and Years Ended June 30, 1996 and 1995
Six Months Ended Years Ended June 30,
--------------------
December 31, 1996 1996 1995
----------------- --------- ---------
Cash flows from operating
activities:
Net income $ 141,880 631,677 951,938
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses - 55,000 -
Depreciation 103,101 199,309 139,899
Loss on retirement of premises
and equipment, net - 17,430 3,462
Amortization of premiums and
discounts on loans and
mortgage-backed securities,
net (6,553) 30,239 40,798
Stock dividends reinvested in
Federal Home Loan Bank stock (45,500) (79,200) (61,000)
Decrease (increase) in accrued
interest receivable (2,933) 34,733 (53,913)
Decrease (increase) in income
tax receivable 25,817 (65,817) -
Decrease (increase) in prepaid
expenses and other assets 93,860 163,646 (51,503)
Increase (decrease) in accrued
expenses and other liabilities 21,734 (131,634) 156,686
Decrease in income taxes payable - (46,177) (89,561)
Increase (decrease) in deferred
income taxes (50,115) 48,007 (482)
----------- ---------- ----------
Net cash provided by
operating activities 281,291 857,213 1,036,324
----------- ---------- ----------
Cash flows from investing
activities:
Net change in interest-bearing
deposits (28,486,443) (103,092) 24,457
Net change in loans receivable 179,744 (2,504,609) 1,955,888
Purchases of investment
securities held-to-maturity (449,750) (3,998,800) (1,497,500)
Proceeds from matured or called
investment securities held-to-
maturity 250,000 3,997,500 200,000
Purchases of mortgage-backed
securities held-to-maturity (4,245,465) (5,704,272) (4,869,975)
Principal payments on mortgage-
backed securities held-to-
maturity 3,460,059 4,535,653 5,489,487
Principal payments on mortgage-
backed securities available-
for-sale 857,284 2,313,580 -
Purchases of premises and
equipment (42,188) (393,480) (438,600)
----------- ---------- ----------
Net cash provided by
(used in) investing
activities (28,476,759) (1,857,520) 863,757
----------- ---------- ----------
Cash flows from financing
activities:
Net change in deposits (849,936) 1,484,080 (1,272,116)
Proceeds from advances from
Federal Home Loan Bank - 1,500,000 1,000,000
Repayment of advances from
Federal Home Loan Bank (1,500,000) (1,750,926) (1,438,172)
Repayment of note payable - - (70,000)
Net change in advances from
borrowers for taxes and
insurance (36,004) (33,137) 2,739
Sale of common stock, net of
offering costs 23,094,597 - -
Proceeds from stock over
subscription 6,987,070 - -
Increase in accrued offering
costs 504,145 - -
----------- ---------- ----------
Net cash provided by
(used in) financing
activities 28,199,872 1,200,017 (1,777,549)
----------- ---------- ----------
Net increase in cash and cash
equivalents 4,404 199,710 122,532
Cash and cash equivalents,
beginning of year 1,160,760 961,050 838,518
----------- ---------- ----------
Cash and cash equivalents,
end of year $ 1,165,164 1,160,760 961,050
=========== ========== ==========
See accompanying notes to consolidated financial statements.
49
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) General
-------
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). The
consolidated financial statements also include 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.
Empire provides services to customers in south central Montana through
a main office and two branches in three separate communities. Empire
offers a variety of deposit products to its customers while
concentrating its lending activities on real estate loans. These real
estate lending activities focus primarily on the origination of loans
secured by one- to four-family residential real estate but also
include the origination of multi-family, commercial real estate and
home equity loans. Empire is subject to competition from other
financial service providers and is also subject to the regulations of
certain federal and state agencies and undergoes periodic examinations
by those regulatory authorities.
Dime was formed in December 1985 to conduct business as an insurance
agency.
(b) Conversion to Stock Ownership
-----------------------------
The Holding Company was incorporated in September 1996 to acquire and
hold all of the outstanding capital stock of Empire 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 reflects 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, among other things, 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 over
subscription proceeds recorded as a liability. The over subscription
proceeds and accrued interest due on all subscription proceeds were
refunded on January 23, 1997.
In accordance with OTS regulations, at the time of conversion, Empire
restricted a portion of retained earnings by establishing a
liquidation account. The liquidation account will be maintained for
the benefit of eligible holders who continue to maintain their
accounts in Empire after the conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have
reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of Empire, and only
in such an event, each account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate
to the adjusted qualifying account balances then held.
(Continued)
50
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Basis of Presentation
The accounting and consolidated financial statement reporting policies
conform with generally accepted accounting principles and prevailing
practices within the financial services industry. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported and disclosed
amounts of assets and liabilities as of the date of the balance sheet
and income and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses. Management believes that the allowance for loan
losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for losses on loans. Such
agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them
at the time of their examination.
(d) Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all cash and non-interest-bearing deposits with banks to be cash
equivalents.
(e) Investment Securities
Investment securities are classified and accounted for as follows:
Trading Securities - Debt and equity securities bought and
held principally for the purpose of selling them in the near
term are classified as trading securities and are reported at
fair value, with unrealized gains and losses included in
earnings.
Securities Held-to-Maturity - Debt securities for which the
company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and are reported
at amortized cost.
Securities Available-for-Sale - Securities not classified as
either held-to-maturity or trading securities are classified
as available-for-sale. Available-for-sale securities are
stated at fair value, with net unrealized gains and losses
excluded from earnings and reported (net of deferred taxes)
as a separate component of stockholders' equity.
The Company did not hold any trading securities during the six
months ended December 31, 1996 or during the year ended June 30,
1996.
Declines in the fair value of available-for-sale or held-to-maturity
securities below carrying value that are other than temporary are
charged to expense as realized losses and the related carrying value
reduced to fair value.
The amortized cost of debt securities is adjusted for amortization
of premium and accretion of discount using the interest method over
the term of each security. The cost of investments sold is
determined by specific identification.
(Continued)
51
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Mortgage-Backed Securities
Mortgage-backed securities represent participating interests in
pools of first mortgage loans originated and serviced by issuers of
the securities. These securities are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using the interest method over
the remaining period to contractual maturity, adjusted for
anticipated prepayments. The cost of mortgage-backed securities
sold is determined by specific identification. The mortgage-backed
securities are classified as held-to-maturity or available-for-sale
as defined in "Investment Securities" above.
(g) Loans Receivable
Loans receivable are stated at unpaid principal balances less
unearned discounts and net deferred loan origination fees. Interest
on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Discounts on purchased loans
are amortized using the level-yield method over the remaining period
to contractual maturity, adjusted for anticipated prepayments.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on factors such
as past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, current
and prospective economic conditions, and independent appraisals.
Accrued interest on loans that are contractually ninety days or more
past due is generally charged off against income. Interest is
subsequently recognized only to the extent cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is reasonably assured,
in which case the loan is returned to accrual status.
The Company also provides an allowance for losses on specific loans
which are deemed to be impaired. Groups of small-balance
homogeneous loans (generally residential real estate and consumer
loans) are evaluated for impairment collectively. A loan is
considered impaired when, based upon current information and events,
it is probable that the Company will be unable to collect, on a
timely basis, all principal and interest according to the
contractual terms of the loan's original agreement. When a specific
loan is determined to be impaired, the allowance for loan losses is
increased through a charge to expense for the amount of the
impairment. The amount of the impairment is measured using cash
flows discounted at the loan's effective interest rate, except when
it is determined that the sole source of repayment for the loan is
the operation or liquidation of the underlying collateral. In such
cases, the current value of the collateral, reduced by anticipated
selling costs, will be used in place of discounted cash flows. The
Company uses the cash basis of income recognition on impaired loans.
The Company's existing policies for evaluating the adequacy of the
allowance for loan losses and policies for discontinuing the accrual
of interest on loans are used to establish the basis for determining
whether a loan is impaired. At December 31, 1996 and June 30, 1996,
no loans were classified as non-accrual or impaired.
(Continued)
52
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(h) Loan Origination Fees and Related Costs
Loan origination fees and certain direct loan origination costs are
deferred and the net fee or cost is recognized in interest income
using the level-yield method over the contractual life of the loans.
The amortization of deferred loan fees and costs and the accretion
of unearned discounts on non-performing loans is discontinued during
periods of non-performance.
(i) Stock in Federal Home Loan Bank
Federal law requires a member institution of the Federal Home Loan
Bank (FHLB) System to hold common stock of its district FHLB
according to predetermined formulas.
(j) Real Estate Owned
Real estate owned represents real estate acquired through foreclosure
or in satisfaction of loans and is initially recorded at the lower of
fair market value less estimated costs to sell or "cost" (defined as
the fair market value at initial foreclosure). Valuations are
periodically performed by management and an allowance for losses is
established by a charge to operations if the fair market value less
estimated costs to sell is less than "cost" or carrying value.
(k) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over the estimated useful
lives, which range from 3 to 50 years, of the respective assets on
straight-line and accelerated methods. Leasehold improvements are
amortized on the straight-line method over their estimated useful
life or lease term, whichever is less.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(m) Net Income Per Share
Net income per common share is calculated by dividing net income by
the weighted average number of common shares and common share
equivalents outstanding during the period. Unallocated ESOP shares
are excluded from the weighted average common shares outstanding
calculation, while allocated and shares committed to be released are
considered to be outstanding. Net income per share was not
calculated as no shares were outstanding during the six months ended
December 31, 1996 [see note 1(a)].
(Continued)
53
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(n) Impairment and Disposal of Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss is recognized if
the sum of the expected future cash flows is less than the carrying
amount of the asset. SFAS No. 121 was adopted July 1, 1996 and did
not have a material impact on the Company's consolidated financial
position or results of operations.
(o) 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 (see note 11).
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.
(Continued)
54
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Change in Fiscal Year
In connection with the conversion, Empire changed its reporting period
from a fiscal year ended June 30 to a calendar year end. Accordingly,
results of operations for the transition period ended December 31, 1996
cover a six-month period. The following statements of income present
financial data for the six months ended December 31, 1996 and the
comparable six month period of the prior year. These statements are for
comparative purposes only.
