SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
For the transition period from to
--------- ---------
Commission File No. 0-28934
Empire Federal Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 81-0512374
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 South Main Street, Livingston, Montana 59047
-------------------------------------------------
(Address of principal executive offices)
(406) 222-1981
---------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class: Common Stock, par value $.01 per share
Outstanding at October 31, 1998: 2,339,370
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
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EMPIRE FEDERAL BANCORP, INC.
INDEX TO FORM 10-QSB
Page
PART I FINANCIAL INFORMATION ----
---------------------
tem 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1998 and December 31, 1997 (unaudited).......... 1
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 (unaudited)..... 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 (unaudited).......... 3
Notes to Unaudited Interim Consolidated Financial Statements.. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 7
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.............................................. 13
Item 2. Changes in Securities.......................................... 13
Item 3. Defaults upon Senior Securities................................ 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
Item 5. Other Information.............................................. 13
Item 6. Exhibits and Reports on Form 8-K............................... 13
SIGNATURES............................................................. 14
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Part I, Item 1 - Financial Statements
- - -------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
Assets 1998 1997
------ ---- ----
(unaudited) (unaudited)
Cash and cash equivalents $ 875,366 $ 1,078,823
Interest-bearing deposits 3,488,833 1,825,208
Investment and mortgage-backed securities
available-for-sale 34,263,207 36,495,581
Investment and mortgage-backed securities
held-to-maturity (estimated market
value of $12,839,698 at September 30,
1998 and $20,802,559 at December
31, 1997) 12,643,276 20,556,479
Loans receivable, net 49,890,763 45,713,508
Stock in Federal Home Loan Bank of Seattle,
at cost 1,334,600 1,261,100
Accrued interest receivable 354,880 427,496
Premises and equipment, net 2,053,050 2,051,238
Prepaid expenses and other assets 295,305 391,470
------------- -------------
Total assets $ 105,199,280 $ 109,800,903
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Passbook Accounts $ 13,901,662 $ 13,572,343
NOW Accounts 13,578,862 14,838,604
Certificates of Deposit 37,932,683 38,448,145
------------- -------------
Total Deposits 65,413,207 66,859,092
Note Payable 660,461 698,136
Advances from borrowers for taxes and
insurance 402,571 208,258
Accrued expenses and other liabilities 1,282,993 1,437,029
------------- -------------
Total liabilities 67,759,232 69,202,515
Stockholders' equity:
Preferred stock, par value $.01 per share,
250,000 shares authorized, none issued and
outstanding -- --
Common stock, par value $.01 per share,
4,000,000 shares authorized, 2,592,100
issued 25,921 25,921
Additional paid-in capital 25,277,188 25,208,225
Unearned ESOP and MRDP compensation (3,018,530) (2,737,305)
Retained earnings, substantially restricted 17,187,903 16,815,367
Accumulated other comprehensive income, net 1,614,485 1,286,180
Treasury stock, at cost (3,646,919) --
------------ ------------
Total stockholders's equity 37,440,048 40,598,388
------------ ------------
Total liabilities and stockholders'
equity $105,199,280 $109,800,903
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
1
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1998 and 1997
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)(unaudited)
(unaudited)
Interest income:
Loans receivable $ 1,041,486 $ 921,616 $ 3,006,795 $ 2,748,973
Mortgage-backed
securities 749,987 787,957 2,329,374 2,165,067
Investment securities 82,590 181,504 289,633 454,137
Other 44,268 66,344 170,540 392,852
----------- ----------- ----------- -----------
Total interest income 1,918,331 1,957,421 5,796,342 5,761,029
----------- ----------- ----------- -----------
Interest expense:
