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 June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
For the transition period from to
--------- ---------
Commission File No. 0-28934
Empire Federal Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 81-0512374
- ----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 South Main Street, Livingston, Montana 59047
-------------------------------------------------
(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 July 31, 1999: 2,001,270
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
<PAGE>
EMPIRE FEDERAL BANCORP, INC.
INDEX TO FORM 10-QSB
Page
PART I FINANCIAL INFORMATION ----
---------------------
Item 1. Condensed Financial Statements
Consolidated Balance Sheets at June 30, 1999 (unaudited)
and December 31, 1998 (unaudited)......................... 1
Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 1999 and 1998 (unaudited)....... 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited).................. 3
Notes to Unaudited Interim Consolidated Financial
Statements................................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities....................................... 14
Item 3. Defaults upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
SIGNATURES............................................................ 15
<PAGE>
Part I, Item 1 - Financial Statements
- -------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
June 30, December 31,
Assets 1999 1998
------ (unaudited) (unaudited)
------------ ------------
Cash and due from banks $ 963,497 2,092,487
Interest-bearing deposits 3,077,077 3,061,310
------------ ------------
Cash and cash equivalents 4,040,574 5,153,797
Investment and mortgage-backed securities
available-for-sale 39,625,030 39,865,809
Investment and mortgage-backed securities
held-to-maturity (estimated market value
of $7,843,117 at June 30, 1999 and
$10,582,975 at December 31, 1998) 7,816,791 10,497,993
Loans receivable, net 52,643,443 49,499,156
Stock in Federal Home Loan Bank of Seattle,
at cost 1,411,600 1,360,600
Accrued interest receivable 428,960 353,145
Premises and equipment, net 2,160,294 2,140,807
Prepaid expenses and other assets 279,054 329,864
------------ ------------
Total assets $108,405,746 109,201,171
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Passbook Accounts $ 13,039,354 13,928,934
NOW Accounts 15,760,559 14,757,910
Certificates of Deposit 40,776,317 37,725,753
------------ ------------
Total Deposits 69,576,230 66,412,597
Advances from Federal Home Loan Bank 4,000,000 4,000,000
Note payable 620,033 647,443
Advances from borrowers for taxes and
insurance 283,811 232,492
Accrued expenses and other liabilities 1,070,992 1,607,515
------------ ------------
Total liabilities 75,551,066 72,900,047
Stockholders' equity:
Preferred stock, par value $.01 per
share, 250,000 shares authorized,
none issued and outstanding - -
Common stock, par value $.01 per share,
4,000,000 shares authorized,
2,592,100 issued 25,921 25,921
Additional paid-in capital 25,294,246 25,277,770
Unearned ESOP and MRDP compensation (2,471,634) (2,501,054)
MRDP shares acquired (302,011) (432,215)
Retained earnings, substantially
restricted 17,591,683 17,327,635
Accumulated other comprehensive
income, net 1,155,937 1,913,886
Treasury shares acquired, at cost,
590,830 and 369,698 shares at June 30,
1999 and December 31, 1998 respectively (8,439,462) (5,310,819)
------------ ------------
Total stockholders' equity 32,854,680 36,301,124
------------ ------------
Total liabilities and stockholders'
equity $108,405,746 109,201,171
============ ===========
See accompanying notes to unaudited interim consolidated financial statements.