Six Months Ended December 31,
-----------------------------
1996 1995
------------ ------------
(unaudited)
Interest income:
Loans receivable $ 1,796,344 1,671,603
Mortgage-backed securities 1,170,112 1,256,928
Investment securities 104,077 94,898
Other 159,780 98,910
---------- ---------
Total interest income 3,230,313 3,122,339
---------- ---------
Interest expense:
Passbook accounts 240,485 243,985
NOW accounts 229,349 216,946
Certificates of deposit 1,149,333 1,158,261
Advances from Federal Home Loan Bank 6,610 48,794
---------- ---------
Total interest expense 1,625,777 1,667,986
---------- ---------
Net interest income 1,604,536 1,454,353
Provision for loan losses - -
---------- ---------
Net interest income after
provision for loan losses 1,604,536 1,454,353
Non-interest income:
Insurance commission income 336,298 352,686
Customer service charges 86,125 69,081
Other 16,347 26,211
---------- ---------
Total non-interest income 438,770 447,978
Non-interest expense:
Compensation and benefits 806,607 829,411
Occupancy and equipment 171,166 176,613
Special assessment by the SAIF 450,728 -
Deposit insurance premiums 56,220 91,910
Data processing services 48,643 56,027
Other 306,540 299,065
---------- ---------
Total non-interest expense 1,839,904 1,453,026
---------- ---------
Income before income taxes 203,402 449,305
Income taxes 61,522 160,000
---------- ---------
Net income $ 141,880 289,305
========== =========
(Continued)
55
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities Available-For-Sale
The amortized cost, unrealized gains and losses, and estimated market
values of investment and mortgage-backed securities available-for-sale
are summarized as follows:
December 31, 1996
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
FHLMC common and
preferred stock $ 67,791 1,269,274 - 1,337,065
Mutual funds 350,000 4,597 (1,499) 353,098
------------ --------- -------- ----------
417,791 1,273,871 (1,499) 1,690,163
Mortgage-backed
securities:
FHLMC certificates 9,956,294 21,779 (108,175) 9,869,898
FNMA certificates 2,256,253 - (48,541) 2,207,712
------------ --------- -------- ----------
12,212,547 21,779 (156,716) 12,077,610
------------ --------- -------- ----------
$ 12,630,338 1,295,650 (158,215) 13,767,773
============ ========= ======== ==========
June 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
FHLMC common and
preferred stock $ 67,791 970,709 - 1,038,500
Mutual funds 350,000 - (3,463) 346,537
------------ --------- -------- ----------
417,791 970,709 (3,463) 1,385,037
Mortgage-backed
securities:
FHLMC certificates 10,680,009 - (451,433) 10,228,576
FNMA certificates 2,391,439 - (128,393) 2,263,046
------------ --------- -------- ----------
13,071,448 - (579,826) 12,491,622
------------ --------- -------- ----------
$ 13,489,239 970,709 (583,289) 13,876,659
============ ========= ======== ==========
There were no sales of investment securities available-for-sale during the
six months ended December 31, 1996 and years ended June 30, 1996 and 1995.
(Continued)
56
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of securities available-for-sale by contractual maturity at
December 31, 1996 are shown below. Maturities of securities do not
reflect repricing opportunities present in many adjustable rate
securities, nor do they reflect expected shorter maturities based upon
early prepayments of principal.
Estimated
Amortized market
cost value
--------- ---------
Due after one year through five years $ 8,645,849 8,529,674
Due after five years through ten years 1,986,830 2,004,702
Due after ten years 1,579,868 1,543,234
12,212,547 12,077,610
Equity securities 417,791 1,690,163
------------ ----------
$ 12,630,338 13,767,773
============ ==========
(4) Investment and Mortgage-Backed Securities Held-to-Maturity
The amortized cost, unrealized gains and losses, and estimated market
values of investment and mortgage-backed securities held-to-maturity are
summarized as follows:
December 31, 1996
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
United States Govern-
ment and agency
obligations $ 2,698,550 4,850 (24,606) 2,678,794
Other 200 - - 200
------------ ------- -------- ----------
2,698,750 4,850 (24,606) 2,678,994
Mortgage-backed
securities:
FHLMC certificates 10,475,150 139,724 (27,258) 10,587,616
FNMA certificates 8,446,004 96,052 (23,783) 8,518,273
GNMA certificates 2,702,424 61,496 (259) 2,763,661
REMIC certificates 1,865,493 27,090 (55,600) 1,836,983
------------ ------- -------- ----------
23,489,071 324,362 (106,900) 23,706,533
------------ ------- -------- ----------
$ 26,187,821 329,212 (131,506) 26,385,527
============ ======= ======== ==========
(Continued)
57
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
United States Govern-
ment and agency
obligations $ 2,498,800 - (94,050) 2,404,750
Other 200 - - 200
------------ ------- -------- ----------
2,499,000 - (94,050) 2,404,950
Mortgage-backed
securities:
FHLMC certificates 13,029,147 77,388 (148,094) 12,958,441
FNMA certificates 6,821,387 16,623 (66,395) 6,771,615
GNMA certificates 980,504 34,996 - 1,015,500
REMIC certificates 1,865,493 15,319 (26,200) 1,854,612
------------ ------- -------- ----------
22,696,531 144,326 (240,689) 22,600,168
------------ ------- -------- ----------
$ 25,195,531 144,326 (334,739) 25,005,118
============ ======= ======== ==========
The REMICs consist of two certificates which are backed by the FNMA and
the FHLMC.
Maturities of securities held-to-maturity by contractual maturity at
December 31, 1996 are shown below. Maturities of securities do not
reflect repricing opportunities present in many adjustable rate
securities, nor do they reflect expected shorter maturities based upon
early prepayments of principal.
Estimated
Amortized market
cost value
--------- ---------
Due within one year $ 360,992 362,873
Due after one year through five years 6,924,076 6,984,146
Due after five years through ten years 4,807,239 4,908,255
Due after ten years 14,095,514 14,130,253
------------ ----------
$ 26,187,821 26,385,527
============ ==========
There were no sales of investment securities held-to-maturity during the
six months ended December 31, 1996 and the years ended June 30, 1996 or
1995.
The Association has not entered into any interest rate swaps, options or
future contracts. Included in U.S. Government agency obligations are
investments in structured notes which have contractual step-up interest
rates which have an amortized cost of $750,000 and $750,000 and a market
value of $733,600 and $697,850 at December 31, 1996 and June 30, 1996,
respectively. All of the U.S. Government and agency obligations at
December 31, 1996 and June 30, 1996 have call features.
(Continued)
58
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Loans Receivable
Loans receivable are summarized as follows:
December 31, June 30,
1996 1996
------------- ----------
First mortgage loans:
One to four family $ 35,287,132 35,201,819
Multi-family 2,241,000 2,333,000
Commercial real estate 1,118,000 1,182,000
Construction loans 2,238,000 1,380,000
Loans to depositors, secured by savings 629,115 900,771
Other consumer loans 2,321,511 2,112,269
------------ ----------
43,834,758 43,109,859
Less:
Unearned discounts (4,138) (5,174)
Undisbursed portion of mortgage
loans (1,657,105) (770,190)
Allowance for loan losses (200,000) (200,000)
Net deferred loan origination fees (269,925) (252,197)
------------ ----------
$ 41,703,590 41,882,298
============ ==========
Loans receivable include approximately $4,200,000 and $4,440,000 in
adjustable rate mortgages at December 31, 1996 and June 30, 1996,
respectively.
Real estate loans serviced for others totaled approximately $105,000 and
$110,000 at December 31, 1996 and June 30, 1996, respectively.
A summary of activity in the allowance for loan losses follows:
Six Months Ended Years Ended June 30,
--------------------
December 31, 1996 1996 1995
----------------- -------- --------
Balance at beginning of
period $ 200,000 145,000 145,000
Provision charged to
expense - 55,000 -
--------- ------- -------
Balance at end of period $ 200,000 200,000 145,000
========= ======= =======
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
December 31, June 30,
1996 1996
------------ --------
Loans receivable $ 205,857 211,440
Mortgage-backed securities 83,138 83,685
Investment securities and interest-
bearing deposits 41,932 32,869
----------- -------
$ 330,927 327,994
=========== =======
(Continued)
59
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Premises and Equipment
Premises and equipment is summarized as follows:
December 31, June 30,
1996 1996
------------ ----------
Buildings and leasehold improvements $ 2,164,215 2,160,134
Land and improvements 428,784 424,182
Furniture, fixtures and equipment 923,413 891,884
----------- -----------
3,516,412 3,476,200
Accumulated depreciation (2,239,594) (2,138,469)
----------- -----------
$ 1,276,818 1,337,731
=========== ===========
The Company is a party to a long-term lease agreement with an officer and
related individuals (lessor) for land on which the Livingston, Montana
main office is built. The lease expires in March 1997 at which time all
improvements made by the Company revert to the lessor. At December 31,
1996, these improvements had an amortized cost basis of approximately
$16,000. The Company has negotiated with the lessor to purchase the
building. If the Company determines not to purchase the building, it
will negotiate to enter into a lease with the lessor for rental of the
building prior to the expiration of the current lease term. Total lease
expense under this agreement was $5,028 for the six months ended December
31, 1996 and $10,056 for the years ended June 30, 1996 and 1995.
(8) Deposits
Deposits are summarized as follows:
Weighted
average rate at December 31, 1996 June 30, 1996
----------------- ----------------
December 31, 1996 Amount % Amount %
----------------- ------ - ------ -
Passbook
accounts 3.25% $ 14,521,391 21.5% $ 14,948,530 21.8%
NOW accounts 2.71% 14,629,406 21.6 13,624,016 19.9
------------ ----- ------------ -----
29,150,797 43.1 28,572,546 41.7
------------ ----- ------------ -----
Certificates
of deposit: 3.01 to 4.00 204,962 .3 -- --
4.01 to 5.00 7,285,980 10.7 4,626,075 6.8
5.01 to 6.00 25,318,501 37.4 26,196,709 38.2
6.01 to 7.00 3,997,839 5.9 6,764,071 9.9
7.01 to 8.00 1,619,598 2.4 2,156,573 3.1
8.01 to 9.00 120,189 .2 231,828 .3
------------ ----- ------------ -----
Total certificates
of deposit 38,547,069 56.9 39,975,256 58.3
------------ ----- ------------ -----
$ 67,697,866 100.0% $ 68,547,802 100.0%
============ ===== ============ =====
Scheduled maturities of certificates of deposit at December 31, 1996 are
as follows:
Due within one year $ 27,272,927
Due within two to three years 8,577,760
Due within four to five years 1,980,288
Thereafter 716,094
------------
$ 38,547,069
============
(Continued)
60
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certificates of deposit of $100,000 or more are approximately $2,871,000
and $3,334,000 at December 31, 1996 and June 30, 1996, respectively.