Deposits 732,890 761,493 2,211,511 2,245,760
Advances from Federal
Home Loan Bank and other 15,276 17,285 47,044 81,638
----------- ----------- ----------- -----------
Total interest expense 748,166 778,778 2,258,555 2,327,398
----------- ----------- ----------- -----------
Net interest income 1,170,165 1,178,643 3,537,787 3,433,631
Provision for loan losses -- -- -- 19,895
----------- ----------- ----------- -----------
Net interest income after
provision for loan
losses 1,170,165 1,178,643 3,537,787 3,413,736
Non-interest income:
Insurance commission
income 173,528 161,130 474,845 469,700
Customer service charges 53,884 50,623 150,789 135,727
Other 3,968 8,695 18,915 17,398
----------- ----------- ----------- -----------
Total non-interest
income 231,380 220,448 644,549 622,825
Non-interest expense:
Compensation and benefits 851,698 432,674 1,731,154 1,187,636
Occupancy and equipment 71,952 84,919 237,164 245,295
Deposit insurance premiums 26,995 27,563 61,949 67,620
Other 172,065 188,034 539,017 548,657
----------- ----------- ----------- -----------
Total non-interest
expense 1,122,710 733,190 2,569,284 2,049,208
----------- ----------- ----------- -----------
Income before income
taxes 278,835 665,901 1,613,052 1,987,353
Income taxes 148,176 257,421 687,223 783,377
----------- ----------- ----------- -----------
Net income $ 130,659 $ 408,480 $ 925,829 $ 1,203,976
=========== =========== =========== ===========
Basic earnings per share $ 0.07 $ 0.17 $ 0.41 $ 0.50
=========== =========== =========== ===========
Diluted earnings per share $ 0.07 $ 0.17 $ 0.41 $ 0.50
=========== =========== =========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
2
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 925,829 $ 1,203,976
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses -- 19,895
Depreciation 119,836 114,814
ESOP shares committed to be released 168,860 161,762
MRDP shares vested 545,854 --
Stock dividends reinvested in Federal
Home Loan Bank (73,500) (67,400)
Decrease (increase) in accrued interest
receivable 72,616 (82,348)
Decrease in prepaid expenses and other assets 96,392 163,949
Decrease in accrued expenses and other
liabilities (364,163) (508,352)
----------- -------------
Net cash provided by operating activities 1,491,724 1,006,296
Cash flows from investing activities:
Net change in interest-bearing deposits (1,663,625) 25,118,807
Net change in loans receivable (4,177,255) (2,660,872)
Proceeds from matured or called investment
securities held-to-maturity 1,500,200 248,750
Principal payments on mortgage-backed
securities held-to maturity 9,777,288 3,075,733
Purchases of investment securities
available-for-sale (500,000) (8,864,495)
Proceeds from called investment securities
available for sale 4,500,000 2,412,500
Principal payments on mortgage-backed
securities available-for sale 6,413,003 3,116,616
Purchases of mortgage-backed securities
available-for-sale (11,006,709) (16,029,505)
Purchases of premises and equipment (121,648) (870,776)
----------- -------------
Net cash provided by investing
activities 4,721,254 5,546,758
----------- -------------
Cash flows from financing activities:
Net change in deposits (1,445,885) 448,082
Repayment of note and advances from FHLB (37,675) (1,039,800)
Net change in advances from borrowers for
taxes and insurance 194,313 215,203
Dividends paid (553,293) (357,710)
Funding of MRDP trust (926,976) (801,875)
Refund of stock oversubscription -- (6,987,070)
Proceeds from advances from Federal Home
Loan Bank -- 1,750,000
Purchase of treasury stock (3,646,919) --
----------- -------------
Net cash used in financing activities (6,416,435) (6,773,170)
----------- -------------
Net decrease in cash and cash equivalents (203,457) (220,116)
Cash and cash equivalents, beginning of period 1,078,823 1,165,164
----------- -------------
Cash and cash equivalents, end of period $ 875,366 $ 945,048
=========== =============
See accompanying notes to unaudited interim consolidated financial statements.
3
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
Note 1 Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for audited financial statements. They should be read in conjunction with the
audited consolidated financial statements filed as part of the Annual Report
on Form 10-KSB for the year ended December 31, 1997.