1
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three and Six Months Ended June 30, 1999 and 1998
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income:
Loans receivable $1,098,626 $ 998,244 $2,092,927 $1,965,310
Mortgage-backed
securities 691,007 805,663 1,412,951 1,579,387
Investment securities 39,577 94,315 77,160 207,042
Other 56,804 44,141 123,074 126,272
---------- ---------- ---------- ----------
Total interest income 1,886,014 1,942,363 3,706,112 3,878,011
---------- ---------- ---------- ----------
Interest expense:
Deposits 705,876 740,455 1,388,831 1,478,620
Note payable and other 64,702 16,102 129,894 31,768
---------- ---------- ---------- ----------
Total interest expense 770,578 756,557 1,518,725 1,510,388
---------- ---------- ---------- ----------
Net interest income 1,115,436 1,185,806 2,187,387 2,367,623
Provision for loan losses - - - -
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 1,115,436 1,185,806 2,187,387 2,367,623
Non-interest income:
Insurance commission
income 129,499 139,032 289,639 301,317
Customer service charges 69,332 50,618 142,823 96,904
Other 7,528 5,284 16,587 14,948
---------- ---------- ---------- ----------
Total non-interest
income 206,359 194,934 449,049 413,169
Non-interest expense:
Compensation and benefits 456,055 451,671 895,800 879,456
Occupancy and equipment 117,100 91,434 205,560 165,212
Deposit insurance premiums 9,625 7,150 34,881 34,954
Other 211,413 161,533 431,985 366,953
---------- ---------- ---------- ----------
Total non-interest expense 794,193 711,788 1,568,226 1,446,575
---------- ---------- ---------- ----------
Income before income
taxes 527,602 668,952 1,068,210 1,334,217
Income taxes 204,534 277,087 417,799 539,047
---------- ---------- ---------- ----------
Net income $ 323,068 $ 391,865 $ 650,411 $ 795,170
========== ========== ========== ==========
Basic earnings per share $ 0.19 $ 0.17 $ 0.36 $ 0.34
========== ========== ========== ==========
Diluted earnings per share $ 0.19 $ 0.17 $ 0.36 $ 0.34
========== ========== ========== ==========
Dividends declared per
share $ 0.10 $ 0.08 $ 0.20 $ 0.155
========== ========== ========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
2
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
Six Months Ended
June 30,
---------------------------
1999 1998
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 650,411 $ 795,170
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - -
Depreciation 114,045 79,821
ESOP shares committed to be released 85,596 117,573
MRDP shares vested 90,505 107,735
Stock dividends reinvested in Federal
Home Loan Bank (51,000) (48,800)
Decrease (increase) in accrued interest
receivable (75,815) 32,092
Decrease in prepaid expenses and other
assets 50,810 98,243
Decrease in accrued expenses and other
liabilities (51,936) (283,222)
----------- -----------
Net cash provided by operating
activities 812,616 898,612
----------- -----------
Cash flows from investing activities:
Net change in loans receivable (3,144,287) (3,414,590)
Proceeds from matured or called investment
securities held-to-maturity - 1,500,200
Principal payments on mortgage-backed
securities held-to maturity 2,255,634 4,695,105
Purchases of investment securities
available-for-sale - (500,000)
Proceeds from matured or called investment
securities available sale - 2,000,000
Principal payments on mortgage-backed
securities available-for-sale 6,002,307 7,247,342
Purchases of mortgage-backed securities
available-for-sale (6,578,497) (7,864,385)
Purchases of premises and equipment (133,532) (20,176)
----------- -----------
Net cash provided (used) by investing activities (1,598,375) 3,643,496
----------- -----------
Cash flows from financing activities:
Net change in deposits 3,163,633 (829,804)
Repayment of note payable (27,410) (24,947)
Net change in advances from borrowers for
taxes and insurance 51,319 40,519
Dividends paid (386,363) (370,671)
Funding of MRDP trust - (926,976)
Purchase of treasury stock (3,128,643) (1,740,409)
----------- -----------
Net cash used in financing
activities (327,464) (3,852,288)
----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,113,223) 689,820
Cash and cash equivalents, beginning of period 5,153,797 2,904,031
----------- -----------
Cash and cash equivalents, end of period $ 4,040,574 $ 3,593,851
=========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
3
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to unaudited Interim Consolidated Financial Statements
Note 1 Basis of Presentation
---------------------
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for audited financial statements. They should be read in conjunction with the
audited consolidated financial statements filed as part of the Annual Report
on Form 10-KSB for the year ended December 31, 1998.
The accompanying consolidated financial statements include the accounts of
Empire Federal Bancorp, Inc. (the Holding Company) and its wholly-owned
subsidiary, Empire Federal Savings Bank (Empire) and Dime Service Corporation
(Dime), a wholly-owned subsidiary of Empire. The Holding Company, Empire and
Dime are herein referred to collectively as "the Company." All significant
intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentations have been included. The
results of operations for the three and six months ended June 30, 1999, and
1998 are not necessarily indicative of the results which may be expected for
an entire year or any other period.