Amounts in excess of $100,000 are not insured by a federal agency.
Accrued interest payable on deposits (included in accrued expenses and
other liabilities) was approximately $98,500 and $107,000 at December
31, 1996 and June 30, 1996, respectively.
Cash payments for interest on deposits for the six months ended December
31, 1996 and years ended June 30, 1996 and 1995 totaled approximately
$1,600,000, $3,300,000 and $2,700,000, respectively.
Interest-bearing deposits with a carrying value of $100,000 were pledged
to secure public deposits at June 30, 1996. No amounts were pledged at
December 31, 1996.
(9) Advances from Federal Home Loan Bank
Advances from Federal Home Loan Bank are summarized as follows:
December 31, 1996 June 30, 1996
----------------- -------------
5.27% advance, paid September 1996 $ -- 250,000
6.02% advance, paid July 1996 -- 750,000
5.82% advance, paid July 1996 -- 500,000
--------- ---------
$ -- 1,500,000
========= =========
Cash payments for interest on advances for the six months ended December
31, 1996 and the years ended June 30, 1996 and 1995 were approximately
$6,600, $95,000 and $145,000, respectively.
(10) Income Taxes
Income tax expense for the six months ended December 31, 1996 and years
ended June 30, 1996 and 1995 is summarized as follows:
Federal State Total
------- ----- -----
December 31, 1996:
Current $ 89,108 22,529 111,637
Deferred (41,316) (8,799) (50,115)
--------- ------- -------
$ 47,792 13,730 61,522
========= ======= =======
June 30, 1996:
Current $ 290,714 60,759 351,473
Deferred 41,212 6,795 48,007
--------- ------- -------
$ 331,926 67,554 399,480
========= ======= =======
June 30, 1995:
Current $ 485,284 103,821 589,105
Deferred (400) (82) (482)
--------- ------- -------
$ 484,884 103,739 588,623
========= ======= =======
(Continued)
61
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Actual income tax expense for the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995 differs from "expected" income tax
expense (computed by applying the United States Federal corporate income
tax rate of 34% to income before income taxes) as follows:
Six Months Ended Years Ended June 30,
--------------------
December 31, 1996 1996 1995
----------------- -------- --------
Computed "expected" tax
expense $ 69,157 350,593 523,791
Increase (decrease)
resulting from:
State taxes, net of
Federal income tax
benefit 9,062 48,887 68,632
Other (16,697) -- (3,800)
------- ------- -------
$ 61,522 399,480 588,623
======== ======= =======
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities. The types of temporary
differences that give rise to significant portions of the deferred tax
assets and liabilities are as follows:
December 31, June 30,
1996 1996
----------- --------
Deferred tax assets:
Loans:
Allowance for loan losses $ 76,910 76,910
Loan origination fees deferred
for financial reporting
purposes 105,391 96,982
Premises and equipment,
principally due to differences
in depreciation 10,834 7,691
Deferred compensation accrual 38,995 34,998
Other, net 18,276 --
Gross deferred tax assets 250,406 216,581
Deferred tax liabilities:
Stock in Federal Home Loan Bank of
Seattle, principally due to
dividends not recognized for
tax purposes (293,950) (276,453)
Prepaid insurance premium (5,852) (30,379)
Unrealized gains on securities
available-for-sale (384,977) (131,723)
Other, net -- (9,260)
Gross deferred tax liabilities (684,779) (447,815)
---------- --------
Net deferred tax liability $ (434,373) (231,234)
========== ========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the existence of, or generation
of, taxable income in the periods which those temporary differences are
deductible. Management considers the scheduled reversal of deferred tax
liabilities, taxes paid in carryback years, projected future taxable
income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projection for future
taxable income over the
(Continued)
62
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
periods which the deferred tax assets are deductible, at December 31,
1996 and June 30, 1996, management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences.
For taxable years beginning prior to January 1, 1996, savings
institutions such as Empire were allowed, if certain conditions were met,
a special bad debt deduction for income tax purposes based on a
percentage of taxable income before such deduction. As a result of
recently enacted federal legislation, savings associations are no longer
able to calculate their deduction for bad debts using the percentage-of-
taxable-income method. Instead, savings associations with assets less
than $500 million are required to compute their deduction, based on
actual loss experience over a specified period of years. This
legislation also requires savings associations to recapture into taxable
income over a six-year period their post-1987 additions to their bad debt
tax reserves. At December 31, 1996, Empire's post-1987 tax bad debt
reserves were approximately $1,000. The recapture may be suspended for
up to two years if, during those years, the institution satisfies a
residential loan requirement which Empire anticipates will be met.
Retained earnings at December 31, 1996 includes approximately $3,320,000
for which no provision for Federal income tax has been made. This amount
represents the base year tax bad debt reserve at December 31, 1986. This
amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this reserve will be reduced and
thereby result in taxable income in the foreseeable future. The Company
is not currently contemplating any changes in its business or operations
which would result in a recapture of this Federal bad debt reserve into
taxable income.
Cash paid for income taxes for the six months ended December 31, 1996 and
years ended June 30, 1996 and 1995 totaled approximately $86,000,
$462,000 and $511,000, respectively.
(11) Employee Benefit Plans
Retirement Plan. The Company participates in a noncontributory multi-
employer trustee defined benefit pension plan. To be eligible to
participate, employees must be at least 21 years of age and have
completed one year of service. Actuarially determined pension costs
are funded as required by the trustee. Information related to the
Company's portion of the actuarial present value of benefits is not
available. Consulting actuaries to the plan have indicated that the plan
reached the ERISA full funding limitation during 1996. Contributions to
the plan were $2,000, $108,000 and $101,000 for the six months ended
December 31, 1996 and years ended June 30, 1996 and 1995, respectively.
(Continued)
63
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Employee Stock Ownership Plan . As part of the conversion discussed in
note 1(b), an ESOP was established for all employees that are age 21 or
older and have completed 1,000 hours of service during a 12-month period
with the Company. The ESOP borrowed $2,073,680 from the Company and used
the funds to purchase 207,368 shares of the common stock of the Company
issued in the offering. The loan is intended to be repaid principally
from the Company's distributions to the ESOP over a period of ten years.
At December 31, 1996, the loan had an outstanding balance of $2,073,680
and an interest rate of 8.25%. The loan obligation of the ESOP is
considered unearned compensation and, as such, is recorded as a reduction
of the Company's stockholders' equity. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants
as the loan is repaid. Contributions to the ESOP and shares released
from the suspense account are allocated among participants on the basis
of compensation in the year of allocation. Benefits will vest upon the
completion of five years of service. Forfeitures are reallocated to
remaining plan participants and may reduce the Company's contributions.
Benefits may be payable upon retirement, death, disability, or separation
from service. Compensation expense is recognized to the extent of the
fair value of shares committed to be released in any plan year. The
Company did not record compensation expense under the ESOP in 1996.
Employment Contracts. In conjunction with the conversion, the Company
entered into three-year employment contracts with two senior officers
that provide severance up to three times average annual compensation
following a change in control of the Company.
Option Plan Within one year of the conversion, the Company intends to
adopt an option plan for the issuance of up to 259,210 shares of common
stock through option grants to employees, officers and directors of the
Company. The options would vest over a five year period following the
date of the grant of the option. The plan is subject to approval by the
Board of Directors and stockholders.
Management Recognition Plan. Also within one year of the conversion, the
Company intends to adopt a management recognition plan which would grant
up to 103,684 of common shares to employees, officers and directors of
the Company. The shares granted would vest over a five year period
following the date of grant. The plan is subject to approval by the
Board of Directors and stockholders.
(12) Regulatory Capital
Empire is required to meet three capital requirements: a tangible capital
requirement equal to not less than 1.5% of tangible assets (as defined in
the regulations); a core capital requirement, comprised of tangible
capital adjusted for supervisory goodwill and other defined factors equal
to not less than 3.0% of tangible assets; and a risk-based capital
requirement equal to at least 8.0% of all risk-weighted assets. For
risk-weighting, selected assets are given a risk assignment of 0% to
100%. Empire's total risk-weighted assets at December 31, 1996 were
$38,313,000.
(Continued)
64
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Generally accepted accounting principles (GAAP) capital of Empire,
adjusted to reflect the effect of the conversion, differs from tangible,
core, and risk-based capital as a result of the following:
Capital as reported in Empire's Thrift
Financial Report $ 16,537,000
Stock issued in Conversion 9,501,000
Other (22,000)
------------
Capital measured by GAAP 26,016,000
Non-includable assets of Dime (376,000)
Unrealized gains on certain available-
for-sale securities (752,000)
------------
Tangible and core capital 24,888,000
Allowance for loan losses 200,000
Assets required to be deducted (22,000)
------------
Risk-based capital $ 25,066,000
============
The following table demonstrates, in dollars and percents, the extent to
which Empire exceeds the minimum capital requirements as of December 31,
1996:
Regulatory Capital
------------------------------------
Actual Requirement Excess
------ ----------- ------
Tangible capital:
Dollar amount $ 24,888,000 1,718,000 23,170,000
Percent of tangible
assets 21.7% 1.5% 20.2%
Core capital:
Dollar amount $ 24,888,000 3,437,000 21,451,000
Percent of adjusted
tangible assets 21.7% 3.0% 18.7%
Risk-based capital:
Dollar amount $ 25,066,000 3,065,000 22,001,000
Percent of risk-
weighted assets 65.4% 8.0% 57.4%
Failure to comply with applicable regulatory capital requirements can
result in capital directives from the director of the Office of Thrift
Supervision, restrictions on growth and other limitations on a savings
bank's operations.
Savings banks that meet or exceed their capital requirements may make
capital distributions during any one year up to 100% of its year-to-date
net income plus one-half of its surplus capital ratio at the beginning of
the calendar year. In addition, Empire may not pay dividends if those
dividends would reduce equity capital below the liquidation account
amount [see note 1(b)].
(13) Noncash Investing Activities
The Company recorded an increase in unrealized gain on investment
securities available-for-sale of $750,015, net of deferred taxes of
$253,254, for the six months ended December 31, 1996.