The accompanying consolidated financial statements include the accounts
of Empire Federal Bancorp, Inc. (the Holding Company) and its wholly-owned
subsidiary, Empire Federal Savings Bank (Empire) and Dime Service Corporation
(Dime), a wholly-owned subsidiary of Empire. The Holding Company, Empire and
Dime are herein referred to collectively as "the Company." All significant
intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentations have been
included. The results of operations for the nine months ended September 30,
1998, and 1997 are not necessarily indicative of the results which may be
expected for an entire year or any other period.
Note 2 New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS') No. 130 "Reporting
Comprehensive Income," which establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial information. The Company adopted the provisions of SFAS
No. 130 as of January 1, 1998. The only additional component of comprehensive
income other than net income is the Company's net unrealized gains or losses
on securities available-for-sale. The following summarizes accumulated other
comprehensive income for the periods ended September 30, 1998, and 1997, and
for the year ended December 31, 1997:
Accumulated Other
Comprehensive Income, Net
---------------------------------------------
Nine Months Ended Year Ended
Sept. 30, 1998 Sept. 30, 1997 Dec. 31, 1997
-------------- -------------- -------------
Beginning of period $1,286,180 $ 752,458 $ 752,458
Increase in unrealized gains on
securities-available-for-sale, net 328,305 383,958 533,722
---------- ----------- -----------
Ending balance $1,614,485 $ 1,136,416 $ 1,286,180
========== =========== ===========
4
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The increases in unrealized gains on securities-available-for-sale are
shown net of tax. Federal and state income taxes related to the unrealized
gains are $210,000 and $198,000 for the nine-month periods ended September 30,
1998 and 1997, and $341,000 for the year ended December 31, 1997.
Note 3 Earnings Per Share
------------------
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 replaces the presentation of primary earnings per share (EPS) with a
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. SFAS No. 128 also requires a
reconciliation of the numerator and denominator of the basic and diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Additionally, ESOP shares which are
unallocated and not yet committed to be released (unallocated) and unvested
MRDP shares issued are excluded from the weighted-average common shares
outstanding calculation. At September 30, 1998, there were 13,825 allocated
shares and 10,386 committed to be released ESOP shares. There were 32,833
vested MRDP shares. The weighted-average common shares outstanding for the
nine months ended September 30, 1998, was 2,250,094, which is net of
weighted-average unallocated ESOP and unvested MRDP shares.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or resulted
in the issuance of common stock that would share in the earnings of the
entity. At September 30, 1998, outstanding stock options and unvested MRDP
shares did not result in dilution of EPS. Dilutive potential common shares
are added to the weighted-average shares used to compute basic EPS. The
following information provides a reconciliation of the numerators and
denominators of the basic and fully diluted EPS computation:
For the nine months ended September 30, 1998
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Net income available to
common stockholders $ 925,829 2,276,773 $0.41
========== =====
Effect of Dilutive Securities
Stock Options - granted 3,289
Unvested MRDP shares 2,095
Diluted EPS ---------
Income available to common
stockholders plus assumed
conversion $ 925,829 2,282,157 $0.41
========== ========= =====
The weighted-average number of common shares outstanding was the same for both
basic and diluted EPS for the nine months ended September 30, 1997, given that
there were no potential common shares.
5
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 4 Cash Dividend Declared
----------------------
On October 28, 1998, the Board of Directors declared a quarterly cash
dividend of $.085 per common share to stockholders of record on November 10,
1998, payable on November 25, 1998.