The Company recorded a decrease in unrealized gain on investment
securities available-for-sale of $386,723, net of deferred taxes of
$131,486, for the year ended June 30, 1996.
The Company recorded an increase in unrealized gain on investment
securities available-for-sale of $111,129, net of deferred taxes of
$37,784, for the year ended June 30, 1995.
(Continued)
65
PAGE
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and involve, to varying degrees, elements of credit risk.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments outstanding at December 31, 1996 whose contract
amounts represent credit risk are fixed-rate commitments to extend credit
totaling approximately $80,000 with interest rates of 7.5%. These
commitments generally contain a termination date of 30 days from date the
commitment is approved.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case by case
basis. The amount of collateral obtained by the Company upon extension
of credit, if deemed necessary, is based on management's evaluation of
the counter-party. Collateral held varies but may include personal
property, residential real property and income-producing commercial
properties.
(15) Financial Instruments With Concentration of Credit Risk
At December 31, 1996, approximately $1,700,000 of the Company's loans
receivable are secured by real property located outside of the Company's
trade area of three counties in south central Montana. Of this amount,
approximately $1,000,000 are secured by properties located in Southern
California.
(16) Fair Value of Financial Instruments
The Company is required to disclose the fair value for financial
instruments, whether recognized or not recognized on the statement of
financial condition. A financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that both imposes a
contractual obligation on one entity to deliver cash or another financial
instrument to a second entity.
Quoted market prices are used for fair value when available, but do not
exist for some of the Company's financial instruments, primarily loans
and time deposits. The fair value of these instruments has been derived
from the Office of Thrift Supervision Net Portfolio Value Model (OTS
Model). The OTS Model primarily employs the static discounted cash flow
method which estimates the fair value of loans and time deposits by
discounting the cash flows the instruments are expected to generate by
the yields currently available to investors on instruments of comparable
risk and duration. Therefore, to calculate present value, the OTS Model
makes assumptions about the size and timing of expected cash flows and
appropriate discount rates. Different assumptions could materially
change these instruments' estimated values.
(Continued)
66
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following assumptions and methods were used by the Company in
estimating fair value:
Financial Assets. Due to the liquid nature of the instruments, the
carrying value of cash and cash equivalents and interest-bearing
deposits approximates market value. For all investment and
mortgage-backed securities, the fair value is based upon quoted market
prices. The fair value of loans receivable was obtained from the OTS
Model. The fair value of accrued interest receivable approximates book
value as the Company expects contractual receipt in the short-term.
The fair value of FHLB stock approximates redemption value.
Financial Liabilities. The fair value of NOW and demand accounts and
non-term savings deposits approximates book values as these deposits
are payable on demand. The fair value of time deposits was obtained
from the OTS Model.
Off-Balance Sheet. Commitments made to extend credit represent
commitments for loan originations, the majority of which are contracted
for immediate sale and therefore no fair value adjustment is necessary.
Limitations. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
comparable market interest rates, future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. In addition, the tax
effect of the difference between the fair value and carrying value of
financial instruments can have a significant effect on fair value
estimates and have not been considered in the estimates presented
herein.
December 31, 1996 June 30, 1996
------------------------- -------------- ----------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Financial Assets:
Cash and cash
equivalents $ 1,165,164 1,165,164 1,160,760 1,160,760
Interest-bearing
deposits 29,824,391 29,824,391 1,337,948 1,337,948
Investment and
mortgage-backed
securities
available-for-
sale 13,767,773 13,767,773 13,876,659 13,876,659
Investment and
mortgage-backed
securities held-
to-maturity 26,187,821 26,385,527 25,195,531 25,005,118
Loans receivable, net 41,703,590 42,035,000 41,882,298 42,318,000
Stock in Federal Home
Loan Bank of Seattle 1,168,800 1,168,800 1,123,300 1,123,300
Accrued interest
receivable 330,927 330,927 327,994 327,994
(Continued)
67
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 June 30, 1996
------------------------- -------------- ----------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Financial
Liabilities:
Deposits $ 67,697,866 67,728,000 68,547,802 68,463,000
Advances from FHLB - - 1,500,000 1,500,000
Off-Balance Sheet:
Commitments to ex-
tend credit
(notional amount) 80,000 80,000 304,000 304,000
(17) Holding Company Information (Condensed)
The summarized financial information for Empire Federal Bancorp, Inc. is
presented below.
Condensed Balance Sheet:
December 31,
Assets 1996
------ -----------
Cash $ 7,884,812
Loan to Empire 13,200,000
Investment in Empire 26,016,040
Other assets 36,000
-----------
Total assets $47,136,852
===========
Liabilities and Stockholders' Equity
------------------------------------
Stock over subscription $ 6,987,070
Accrued offering costs 504,145
Other liabilities 36,000
-----------
Total liabilities 7,527,215
-----------
Stockholders' equity:
Common stock 25,921
Additional paid-in capital 25,142,356
Retained earnings 15,762,582
Unearned ESOP compensation (2,073,680)
Unrealized gain on securities available-
for-sale 752,458
-----------
Total stockholders' equity 39,609,637
-----------
Total liabilities and stockholders' equity $47,136,852
===========
(Continued)
68
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statement of Cash Flows:
Six Months Ended
December 31, 1996
-----------------
Cash flows from investing activities:
Loan to Empire $ (13,200,000)
Investment in Empire common stock (9,501,000)
-------------
Net cash used in investing
activities (22,701,000)
-------------
Cash flows from financing activities:
Sale of common stock, net of offering costs 23,094,597
Proceeds from stock over subscription 6,987,070
Increase in accrued offering costs 504,145
-------------
Net cash provided by financing
activities 30,585,812
-------------
Net increase in cash from inception
to December 31, 1996 $ 7,884,812
=============
69<PAGE>
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
- ---------------------------------------------------------
No disagreement with the Corporation's independent accountants on
accounting and financial disclosure has occurred during the past 24 months.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------------------------
The Board of Directors of the Corporation is presently composed of seven
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of the Corporation.
The executive officers of the Corporation are elected annually by the Board of
Directors and serve at the Board's discretion. The following tables set forth
information with respect to the Directors and executive officers of the
Corporation and Savings Bank.
Directors of the Corporation and the Savings Bank
Age at Current
December 31, Director Term
Name 1996 Since(1) Expires
---- ------------ -------- -------
Beverly D. Harris 63 1971 1998
Walter J. Peterson, Jr. 73 1964 1997
Ernest A. Sandberg 60 1971 1999
John R. Boe 72 1979 1999
Edwin H. Doig 65 1979 1998
Sanroe J. Kaisler, Jr. 72 1964 1997
Walter R. Sales 69 1977 1997
- ------------
(1) Includes prior service on the Board of Directors of the Savings Bank.
Executive Officers of the Corporation and Savings Bank
Age at
December 31, Position
---------------------------------
Name 1996 Corporation Savings Bank
----- ------------ ----------- ------------
Beverly D. Harris 63 President and Chief President and
Executive Officer Chief Executive
Officer
Ernest A. Sandberg 60 Treasurer, Chief Executive Vice
Financial Officer President and
and Secretary Secretary
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each
Director and executive officer has held his or her current occupation for the
last five years. There are no family relationships among or between the
Directors or executive officers, except for Mrs. Harris and Mr. Sandberg who
are sister- and brother-in-law.
70
<PAGE>
<PAGE>
Beverly D. Harris has been employed by the Savings Bank since 1956, and
has been President since 1972. She is Director and Treasurer of the Park
County Chapter American Red Cross, the Livingston Community Trust, the
Livingston Community Concert Association, and the Park County Friends of the
Arts. Mrs. Harris also serves on the Board of Directors of the Savings Bank's
service corporation, Dime Service Corporation, the Montana Power Company, and
the Financial Institutions Retirement Fund ("FIRF").
Walter J. Peterson, Jr. is Vice President and Manager of Dime Service
Corporation. He is a past president of the Montana Association of Insurance
Agents and a past national director. He co-organized and served as trustee of
the Montana Insurance Education Foundation. Community endeavors have included
serving as president of the Livingston Community Hospital Association, the
Livingston Chamber of Commerce, and the Livingston Golf and Country Club; as
trustee of the Livingston Elks Lodge #245 B.P.O.E., as alderman on the
Livingston City Council, as chairman of the City Water Board, and as a member
of the City-County Planning Board. He is an active member of the Livingston
Rotary Club.
Ernest A. Sandberg has been employed by the Savings Bank since 1969 and
has been Executive Vice President and Secretary since 1979. Mr. Sandberg is a
member of the Livingston Rotary Club, Chairman of two high school scholarship
programs and has served on the Advisory Committee for the Livingston Block
Grant Program. Mr. Sandberg also serves on the Board of Directors of the
Savings Bank's service corporation, Dime Service Corporation.
John R. Boe is retired after 39 years as a teacher and Vice Principal of
the local junior high school in Big Timber. He has been a director of the
Savings Bank for 18 years. Mr. Boe is a member of the Board of Directors of
the Pioneer Medical Center. Mr. Boe is also a member of the American Legion
and the Masonic Lodge/Scottish Rite.
Edwin H. Doig is a registered pharmacist and has been employed by Pamida
Pharmacy, a retail drugstore, since 1995. From 1972 to 1995, Mr. Doig was the
owner and manager of Livingston Drug. He is past president of the Montana
State Pharmacy Association, and a member of the American Legion, the Masonic
Lodge, the Elks Lodge, and the Livingston Golf and Country Club.
Sanroe J. Kaisler, Jr., a retired insurance broker, was the partner and
majority stockholder of Waite & Company, an insurance company. He is a
volunteer for the American Red Cross, the American Lung Association and the
Diabetes Association.
Walter R. Sales is a retired rancher who served 10 years in the Montana
legislature. He has been a director of the Savings Bank for 20 years.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act, requires the Corporation's executive
officers and directors, and persons who own more than 10% of any registered
class of the Corporation's equity securities, to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than 10% shareholders are required by regulation to furnish the Corporation
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above
referenced persons, the Corporation believes that all filing requirements
applicable to its reporting officers, directors and greater than 10%
shareholders were properly and timely complied with since the date of
completion of the Corporation's initial stock offering (January 23, 1997).
71
<PAGE>
<PAGE>
Item 10. Executive Compensation
- --------------------------------
Summary Compensation Table. The following information is furnished for
Mrs. Harris and Mr. Sandberg for the year ended December 31, 1996. No other
executive officer of the Corporation received salary and bonus in excess of
$100,000 during the year ended December 31, 1996.