Note 5 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory
capital requirements at September 30, 1998 (dollars in thousands):
Percentage
Amount of Assets
------ ---------
GAAP capital(1) $29,337 27.89%
======= =====
Tangible capital $27,313 26.77%
Tangible capital requirement 1,530 1.50%
------- -----
Excess $25,783 25.27%
======= =====
Core capital $27,313 26.77%
Core capital requirement 4,081 3.00%
------- -----
Excess $23,232 23.77%
======= =====
Total risk-based capital(2) $28,536 72.25%
Total risk-based capital requirement(2) 3,160 8.00%
------- -----
Excess $25,376 64.25%
======= =====
(1) GAAP capital includes unrealized gains on certain
available-for-sale securities of $1,614,000 and $410,000 of
investments in Dime, which are excluded for purposes of
calculating both tangible and core capital.
(2) Based on risk-weighted assets of $39,495,000.
6
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Part I, Item 2. - Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company.
Operating Strategy
The business of Empire consists principally of attracting deposits from the
general public and using such deposits to originate mortgage loans secured
primarily by one- to four-family residences. Empire also invests in
interest-bearing deposits, investment grade federal agency securities and
mortgage-backed securities. Empire plans to continue to fund its assets
primarily with deposits, although FHLB advances may be used as a supplemental
source of funds.
Empire'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
and debt. 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. Empire'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,
insurance commissions and net real estate owned income. Other expenses
include compensation and employee benefits, occupancy expenses, deposit
insurance premiums, equipment and data servicing expenses, professional fees
and other operating costs. Empire'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.
Year 2000 Issues
As the Year 2000 approaches, significant concerns have been expressed with
respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the Year
2000 and thereafter. Many existing application software products were
designed to accommodate only a two digit year. The Company's operating,
processing and accounting operations are computer reliant and could be
affected by the Year 2000 issues. Both Empire and the holding company are
reliant on third-party vendors for most of their data processing needs as well
as certain other significant functions and services. The Company is currently
working with its third-party vendors in order to assess their Year 2000
readiness. While no assurances can be given that such third-party vendors
will be Year 2000 compliant, management believes that such vendors are taking
appropriate steps to address the issues on a timely basis. While the company
currently has no reason to believe that the cost of addressing such issues
will materially affect Empire's products, services or ability to compete
effectively, no assurance can be made that the Company or the third-party
vendors on which is relies will become Year 2000 compliant in a successful and
timely fashion. Nevertheless, the Company does not believe that the cost of
addressing the Year 2000 issues will be a material event
7
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
or uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions,
nor does it believe that the costs or the consequences of incomplete or
untimely resolutions of its Year 2000 issues represent a known material event
or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future financial condition.
For nearly two years Empire has been investigating and addressing potential
Year 2000 problems. In the course of this process Empire has examined its
computer systems, phone systems, mailing and fax capabilities, office
environmental systems, and servicer relationships related to daily business
processing, ATM processing, ACH processing, check processing, wire transfers
processing, travelers check processing, and all other relevant out-sourced
services. The general plan for addressing Year 2000 problems has been
established by Company management, and is currently on schedule with respect
to implementation of that plan. As of September 1998 all areas of potential
impact directly addressable by Empire appear to be Year 2000 compliant, except
the teller system as discussed below. Areas to be addressed by third-party
vendors have been represented as either fully compliant or on schedule for
full compliance by December 1998. The Company's plan for full Year 2000
compliance, including a comprehensive second round of testing of third-party
vendors' provided systems, is scheduled to be complete by April 15, 1999. The
first round of testing, focusing on critical operational systems, is scheduled
for mid-November 1998.
The primary negative impact of the potential Year 2000 problem lies in
Empire's present Olivetti-America 8-window teller hardware/software system now
in use in all three offices. This system has known Year 2000 problems as well
as other inadequacies relevant to current needs on the working teller line.
Empire is in the process of replacing the existing teller system with a
PC-based teller system working internally at each office with a Local Area
Network (LAN) and tied together to the central office and our primary servicer
by a Wide Area Network (WAN). This conversion will not only solve the
potential Year 2000 problem in the teller system, but will also position
Empire to take maximum advantage of current technology in banking as it enters
the 21st Century. The estimated cost of conversion and re-training and
implementation of the new PC-based system is approximately $225,000 based on
information currently available, and the estimated timetable for conversion is
that it will be in process or complete by the end of 1998. Most of the
estimated cost will be for the new teller system and will be depreciated over
five years.