Summary Compensation Table(1)
Annual Compensation
-------------------------------------
Name and Other Annual
Position Year Salary($) Bonus($) Compensation($)
- -------- ---- -------- -------- ---------------
Beverly D. Harris 1996 $104,580 $19,028 $12,000
President and Chief Executive
Officer of the Corporation and
the Savings Bank
Ernest A. Sandberg 1996 $ 95,760 $17,429 $12,000
Treasurer, Chief Financial
Officer and Secretary of the
Corporation and Executive Vice
President and Secretary of the
Savings Bank
- ----------------
(1) Compensation information for the fiscal year ended December 31, 1995
and 1994 has been omitted as the Corporation was not a public
company, nor a subsidiary thereof, at such time. Excludes certain
additional benefits, the aggregate amounts of which do not exceed 10%
of total salary and bonus.
Employment Agreements. Effective January 23, 1997, the Corporation and
the Savings Bank (collectively, the "Employers") entered into three year
employment agreements with Mrs. Harris and Mr. Sandberg. The agreements
provide for an initial salary level for Mrs. Harris and Mr. Sandberg of
$106,680 and $97,680, respectively, which amounts are paid by the Savings Bank
and may be increased at the discretion of the Board of Directors or an
authorized committee of the Board. In determining salary levels for Mrs.
Harris and Mr. Sandberg, the Board will consider compensation levels for
similarly situated executives at comparable institutions, the financial
performance of the Savings Bank, as well as their individual performance. On
each anniversary of the commencement date of the agreements, the term of the
agreements may be extended for an additional year. The agreements are
terminable by the Employers at any time or upon the occurrence of certain
events specified by federal regulations.
The employment agreements provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also are
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, Mrs. Harris and Mr.
Sandberg are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" is defined in the agreements as having occurred when,
among other things, (a) a person other than the Corporation purchases shares
of Common Stock pursuant to a tender or exchange offer for such shares, (b)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities, (c) the membership of
the Board of Directors changes as the result of a contested election, or (d)
shareholders of the Corporation approve a merger, consolidation, sale or
disposition of all or substantially all of the Corporation's assets, or a plan
of partial or complete liquidation.
72
<PAGE>
<PAGE>
The severance payments from the Employers will equal 2.99 times each
executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within 10
business days following the termination of employment. Assuming that a change
in control had occurred at December 31, 1996, Mrs. Harris and Mr. Sandberg
would be entitled to severance payments of approximately $334,000 and
$306,000, respectively. Section 280G of the Code states that severance
payments that equal or exceed three times the base compensation of the
individual are deemed to be "excess parachute payments" if they are contingent
upon a change in control. Individuals receiving excess parachute payments are
subject to a 20% excise tax on the amount of such excess payments, and the
Employers would not be entitled to deduct the amount of such excess payments.
The agreements restrict each executive's right to compete against the
Employers for a period of one year from the date of termination of the
agreement if Mrs. Harris and Mr. Sandberg involuntarily terminate employment,
except in the event of a change in control.
Compensation Committee Interlocks and Insider Participation.
Mrs. Harris, President and Chief Executive Officer of the Corporation,
serves as a member of the Compensation Committee. Although the Chief
Executive Officer recommends compensation to be paid to executive officers,
the entire Board of Directors of the Savings Bank reviews such recommendations
and sets the compensation for Mrs. Harris.
Directors' Compensation
Directors received a fee of $500 per month and a fee of $500 for
attendance at regular Board meetings during the year ended December 31, 1996.
Effective January 1, 1997, directors receive a retainer of $500 per month and
a fee of $250 for attendance at regular Board meetings of the Savings Bank and
a fee of $250 per month, payable quarterly, by the Corporation. In addition,
Directors residing in Bozeman and Big Timber received $20 per meeting for
travel expenses. No additional fees are paid to Directors for committee
meetings. Directors' fees totalled $85,000 for the year ended December 31,
1996.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing
such ownership pursuant to the Exchange Act. Based on such reports, the
following table sets forth, as of March 4, 1997, certain information as to
those persons who were beneficial owners of more than 5% of the outstanding
shares of Common Stock. Management knows of no persons other than those set
forth below who beneficially owned more than 5% of the outstanding shares of
Common Stock at March 4, 1997. The following table also sets forth, as of
March 4, 1997, information as to the shares of Common Stock beneficially owned
by each director, by the named executive officers of the Corporation, and by
all executive officers and directors of the Corporation as a group.
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Number of Shares Percent of Shares
Name Beneficially Owned (1) Outstanding
- ---- ---------------------- -----------------
Beneficial Owners of
More Than 5%
Empire Federal Savings
Bank Employee 207,368
Stock Ownership Plan Trust 8.00%
Directors
Walter J. Peterson, Jr. 15,600 *
John R. Boe 4,000 *
Edwin H. Doig 10,000 *
Sanroe J. Kaisler, Jr. 5,000 *
Walter R. Sales 10,000 *
Named Executive Officers(2)
Beverly D. Harris 22,506 0.87%
Ernest A. Sandberg 12,500 *
All Executive Officers and *
Directors as a Group (7 persons)
_______________
* Less than 1 percent of shares outstanding.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has voting or investment power with respect
to such security. The table includes shares owned by spouses, other
immediate family members in trust, shares held in retirement accounts or
funds for the benefit of the named individuals, and other forms of
ownership, over which shares the persons named in the table may possess
voting and/or investment power.
(2) Under SEC regulation, the term "named executive officer" is defined to
include the chief executive officer, regardless of compensation level,
and the four most highly compensated executive officers, other than the
chief executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. Mrs. Beverly D. Harris and Mr.
Ernest A. Sandberg were the Corporation's only "named executive officers"
for the year ended December 31, 1997. Mrs. Harris and Mr.
Sandberg also are directors of the Corporation.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any
pledge by any person of securities of the Corporation, the operation
of which may at a subsequent date result in a change in control of
the Corporation.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
Applicable law and regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features,
and the Savings Bank has adopted a policy to this effect. In addition, loans
made to a director or executive officer in an amount that, when aggregated
with the amount of all other loans to such director or executive officer and
his or her related interests are in excess of the greater of $25,000, or 5% of
the Savings Bank's capital and surplus (up to a maximum of $500,000), must be
approved in advance by a majority of
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the disinterested members of the Board of Directors. See "REGULATION --
Federal Regulation of Savings Banks -- Transactions with Affiliates" contained
in Item 1 of this Report. The aggregate amount of loans by the Savings Bank
to its executive officers and directors was $21,000 at December 31, 1996.
Mr. Joseph T. Swindlehurst, General Counsel to the Savings Bank, is a
partner with the law firm of Huppert & Swindlehurst, P.C. Mr. Swindlehurst
also is the brother of Beverly D. Harris, President of the Savings Bank, and
the brother-in-law of Ernest A. Sandberg, Executive Vice President and
Secretary of the Savings Bank. As general counsel to the Savings Bank during
the year ended December 31, 1996, Huppert & Swindlehurst, P.C. was paid
$11,719 in fees and expense reimbursement, which amount did not exceed 5% of
the law firm's annual gross revenues. The fees proposed or estimated to be
paid to Huppert & Swindlehurst, P.C. for the year ending December 31, 1997 are
$13,000, which amount is not expected to exceed 5% of the law firm's annual
gross revenues.
The Savings Bank's main office is owned by Mr. Swindlehurst, Mrs. Harris
and their sister, Mrs. Jean E. Sandberg, who is the wife of Mr. Sandberg, and
is leased by the Savings Bank through March 1997. The Savings Bank has
negotiated the purchase of the building, which has been approved by the OTS.
See Item 1. of this Report. During the year ended December 31, 1996, the
owners received $10,056 in rental income from the Savings Bank.
Item 13. Exhibits, List 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
10.2 Employment Agreement with Ernest A. Sandberg
10.3 Employee Stock Ownership Plan(1)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
_________________
(1) Incorporated by reference to the Corporation's Registration Statement
on Form SB-2, File No. 333-12653.
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended December
31, 1996.
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SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EMPIRE FEDERAL BANCORP, INC.
Date: March 28, 1997 By: /s/ Beverly D. Harris
-------------------------------
Beverly D. Harris
President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Beverly D. Harris March 28, 1997
----------------------------
Beverly D. Harris
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Ernest A. Sandberg March 28, 1997
----------------------------
Ernest A. Sandberg
(Principal Financial and Accounting Officer)
By: /s/ Walter J. Peterson, Jr. March 28, 1997
Walter J. Peterson, Jr.
Chairman of the Board
By:/s/ John R. Boe March 28, 1997
----------------------------
John R. Boe
Director
By: /s/ Edwin H. Doig March 28, 1997
----------------------------
Edwin H. Doig
Director
By: /s/ Sanroe J. Kaisler March 28, 1997
----------------------------
Robert R. Brown II
Director
By:/s/ Walter R. Sales March 28, 1997
----------------------------
Walter R. Sales
Director
<PAGE>
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Exhibit 10.1
Employment Agreement with Beverly D. Harris
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Employment Agreement
THIS AGREEMENT is made effective as of January 23, 1997, by and between
EMPIRE FEDERAL SAVINGS BANK (the "Savings Bank"), EMPIRE FEDERAL BANCORP,
INC., a Delaware corporation (the "Company"); and BEVERLY D. HARRIS (the
"Executive").
WHEREAS, the Savings Bank wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Savings Bank
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of her employment hereunder, Executive agrees to serve
as President and Chief Executive Officer of the Savings Bank. During said
period, Executive also agrees to serve, if elected, as an officer and director
of the Company or any subsidiary or affiliate of the Company or the Savings
Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as
of the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date, and continuing at each anniversary date thereafter, the Board of
Directors of the Savings Bank (the "Board") may extend the Agreement for an
additional year. Prior to the extension of the Agreement as provided herein,
the Board of Directors of the Savings Bank will conduct a formal performance
evaluation of Executive for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
(b) During the period of her employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all her
business time, attention, skill, and efforts to the faithful performance of
her duties hereunder including activities and services related to the
organization, operation and management of the Savings Bank; provided, however,
that, with the approval of the Board, as evidenced by a resolution of such
Board, from time to time, Executive may serve, or continue to serve, on the
boards of directors of, and hold any other offices or positions in, companies
or organizations, which, in such Board's judgment, will not present any
conflict of interest with the Savings Bank, or materially affect the
performance of Executive's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Sections 1 and 2.