Financial Condition
Consolidated assets decreased by approximately $4.6 million, or 4.2%, from
$109.8 million at December 31, 1997 to $105.2 million at September 30, 1998.
This decrease was primarily attributable to the purchase of treasury shares of
$3.6 million, and the decline in deposits of $1.4 million.
The consolidated balance sheet was not materially affected by market
conditions between December 31, 1997 and September 30, 1998. Maturities and
payments of $7.9 million reduced investment and mortgage-backed securities
held-to-maturity from $20.6 million at December 31, 1997, to $12.6 million at
September 30, 1998. Net loans increased $4.2 million, or 9.1% of which $2.6
million consisted primarily of permanent and construction loans of 1-4
dwelling units and multi-family units, and $1.6 million was related to
commercial real estate.
8
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Deposits decreased by $1.4 million, or 2.2%, to $65.4 million at September 30,
1998, from $66.9 million at December 31, 1997.
Stockholders' equity decreased from $40.6 million at December 31, 1997, to
$37.4 million at September 30, 1998. The change is the result of net income
of $926,000, the release of ESOP shares in the amount of $168,000 and an
increase of $328,000 related to the increase in market value of securities
available-for-sale. In addition, during the first nine months of 1998 the
MRDP purchased, through a trust funded by the Company, 53,684 additional
shares of company shares for a total cost of $927,000. In addition, 32,833
shares of the MRDP vested and unearned MRDP compensation was reduced by
$546,000. Shareholders' equity was also decreased by the payments of $553,000
in dividends. During the nine-month period ended September 30, 1998, the
Company repurchased 252,230 shares of its common stock in the open market for
an average price of $14.44 per share for a total of $3.6 million.
Asset Quality
At September 30, 1998 and December 31, 1997, Empire did not have any
nonaccrual loans or troubled debt restructuring. At September 30, 1998,
Empire had six loans delinquent over 30 days amounting to $431,000 of which
$12,000 were delinquent over 90 days. Empire has no real estate acquired
through foreclosure.
Comparison of Results of Operations for the Nine Months Ended September 30,
1998 and 1997
Net Income. Net income was $926,000 for the nine months ended September 30,
1998, as compared to $1.2 million for the same period in 1997. The $278,000
decline in net income is caused primarily by the accelerated vesting of shares
awarded under the Management Recognition and Development Plan ("MRDP"). Under
the terms of the MRDP, shares awarded are vested and amortized to expense
over a 60-month period; however, upon the death of a participant, the vesting
is accelerated. On September 5, 1998, the Chief Financial Officer of the
Company passed away, and 25,921 shares were released to the officer's estate.
The accelerated vesting amounted to $395,000 which was charged to compensation
expense in September 1998. Net income for the nine-month period ending
September 30, 1998 would have been $1.2 million if the accelerated vesting
would not have occurred.
Interest Income. Total interest income increased by $35,000, or 0.6%, for the
nine months ended September 30, 1998 as compared to the same period in 1997.
The increase in interest on mortgage loans of $258,000 was attributable to the
increase in the average balance of loans outstanding from $43.1 million for
the period ended September 30, 1997, to $48.2 million for the same period in
1998. This increase in volume was partially offset by a decrease in the
average yield from 8.50% for the nine months ended September 30, 1997 to 8.32%
for the same period in 1998. Interest on mortgage-backed securities increased
$164,000, or 7.59%, from $2.2 million for the nine months ended September 30,
1997 to $2.3 million for the comparable period in 1998 as a result of an
increase in average outstanding mortgage-backed securities of $2.0 million and
an increase in the average yield from 6.58% to 6.77%. Offsetting these
increases were decreases in interest on investment securities and other
interest of $165,000 and $222,000 respectively. These decreases are the
result of the reinvestment of maturing securities and interest bearing
deposits in mortgage loans and mortgage-backed securities, as previously
noted.