The Savings Bank shall pay Executive as compensation a salary of $106,680 per
year ("Base Salary"). Such Base Salary shall be payable in accordance with
the customary payroll practices of the Savings Bank. During the period of
this Agreement, Executive's Base Salary shall be reviewed at least annually;
the first such review will be made no later than one year from the date of
this Agreement. Such review shall be conducted by a Committee designated by
the Board, and the Board may increase Executive's Base Salary. In addition to
the Base Salary provided in this Section 3(a), the Savings Bank shall provide
Executive at no cost to Executive with all such other benefits as are provided
uniformly to permanent full-time employees of the Savings Bank.
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(b) The Savings Bank will provide Executive with employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Savings Bank
will not, without Executive's prior written consent, make any changes in such
plans, arrangements or perquisites which would adversely affect Executive's
rights or benefits thereunder. Without limiting the generality of the
foregoing provisions of this Subsection (b), Executive will be entitled to
participate in or receive benefits under any employee benefit plans including,
but not limited to, retirement plans, supplemental retirement plans, pension
plans, profit-sharing plans, health-and-accident plan, medical coverage or any
other employee benefit plan or arrangement made available by the Savings Bank
in the future to its senior executives and key management employees, subject
to, and on a basis consistent with, the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan, or pursuant to any
arrangement of the Savings Bank, in which Executive is eligible to
participate. Nothing paid to Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which Executive is
entitled under this Agreement, except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Savings Bank shall pay or reimburse Executive for all
reasonable travel and other obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may
from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein
defined) during Executive's term of employment under this Agreement, the
provisions of this Section shall apply. As used in this Agreement, an "Event
of Termination" shall mean and include any one or more of the following: (i)
the termination by the Savings Bank of Executive's full-time employment
hereunder for any reason other than a Change in Control, as defined in Section
5(a) hereof; disability, as defined in Section 6(a) hereof; death; retirement,
as defined in Section 7 hereof; or Termination for Cause, as defined in
Section 8 hereof; (ii) Executive's resignation from the Savings Bank's employ,
upon (A) unless consented to by Executive, a material change in Executive's
function, duties, or responsibilities, which change would cause Executive's
position to become one of lesser responsibility, importance, or scope from the
position and attributes thereof described in Sections 1 and 2, above (any such
material change shall be deemed a continuing breach of this Agreement), (B) a
relocation of Executive's principal place of employment by more than 35 miles
from its location at the effective date of this Agreement, or a material
reduction in the benefits and perquisites to Executive from those being
provided as of the effective date of this Agreement, (C) the liquidation or
dissolution of the Savings Bank, or (D) any breach of this Agreement by the
Savings Bank. Upon the occurrence of any event described in clauses (A), (B),
(C) or (D), above, Executive shall have the right to elect to terminate her
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four (4) calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Savings Bank
shall pay Executive, or, in the event of her subsequent death, her beneficiary
or beneficiaries, or her estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the payments due to Executive for
the remaining term of the Agreement, including Base Salary, bonuses, and any
other cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on Executive's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the Savings Bank as of the Date of Termination), to Executive for
the term of the Agreement provided, however, that if the Savings Bank is not
in compliance with its minimum capital requirements or if such payments would
cause the Savings Bank's capital to be reduced below its minimum capital
requirements, such payments shall be deferred until such time as the Savings
Bank is in capital compliance. All payments made pursuant to this Section
4(b) shall be paid in substantially equal monthly installments over the
remaining term of this Agreement following Executive's termination; provided,
however, that if the remaining term of the Agreement is less than one (1) year
(determined as of Executive's Date
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of Termination), such payments and benefits shall be paid to Executive in a
lump sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Savings Bank
will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings Bank for
Executive prior to her termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the Company or the Savings Bank. For
purposes of this Agreement, a "Change in Control" of the Company or the
Savings Bank shall be deemed to occur if and when (a) an offeror other than
the Company purchases shares of the common stock of the Company or the Savings
Bank pursuant to a tender or exchange offer for such shares, (b) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of the Company or the Savings Bank representing 25%
or more of the combined voting power of the Company's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Savings Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof
constituting a Change in Control have occurred or the Board of the Savings
Bank or the Company has reasonably determined that a Change in Control has
occurred, Executive shall be entitled to the benefits provided in paragraphs
(c), (d) and (e) of this Section 5 upon her subsequent involuntary termination
following the effective date of a Change in Control (or voluntary termination
following the effective date of a Change in Control following any demotion,
loss of title, office or significant authority, reduction in her annual
compensation or benefits (other than a reduction affecting the Savings Bank's
personnel generally), or relocation of her principal place of employment by
more than thirty-five (35) miles from its location immediately prior to the
Change in Control), unless such termination is because of her death,
retirement as provided in Section 7, termination for Cause, or termination for
Disability.
(c) Upon the occurrence of a Change in Control followed by
Executive's termination of employment, the Savings Bank shall pay Executive,
or in the event of her subsequent death, her beneficiary or beneficiaries, or
her estate, as the case may be, as severance pay or liquidated damages, or
both, a sum equal to 2.99 times Executive's "base amount," within the meaning
of Section 280G(b)(3) of the Internal Revenue Code of 1986 ("Code"), as
amended. Such payment shall be made in a lump sum paid within ten (10) days of
Executive's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by
Executive's termination of employment, the Savings Bank will cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Savings Bank for Executive prior
to her severance. In addition, Executive shall be entitled to receive the
value of employer contributions that would have been made on Executive's
behalf over the remaining term of the agreement to any tax-qualified
retirement plan sponsored by the Savings Bank as of the Date of Termination.
Such coverage and payments shall cease upon the expiration of thirty-six (36)
months.
(e) Upon the occurrence of a Change in Control, Executive shall be
entitled to receive benefits due her under, or contributed by the Company or
the Savings Bank on her behalf, pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Savings Bank or the Company on Executive's behalf to the
extent that such benefits are not otherwise paid to Executive upon a Change in
Control.
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(f) Notwithstanding the preceding paragraphs of this Section 5, in
the event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Code, then, at the election of Executive, (i)
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
Executive's "base amount" under Section 280G(b)(3) of the Code or (ii) Executive
shall receive the amount payable under Section 5(c) as the sole benefit
payable under this Section 5.
6. TERMINATION FOR DISABILITY.
(a) If Executive shall become disabled as defined in the Savings
Bank's then current disability plan (or, if no such plan is then in effect, if
Executive is permanently and totally disabled within the meaning of Section
22(e)(3) of the Code as determined by a physician designated by the Board),
the Savings Bank may terminate Executive's employment for "Disability."
(b) Upon Executive's termination of employment for Disability, the
Savings Bank will pay Executive, as disability pay, a bi-weekly payment equal
to three-quarters (3/4) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence
on the effective date of Executive's termination and will end on the earlier
of (i) the date Executive returns to the full-time employment of the Savings
Bank in the same capacity as she was employed prior to her termination for
Disability and pursuant to an employment agreement between Executive and the
Savings Bank; (ii) Executive's full-time employment by another employer; (iii)
Executive attaining the age of sixty-five (65); or (iv) Executive's death; or
(v) the expiration of the term of this Agreement. The disability pay shall be
reduced by the amount, if any, paid to Executive under any plan of the Savings
Bank providing disability benefits to Executive.
(c) The Savings Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Savings Bank for Executive prior to her termination for
Disability. This coverage and payments shall cease upon the earlier of (i)
the date Executive returns to the full-time employment of the Savings Bank, in
the same capacity as she was employed prior to her termination for Disability
and pursuant to an employment agreement between Executive and the Savings
Bank; (ii) Executive's full-time employment by another employer; (iii)
Executive's attaining the age of sixty-five (65); (iv) Executive's death; or
(v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing her duties hereunder by reason of
temporary disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Savings Bank of Executive based on "Retirement" shall
mean retirement at or after attaining age sixty-five (65) or in accordance
with any retirement arrangement established with Executive's consent with
respect to her. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Savings
Bank or the Company and other plans to which Executive is a party. Upon the
death of Executive during the term of this Agreement, the Savings Bank shall
pay to Executive's estate the compensation due to Executive through the last
day of the calendar month in which her death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of
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this Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interest of the
Savings Bank or its affiliates. Notwithstanding the foregoing, Executive
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to her a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4) of the members of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for her, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the reasons thereof. Executive shall not have the right to
receive compensation or other benefits for any period after termination for
Cause. Any stock options granted to Executive under any stock option plan or
any unvested awards granted under any other stock benefit plan of the Savings
Bank, the Company, or any subsidiary or affiliate thereof, shall become null
and void effective upon Executive's receipt of Notice of Termination for Cause
pursuant to Section 9 hereof, and shall not be exercisable by Executive at any
time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Savings Bank may terminate Executive's employment at any
time, but any termination by the Savings Bank, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement shall be terminated (except
to the extent determined that continuation of the Agreement is necessary for
the continued operation of the Savings Bank): (i) by the Director of the
Office of Thrift Supervision (the "Director") or his designee at the time the
Federal Deposit Insurance Corporation or the Resolution Trust Corporation
enters into an agreement to provide assistance to or on behalf of the Savings
Bank under the authority contained in Section 13(c) of the FDIA or (ii) by the
Director, or his designee at the time the Director or such designee approves a
supervisory merger to resolve problems related to operation of the Savings
Bank or when the Savings Bank is determined by the Director to be in an unsafe
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
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10. NOTICE.