9
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Interest Expense. Total interest expense decreased by $69,000 for the nine
months ended September 30, 1998, as compared to the same period in 1997. The
decrease was the result of a $34,000 decrease in interest on deposits and a
$35,000 decrease in other interest expense.
Average deposits for the nine month periods ended September 30, 1998 amounted
to $66.6 million as compared to $67.1 million for the same period in 1997.
The decline in deposit interest is the result of this reduction in average
outstanding deposits for the nine-month period ended September 30, 1998, and a
reduction in the average cost of deposits from 4.46% to 4.43% for the nine
months ended September 30, 1997 as compared to the same period for 1998.
Other interest expense of $82,000 for the nine months ended September 30,
1997, related primarily to the interest paid to stock subscribers on the stock
issuance date of January 23, 1997. Interest expense of $47,000 for the
comparable period in 1998 is related to the debt associated with the purchase
of the main office building.
Provision for Loan Losses. There was no provision for loan losses during the
nine month period ended September 30, 1998 as compared to $20,000 for the
comparable period in 1997. During the nine months ended September 30, 1997,
Empire charged off $20,000 of mortgage loans. At the end of both periods the
level of reserves was deemed to be adequate by management. Loan loss reserves
as a percentage of loans was .40% at September 30, 1998, and .45% at September
30, 1997.
Non-Interest Income. Non-interest income increased $22,000 for the nine
months ended September 30, 1998, as compared to the same period in 1997
primarily as the result of a $15,000 increase in customer service charges and
other non-interest income and an increase in commissions and profit sharing
contingencies from insurance companies of $5,000.
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $475,000 and $470,000 were
received for the nine months ended September 30, 1998, and 1997, respectively.
The increase in commission income resulted primarily from increases in
premiums and commissions from key companies represented by Dime.
Non-Interest Expense. Total non-interest expense increased $521,000 for the
nine months ended September 30, 1998, compared to the nine months ended
September 30, 1997. This increase was the result of an increase in
compensation and benefits of $544,000, or 45.76%, from $1.2 million for the
nine month period ended September 30, 1997 to $1.7 million for the comparable
period in 1998. The primary cause of this increase is the previously
discussed accelerated vesting of 25,921 shares of the MRDP as the result of
the death of the Chief Financial Officer of the Company. The accelerated
vesting amounted to a $395,000 charge to compensation expense in September
1998. In addition, other vested shares of the MRDP resulted in a charge of
$151,000 for the nine months ended September 30, 1998. The MRDP became
effective in January 1998.
Income Taxes. Income taxes decreased $96,000 from the nine month period ended
September 30, 1997, as compared to the same period in 1998 as the result of
the decrease in income before income taxes. The effective combined federal
and state tax rate was 42.60% and 39.42% for the nine months ended September
30, 1998 and 1997, respectively.
10
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997
Net Income. Net income decreased by $277,000 to $131,000 for the three months
ended September 30, 1998, as compared to $408,000 for the same period in 1997.
The decrease is caused primarily by the accelerated vesting of shares awarded
under the MRDP. Under the terms of the MRDP, shares awarded are vested and
amortized to expense over a 60-month period; however, upon the death of a
participant, vesting is accelerated. On September 5, 1998, the Chief
Financial Officer of the Company passed away and 25,921 shares were released
to the officer's estate. The accelerated vesting amounted to $395,000, which
was charged to compensation expense in September 1998. Net income for the
three-month period ending September 30, 1998 would have been $400,000 if the
accelerated vesting would not have occurred.
Interest Income. Total interest income decreased by $39,000, or 0.2% for the
three months ended September 30, 1998 as compared to the same period in 1997.