(a) Any purported termination by the Savings Bank or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment
is terminated for Disability, thirty (30) days after a Notice of Termination
is given (provided that she shall not have returned to the performance of her
duties on a full-time basis during such thirty (30) day period), and (B) if
her employment is terminated for any other reason, the date specified in the
Notice of Termination (which, in the case of a Termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence
of a Change in Control and voluntary termination by Executive in which case
the Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal there from having expired and no appeal
having been perfected) and provided further that the Date of Termination shall
be extended by a notice of dispute only if such notice is given in good faith
and the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Savings Bank will continue to pay Executive her full compensation in effect
when the notice giving rise to the dispute was given (including, but not
limited to, Base Salary) and continue her as a participant in all
compensation, benefit and insurance plans in which she was participating when
the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder
pursuant to an Event of Termination as provided in Section 4 hereof, Executive
agrees not to compete with the Savings Bank and/or the Company for a period of
one (1) year following such termination in any city, town or county in which
the Savings Bank and/or the Company has an office or has filed an application
for regulatory approval to establish an office, determined as of the effective
date of such termination. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise,
consult or otherwise serve with, directly or indirectly, any entity whose
business materially competes with the depository, lending or other business
activities of the Savings Bank and/or the Company. The parties hereto,
recognizing that irreparable injury will result to the Savings Bank and/or the
Company, its business and property in the event of Executive's breach of this
Subsection 11(a) agree that in the event of any such breach by Executive, the
Savings Bank and/or the Company will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents
and admits that in the event of the termination of her employment pursuant to
Section 8 hereof, Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of
a different nature than the Savings Bank and/or the Company, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the
Savings Bank and/or the Company from pursuing any other remedies available to
the Savings Bank and/or the Company for such breach or threatened breach,
including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Savings Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
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and unique asset of the business of the Savings Bank. Executive will not,
during or after the term of her employment, disclose any knowledge of the
past, present, planned or considered business activities of the Savings Bank
or affiliates thereof to any person, firm, corporation, or other entity for
any reason or purpose whatsoever. Notwithstanding the foregoing, Executive
may disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the
business plans and activities of the Savings Bank. In the event of a breach
or threatened breach by Executive of the provisions of this Section, the
Savings Bank will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned
or considered business activities of the Savings Bank or affiliates thereof,
or from rendering any services to any person, firm, corporation, other entity
to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting
the Savings Bank from pursuing any other remedies available to the Savings
Bank for such breach or threatened breach, including the recovery of damages
from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided
by the Savings Bank, such amounts and benefits shall be paid or provided by
the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Savings Bank
or any predecessor of the Savings Bank and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to her without reference to this
Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to affect any such action
shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive, the Savings Bank, the Company and their respective successors
and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
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16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Montana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or
state law or regulation, the provisions of such law or regulation shall
prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within one hundred (100) miles from the location of the Savings Bank, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that Executive shall be entitled to seek
specific performance of her right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Savings Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Savings Bank shall provide Executive (including her heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and her heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred
by her in connection with or arising out of any action, suit or proceeding in
which she may be involved by reason of her having been a director or officer
of the Savings Bank (whether or not she continues to be a directors or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgment, court costs and
attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE SAVINGS BANK OR THE COMPANY.
The Savings Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank or the Company would be
required to perform if no such succession or assignment had taken place.
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IN WITNESS WHEREOF, the Savings Bank and the Company hereto have caused
this Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all
on the 23rd day of March, 1997.
ATTEST: EMPIRE FEDERAL SAVINGS BANK
/s/Joan E. Shipley BY:/s/W. J. Peterson, Jr.
- ------------------------------- --------------------------------------
Joan E. Shipley W. J. Peterson, Jr.
[SEAL] Chairman
ATTEST: EMPIRE FEDERAL BANCORP, INC.
/s/Joan E. Shipley BY:/s/W. J. Peterson, Jr.
- ------------------------------- --------------------------------------
Joan E. Shipley W. J. Peterson, Jr.
[SEAL] Chairman
WITNESS:
/s/Joan E. Shipley /s/Beverly D. Harris
_______________________________ _______________________________________
Joan E. Shipley Beverly D. Harris
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Exhibit 10.2
Employment Agreement with Ernest A. Sandberg
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Employment Agreement
THIS AGREEMENT is made effective as of January 23, 1997, by and between
EMPIRE FEDERAL SAVINGS BANK (the "Savings Bank"), EMPIRE FEDERAL BANCORP,
INC., a Delaware corporation (the "Company"); and ERNEST A. SANDBERG (the
"Executive").
WHEREAS, the Savings Bank wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Savings Bank
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as Executive Vice President of the Savings Bank. During said period,
Executive also agrees to serve, if elected, as an officer and director of the
Company or any subsidiary or affiliate of the Company or the Savings Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date, and continuing at each anniversary date thereafter, the Board of
Directors of the Savings Bank (the "Board") may extend the Agreement for an
additional year. Prior to the extension of the Agreement as provided herein,
the Board of Directors of the Savings Bank will conduct a formal performance
evaluation of Executive for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Savings Bank; provided, however, that, with
the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict
of interest with the Savings Bank, or materially affect the performance of
Executive's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
Savings Bank shall pay Executive as compensation a salary of $97,680 per year
("Base Salary"). Such Base Salary shall be payable in accordance with the
customary payroll practices of the Savings Bank. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. In addition to the
Base Salary provided in this Section 3(a), the Savings Bank shall provide
Executive at no cost to Executive with all such other benefits as are provided
uniformly to permanent full-time employees of the Savings Bank.
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(b) The Savings Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Savings Bank
will not, without Executive's prior written consent, make any changes in such
plans, arrangements or perquisites which would adversely affect Executive's
rights or benefits thereunder. Without limiting the generality of the
foregoing provisions of this Subsection (b), Executive will be entitled to
participate in or receive benefits under any employee benefit plans including,
but not limited to, retirement plans, supplemental retirement plans, pension
plans, profit-sharing plans health-and-accident plan, medical coverage or any
other employee benefit plan or arrangement made available by the Savings Bank
in the future to its senior executives and key management employees, subject
to, and on a basis consistent with, the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan, or pursuant to any
arrangement of the Savings Bank, in which Executive is eligible to
participate. Nothing paid to Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which Executive is
entitled under this Agreement, except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Savings Bank shall pay or reimburse Executive for all
reasonable travel and other obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may
from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Savings Bank of Executive's full-time employment hereunder
for any reason other than a Change in Control, as defined in Section 5(a)
hereof; disability, as defined in Section 6(a) hereof; death; retirement, as
defined in Section 7 hereof; or Termination for Cause, as defined in Section 8
hereof; (ii) Executive's resignation from the Savings Bank's employ, upon (A)
unless consented to by Executive, a material change in Executive's function,
duties, or responsibilities, which change would cause Executive's position to
become one of lesser responsibility, importance, or scope from the position
and attributes thereof described in Sections 1 and 2, above (any such material
change shall be deemed a continuing breach of this Agreement), (B) a
relocation of Executive's principal place of employment by more than 35 miles
from its location at the effective date of this Agreement, or a material
reduction in the benefits and perquisites to Executive from those being
provided as of the effective date of this Agreement, (C) the liquidation or
dissolution of the Savings Bank, or (D) any breach of this Agreement by the
Savings Bank. Upon the occurrence of any event described in clauses (A), (B),
(C) or (D), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four (4) calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Savings Bank
shall pay Executive, or, in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the payments due to Executive for
the remaining term of the Agreement, including Base Salary, bonuses, and any
other cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on Executive's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the Savings Bank as of the Date of Termination), to Executive for
the term of the Agreement provided, however, that if the Savings Bank is not
in compliance with its minimum capital requirements or if such payments would
cause the Savings Bank's capital to be reduced below its minimum capital
requirements, such payments shall be deferred until such time as the Savings
Bank is in capital compliance. All payments made pursuant to this Section
4(b) shall be paid in substantially equal monthly installments over the
remaining term of this Agreement following Executive's termination; provided,
however, that if the remaining term of the Agreement is less than one (1) year
(determined as of Executive's Date
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of Termination), such payments and benefits shall be paid to Executive in a
lump sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Savings Bank
will cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings Bank for
Executive prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the Company or the Savings Bank. For
purposes of this Agreement, a "Change in Control" of the Company or the
Savings Bank shall be deemed to occur if and when (a) an offeror other than
the Company purchases shares of the common stock of the Company or the Savings
Bank pursuant to a tender or exchange offer for such shares, (b) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of the Company or the Savings Bank representing 25%
or more of the combined voting power of the Company's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Savings Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Savings Bank or the
Company has reasonably determined that a Change in Control has occurred,
Executive shall be entitled to the benefits provided in paragraphs (c), (d)
and (e) of this Section 5 upon his subsequent involuntary termination
following the effective date of a Change in Control (or voluntary termination
following the effective date of a Change in Control following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation or benefits (other than a reduction affecting the Savings Bank's
personnel generally), or relocation of his principal place of employment by
more than thirty-five (35) miles from its location immediately prior to the
Change in Control), unless such termination is because of his death,
retirement as provided in Section 7, termination for Cause, or termination for
Disability.
(c) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Savings Bank shall pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay or liquidated damages, or both, a
sum equal to 2.99 times Executive's "base amount," within the meaning of
Section 280G(b)(3) of the Internal Revenue Code of 1986 ("Code"), as amended.
Such payment shall be made in a lump sum paid within ten (10) days of
Executive's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Savings Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the
coverage maintained by the Savings Bank for Executive prior to his severance.
In addition, Executive shall be entitled to receive the value of employer
contributions that would have been made on Executive's behalf over the
remaining term of the agreement to any tax-qualified retirement plan
sponsored by the Savings Bank as of the Date of Termination. Such coverage
and payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive shall be
entitled to receive benefits due him under, or contributed by the Company or
the Savings Bank on his behalf, pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Savings Bank or the Company on Executive's behalf to the
extent that such benefits are not otherwise paid to Executive upon a Change in
Control.
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(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Code, then, at the election of Executive, (i)
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
Executive's "base amount" under Section 280G(b)(3) of the Code or (ii) Executive
shall receive the amount payable under Section 5(c) as the sole benefit
payable under this Section 5.
6. TERMINATION FOR DISABILITY.
(a) If Executive shall become disabled as defined in the Savings Bank's
then current disability plan (or, if no such plan is then in effect, if
Executive is permanently and totally disabled within the meaning of Section
22(e)(3) of the Code as determined by a physician designated by the Board),
the Savings Bank may terminate Executive's employment for "Disability."
(b) Upon Executive's termination of employment for Disability, the
Savings Bank will pay Executive, as disability pay, a bi-weekly payment equal
to three-quarters (3/4) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence
on the effective date of Executive's termination and will end on the earlier
of (i) the date Executive returns to the full-time employment of the Savings
Bank in the same capacity as he was employed prior to his termination for
Disability and pursuant to an employment agreement between Executive and the
Savings Bank; (ii) Executive's full-time employment by another employer; (iii)
Executive attaining the age of sixty-five (65); or (iv) Executive's death; or
(v) the expiration of the term of this Agreement. The disability pay shall be
reduced by the amount, if any, paid to Executive under any plan of the Savings
Bank providing disability benefits to Executive.