Interest income from investments and mortgage-backed securities decreased
$136,000 from $969,000 for the three-month period ended September 30, 1997 to
$833,000 for the same period in 1998, primarily as the result of a decrease in
average outstanding investments and mortgage-backed securities. The decrease
was caused by net payments and maturities in excess of reinvestment. This
decrease in interest income is partially offset by an increase in interest
from loans of $120,000 for the three-month period ended September 30, 1998 as
compared to the same period in 1997. The increase in interest from loans is
the result of an increase in the average balance of loans outstanding from
$43.6 million for the three-month period ended September 30, 1997 to $47.7
million for the same period in 1998.
Interest Expense. Total interest expense was $748,000 for the three months
ended September 30, 1998, as compared to $779,000 for the same period in 1997.
The $31,000, or 3.9%, decrease was the result of a $29,000 decrease in
interest on deposits and a decrease of $2,000 in other interest expense.
Average deposits for the three-month periods ended September 30, 1998 and 1997
were $66.7 million and $69.1 million, respectively. The decrease in interest
paid depositors is the result of the decline in average deposits coupled with
a decrease in the average rate paid in the three months ended September 30,
1997, of $4.55% as compared to 4.40% in the same period in 1998.
Other interest expense for the three-month periods ended September 30, 1998
and 1997 related to the debt associated with the purchase of the main office
building.
Provision for Loan Losses. There was no provision for loan losses during the
three-month periods ended September 30, 1998 and 1997, and at the end of both
periods the level of reserves was deemed to be adequate by management. Loan
loss reserves as a percentage of loans was .40% at September 30, 1998, and
.45% at September 30, 1997.
Non-Interest Income. Non-interest income increased $11,000 for the three
months ended September 30, 1998, as compared to the same period in 1997
primarily as a result of a $12,000 increase in commissions and profit sharing
contingencies from insurance companies and customer service charges.
11
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $173,000 and $161,000 were
received for the three months ended September 30, 1998, and 1997,
respectively.
Non-Interest Expense. Total non-interest expense increased $390,000 for the
three months ended September 30, 1998, compared to the three months ended
September 30, 1997. This increase is caused by the previously discussed
accelerated vesting of 25,921 shares of MRDP as the result of the death of the
Chief Financial Officer of the Company. The accelerated vesting amounted to a
$395,000 charge to compensation expense in September 1998.
Income Taxes. Income taxes decreased $109,000 from the three-month period
ended September 30, 1997, as compared to the same period in 1998 as the result
of the decrease in income before income taxes. The effective combined federal
and state tax rate was 53.14% and 38.66% for the three months ended September
30, 1998 and 1997, respectively. The increase in the 1998 federal and state
tax rate is the result of a portion of the MRDP charge for the period ended
September 30, 1998 not being deductible.
12
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Part II - Other Information
- - ---------------------------
Item 1. Legal Proceedings
There are no pending material legal proceedings to which the
registrant or its subsidiaries are a party.
Item 2. Changes in Securities
None.
Item 3. Defaults on Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Empire Federal Bancorp, Inc. (1)
3.2 Bylaws of Empire Federal Bancorp, Inc. (1)
10.1 Employment Agreement with Beverly D. Harris (2)
10.2 Employment Agreement with Ernest A. Sandberg (2)
10.3 Employee Stock Ownership Plan (1)
10.4 Management Recognition and Development Plan (3)
10.5 Stock Option Plan (3)
21 Subsidiaries of the Registrant (2)
27 Financial Data Schedule
- - -------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-1, as amended (File No. 333-12653).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(3) Incorporated by reference to the Company's Annual Meeting Proxy
Statement dated March 16, 1998.
(b) Report on Form 8-K
No forms 8-K were filed during the quarter ended September 30,
1998.
13
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Empire Federal Bancorp, Inc.
By s/s Beverly D. Harris November 13,1998
----------------------- ----------------
Beverly D. Harris Date
President & Chief Executive Officer
(Principal Executive Officer)
By s/s Linda M. Alkire November 13, 1998
----------------------- -----------------
Linda M. Alkire Date
Treasurer
(Principal Financial and Accounting Officer)
14
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the unaudited
consolidated financial statements of Empire Federal Bancorp., Inc. for the
nine months ended September 30, 1998, and is qualified in its entirety by
reference to such financial statements.
Financial Data as of
or for the nine months
Item Number ended September 30, 1998 Item Description
- - ----------- ------------------------ ----------------
9-03(1) $ 875,366 Cash and due from banks
9-03(2) 3,488,833 Interest-bearing deposits
9-03(3) -- Federal funds sold - purchased
securities for resale
9-03(4) -- Trading account assets
9-03(6) 34,263,207 Investment and mortgage-backed
securities held-for-sale
9-03(6) 12,643,276 Investment and mortgage-backed
securities held to maturity -
carrying value
9-03(6) 12,839,698 Investment and mortgage-backed
securities held to maturity -
market value
9-03(7) 50,090,763 Loans
9-03(7)(2) 200,000 Allowance for losses
9-03(11) 105,199,280 Total assets
9-03(12) 65,413,207 Deposits
9-03(13) -- Short-term borrowings
9-03(15) 1,685,564 Other liabilities
9-03(16) 660,461 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) 37,414,127 Other stockholders' equity
9-03(23) 105,199,280 Total liabilities and
stockholders' equity
9-04(1) 3,006,795 Interest and fees on loans
9-04(2) 2,619,007 Interest and dividends on
investments
9-04(4) 170,540 Other interest income
9-04)(5) 5,796,342 Total interest income
9-04(6) 2,211,511 Interest on deposits
9-04(9) 2,258,555 Total interest expense
9-04(10) 3,537,787 Net interest income
9-04(11) -- Provisions for loan losses
9-04(13)(h) -- Investment securities gains
(losses)
9-04(14) 2,569,284 Other expenses
9-04(15) 1,613,052 Income/loss before income tax
9-04(17) 1,613,052 Income/loss before extraordinary
items
9-04(18) -- Extraordinary items, less tax
9-04(19) -- Cumulative change in accounting
principles
9-04(20) 925,829 Net income of loss
9-04(21) 0.41 Earnings per share - primary
9-04(21) 0.41 Earnings per share - fully diluted
15
<PAGE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Exhibit 27, Continued
Financial Data Schedule
Financial Data as of
or for the nine months
Item Number ended September 30, 1998 Item Description
- - ----------- ------------------------ ----------------
I.B.5 4.57% Net yield - interest earning
assets - actual
III.C.1.(a) None Loans on nonaccrual
III.C.1.(b) 12,000 Accruing loans past due 90 days or
more
III.C.2.(c) None Troubled debt restructuring
III.C.2 None Potential problem loans
IV.A.1 200,000 Allowance for loan loss -
beginning of period
IV.A.2 None Total charge-offs
IV.A.3 None Total recoveries
IV.A.4 200,000 Allowance for loan loss - end of
period
IV.B.1 200,000 Loan loss allowance allocated to
domestic loans
IV.B.2 None Loan loss allowance allocated to
foreign loans
IV.B.3 None Loan loss allowance - unallocated
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 875366
<INT-BEARING-DEPOSITS> 3488833
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34263207
<INVESTMENTS-CARRYING> 12643276
<INVESTMENTS-MARKET> 12839698
<LOANS> 50090763
<ALLOWANCE> 200000
<TOTAL-ASSETS> 105199280
<DEPOSITS> 65413207
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1685564
<LONG-TERM> 660461
0
0
<COMMON> 25921
<OTHER-SE> 37414127
<TOTAL-LIABILITIES-AND-EQUITY> 105199280
<INTEREST-LOAN> 3006795
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<INCOME-PRETAX> 1613052
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 925829
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 4.57
<LOANS-NON> 0
<LOANS-PAST> 12000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 200000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 200000
<ALLOWANCE-DOMESTIC> 200000
<ALLOWANCE-FOREIGN> 0
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</TABLE>