(c) The Savings Bank will cause to be continued life, medical, dental
and disability coverage substantially identical to the coverage maintained by
the Savings Bank for Executive prior to his termination for Disability. This
coverage and payments shall cease upon the earlier of (i) the date Executive
returns to the full-time employment of the Savings Bank, in the same capacity
as he was employed prior to his termination for Disability and pursuant to an
employment agreement between Executive and the Savings Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive's attaining the age
of sixty-five (65); (iv) Executive's death; or (v) the expiration of the term
of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of
temporary disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Savings Bank of Executive based on "Retirement" shall
mean retirement at or after attaining age sixty-five (65) or in accordance
with any retirement arrangement established with Executive's consent with
respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Savings
Bank or the Company and other plans to which Executive is a party. Upon the
death of Executive during the term of this Agreement, the Savings Bank shall
pay to Executive's estate the compensation due to Executive through the last
day of the calendar month in which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses)
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or final cease-and-desist order, or material breach of any provision of this
Agreement. For purposes of this Section, no act, or the failure to act, on
Executive's part shall be "willful" unless done, or omitted to be done, not in
good faith and without reasonable belief that the action or omission was in
the best interest of the Savings Bank or its affiliates. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than three-fourths (3/4) of
the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
termination for Cause and specifying the reasons thereof. Executive shall not
have the right to receive compensation or other benefits for any period after
termination for Cause. Any stock options granted to Executive under any stock
option plan or any unvested awards granted under any other stock benefit plan
of the Savings Bank, the Company, or any subsidiary or affiliate thereof,
shall become null and void effective upon Executive's receipt of Notice of
Termination for Cause pursuant to Section 9 hereof, and shall not be
exercisable by Executive at any time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Savings Bank may terminate Executive's employment at any time,
but any termination by the Savings Bank, other than Termination for Cause,
shall not prejudice Executive's right to compensation or other benefits under
this Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank): (i) by the Director of the Office
of Thrift Supervision (the "Director") or his designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into
an agreement to provide assistance to or on behalf of the Savings Bank under
the authority contained in Section 13(c) of the FDIA or (ii) by the Director,
or his designee at the time the Director or such designee approves a
supervisory merger to resolve problems related to operation of the Savings
Bank or when the Savings Bank is determined by the Director to be in an unsafe
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
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10. NOTICE.
(a) Any purported termination by the Savings Bank or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day period), and (B) if
his employment is terminated for any other reason, the date specified in the
Notice of Termination (which, in the case of a Termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence
of a Change in Control and voluntary termination by Executive in which case
the Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal there from having expired and no appeal
having been perfected) and provided further that the Date of Termination shall
be extended by a notice of dispute only if such notice is given in good faith
and the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Savings Bank will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not
limited to, Base Salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when
the notice of dispute was given, until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, Executive agrees not
to compete with the Savings Bank and/or the Company for a period of one (1)
year following such termination in any city, town or county in which the
Savings Bank and/or the Company has an office or has filed an application for
regulatory approval to establish an office, determined as of the effective
date of such termination. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise,
consult or otherwise serve with, directly or indirectly, any entity whose
business materially competes with the depository, lending or other business
activities of the Savings Bank and/or the Company. The parties hereto,
recognizing that irreparable injury will result to the Savings Bank and/or the
Company, its business and property in the event of Executive's breach of this
Subsection 11(a) agree that in the event of any such breach by Executive, the
Savings Bank and/or the Company will be entitled, in addition to any other
remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents
and admits that in the event of the termination of his employment pursuant to
Section 8 hereof, Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of
a different nature than the Savings Bank and/or the Company, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the
Savings Bank and/or the Company from pursuing any other remedies available to
the Savings Bank and/or the Company for such breach or threatened breach,
including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Savings Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
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and unique asset of the business of the Savings Bank. Executive will not,
during or after the term of his employment, disclose any knowledge of the
past, present, planned or considered business activities of the Savings Bank
or affiliates thereof to any person, firm, corporation, or other entity for
any reason or purpose whatsoever. Notwithstanding the foregoing, Executive
may disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the
business plans and activities of the Savings Bank. In the event of a breach
or threatened breach by Executive of the provisions of this Section, the
Savings Bank will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned
or considered business activities of the Savings Bank or affiliates thereof,
or from rendering any services to any person, firm, corporation, other entity
to whom such knowledge, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein will be construed as prohibiting
the Savings Bank from pursuing any other remedies available to the Savings
Bank for such breach or threatened breach, including the recovery of damages
from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided
by the Savings Bank, such amounts and benefits shall be paid or provided by
the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Savings Bank
or any predecessor of the Savings Bank and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this
Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Savings Bank, the Company and their respective successors and
assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
7
<PAGE>
<PAGE>
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Montana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or
state law or regulation, the provisions of such law or regulation shall
prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within one hundred (100) miles from the location of the Savings Bank, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Savings Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Savings Bank shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or proceeding in
which he may be involved by reason of his having been a director or officer of
the Savings Bank (whether or not he continues to be a directors or officer at
the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgment, court costs and
attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE SAVINGS BANK OR THE COMPANY.
The Savings Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank or the Company would be
required to perform if no such succession or assignment had taken place.
8
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Savings Bank and the Company hereto have caused
this Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all
on the 23rd day of January, 1997.
ATTEST: EMPIRE FEDERAL SAVINGS BANK
/s/Joan E. Shipley BY:/s/W. J. Peterson, Jr.
- ------------------------------- --------------------------------------
Joan E. Shipley W. J. Peterson, Jr.
[SEAL] Chairman
ATTEST: EMPIRE FEDERAL BANCORP, INC.
/s/Joan E. Shipley BY:/s/W. J. Peterson, Jr.
- ------------------------------- --------------------------------------
Joan E. Shipley W. J. Peterson, Jr.
[SEAL] Chairman
WITNESS:
/s/Joan E. Shipley /s/Ernest A. Sandberg
- ------------------------------- -----------------------------------------
Joan E. Shipley Ernest A. Sandberg
9
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Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Empire Federal Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Empire Federal Savings Bank 100% United States
The Dime Service Corporation(b) 100% Montana
___________
(a) The operation of the Corporation's wholly owned subsidiaries are included
in the Corporation's Financial Statements contained in Item 7 of this
Report.
(b) The Dime Service Corporation is the wholly owned subsidiary of Empire
Federal Savings Bank.
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the consolidated
financial statements of Empire Federal Bancorp, Inc., Inc. for the six months
ended December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
Financial Data as of
or for the six months
Item Number ended December 31, 1996 Item Description
- ----------- ----------------------- ----------------
9-03(1) 1,165,164 Cash and due from the Banks
9-03(2) 29,824,391 Interest-bearing deposits
9-03(3) -- Federal funds sold - purchased
securities for resale
9-03(4) -- Trading account assets
9-03(6) 13,767,773 Investment and mortgage backed
securities held for sale
9-03(6) 26,187,821 Investment and mortgage backed
securities held to maturity - carrying
value
9-03(6) 26,385,527 Investment and mortgage backed
securities held to maturity - market
value
9-03(7) 43,834,758 Loans
9-03(7)(2) 200,000 Allowance for losses
9-03(11) 115,873,757 Total assets
9-03(12) 67,697,866 Deposits
9-03(13) -- Short-term borrowings
9-03(15) 6,566,254 Other liabilities
9-03(16) -- Long-term debt
9-03(19) -- Preferred stock - mandatory redemption
9-03(20) -- Preferred stock - no mandatory
redemption
9-03(21) 25,921 Common stocks
9-03(22) 39,583,716 Other stockholders' equity
9-03(23) 115,873,757 Total liabilities and stockholders'
equity
9-04(1) 1,796,344 Interest and fees on loans
9-04(2) 1,274,189 Interest and dividends on investments
9-04(4) 159,780 Other interest income
9-04(5) 3,230,313 Total interest income
9-04(6) 1,619,167 Interest on deposits
9-04(9) 1,625,777 Total interest expense
9-04(10) 1,604,536 Net interest income
9-04(11) -- Provision for loan losses
9-04(13)(h) -- Investment securities gains/(losses)
9-04(14) 1,839,904 Other expenses
9-04(15) 203,402 Income/loss before income tax
9-04(17) 203,402 Income/loss before extraordinary items
9-04(18) -- Extraordinary items, less tax
9-04(19) -- Cumulative change in accounting
principles
9-04(20) 141,880 Net income or loss
9-04(21) N/A Earnings per share - primary
9-04(21) N/A Earnings per share - fully diluted
I.B.5 3.72% Net yield - interest earning assets -
actual
III.C.1.(a) -- Loans on non-accrual
III.C.1.(b) -- Accruing loans past due 90 days or more
III.C.2.(c) -- Troubled debt restructuring
<PAGE>
<PAGE>
III.C.2 73,000 Potential problem loans
IV.A.1 200,000 Allowance for loan loss - beginning of
period
IV.A.2 -- Total chargeoffs
IV.A.3 -- Total recoveries
IV.A.4 200,000 Allowance for loan loss - end of period
IV.B.1 200,000 Loan loss allowance to allocated to
domestic loans
IV.B.2 -- Loan loss allowance to foreign loans
IV.B.3 -- Loan loss allowance - unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1165164
<INT-BEARING-DEPOSITS> 29824391
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13767773
<INVESTMENTS-CARRYING> 26187821
<INVESTMENTS-MARKET> 26385527
<LOANS> 43834758
<ALLOWANCE> 200000
<TOTAL-ASSETS> 115873757
<DEPOSITS> 67697866
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6566254
<LONG-TERM> 0
0
0
<COMMON> 25921
<OTHER-SE> 39583716
<TOTAL-LIABILITIES-AND-EQUITY> 115873757
<INTEREST-LOAN> 1796344
<INTEREST-INVEST> 1274189
<INTEREST-OTHER> 159780
<INTEREST-TOTAL> 3230313
<INTEREST-DEPOSIT> 1619167
<INTEREST-EXPENSE> 1625777
<INTEREST-INCOME-NET> 1604536
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1839904
<INCOME-PRETAX> 203402
<INCOME-PRE-EXTRAORDINARY> 203402
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141880
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.72
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 73000
<ALLOWANCE-OPEN> 200000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 200000
<ALLOWANCE-DOMESTIC> 200000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