Note 2 Comprehensive Income
--------------------
The Company's only component of comprehensive income is the net unrealized
gains or losses on securities available-for-sale. The following summarizes
accumulated total comprehensive income (loss) for the noted periods:
Six Months Ended Three Months Ended
---------------- ------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------ -------------
$(107,538) $949,951 $(157,705) $403,390
========= ======== ========= ========
4
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 3 Earnings Per Share
------------------
Basic earnings per share (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 June 30, 1999, there were 27,650 allocated shares
and 6,912 committed to be released ESOP shares. There were 40,639 vested MRDP
shares.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or resulted in the
issuance of common stock that would share in the earnings of the entity. At
June 30, 1999, outstanding stock options and unvested MRDP shares were anti-
dilutive to 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:
<TABLE>
For the six months ended June 30
--------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------
Net Income Shares Per-Share Net Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to
common stockholders $650,411 1,820,742 $0.36 $795,170 2,334,051 $0.34
======== ===== ======== =====
Effect of Dilutive Securities
Stock Options - granted - 6,796
Unvest MRDP shares - 3,739
--------- ---------
Diluted EPS
Income available to
common stockholders
plus assumed
conversion $650,411 1,820,742 $0.36 $795,170 2,344,586 $0.34
======== ========= ===== ======== ========= =====
</TABLE>
<TABLE>
For the three months ended June 30
--------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------
Net Income Shares Per-Share Net Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to
common stockholders $323,068 1,696,218 $0.19 $391,865 2,309,115 $0.17
======== ===== ======== =====
Effect of Dilutive Securities
Stock Options - granted - 1,239
Unvest MRDP shares - 1,961
--------- ---------
Diluted EPS
Income available to
common stockholders
plus assumed
conversion $323,068 1,696,218 $0.19 $391,865 2,312,315 $0.17
======== ========= ===== ======== ========= =====
5
</TABLE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 4 Cash Dividend Declared
----------------------
On July 22, 1999, the Board of Directors declared a quarterly cash dividend of
$.10 per common share to stockholders of record on August 13, 1999, payable on
August 27, 1999.
Note 5 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory capital
requirements of June 30, 1999 (dollars in thousands):
Percentage
Amount of Assets
------ ---------
GAAP capital(1) $ 29,904 27.59%
======== =====
Tangible capital $ 28,318 26.72%
Tangible capital requirement 1,590 1.50%
-------- -----
Excess $ 26,728 25.22%
======== =====
Core capital $ 28,318 26.72%
Core capital requirement 3,179 3.00%
-------- -----
Excess $ 25,139 23.73%
======== =====
Total risk-based capital(2) $ 29,741 64.56%
Total risk-based capital requirement(2) 3,685 8.00%
-------- -----
Excess $ 26,056 56.56%
======== =====
(1) Empire's GAAP capital includes unrealized gains on certain
available-for-sale securities of $1,156,000 and $430,000
of investments in Dime, which are excluded for purposes of
calculating both tangible and core capital.
(2) Based on risk-weighted assets of $46,067,000.
Note 6 Subsequent Event
----------------
On July 30, 1999, Empire Federal Savings Bank applied to the Office of Thrift
Supervision for permission to establish a full service branch in Billings,
Montana. Billings is the largest city in Montana.
6
<PAGE>
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 the 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 Bank also invests in
interest-bearing deposits, investment grade federal agency securities and
mortgage-backed securities. The Bank plans to continue to fund its assets
primarily with deposits, although FHLB advances have been used as a
supplemental source of funds.
The Bank's profitability depends primarily on its net interest income, which
is the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits.
Net interest income is also affected by the relative amounts of interest-
earning assets and interest-bearing liabilities. When interest-earning assets
equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Bank's profitability is also
affected by the level of other income and expenses. Other income consists of
service charges on checking and NOW accounts and other fees, and insurance
commissions. Other expenses include compensation and employee benefits,
occupancy expenses, deposit insurance premiums, equipment and data servicing
expenses, professional fees and other operating costs. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies concerning monetary and fiscal affairs, housing and
financial institutions and the attendant actions of the regulatory
authorities.
The Bank's strategy is to operate as a conservative, well-capitalized,
profitable institution dedicated to offering a full line of community banking
services and to providing quality service to all customers. The Bank
believes that it has successfully implemented its strategy by (i) maintaining
strong capital levels, (ii) maintaining effective control over operating
expenses to attempt to achieve profitability under differing interest rate
scenarios, (iii) emphasizing local loan originations, and (iv) emphasizing
high-quality customer service with a competitive fee structure.
Year 2000 Issues
As the Year 2000 approaches, significant concerns have been expressed
regarding the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the Year
2000 and thereafter. Many existing application software products were
designed to accommodate only a two digit year. The Bank's operating,
processing and accounting operations are computer reliant and could be
affected by the Year 2000 issues. Both the Bank and the
7
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Company are reliant on third-party vendors for most of their data processing
needs as well as certain other significant functions and services.
For nearly two years the Bank has been investigating and addressing potential
Year 2000 problems. In the course of this process Empire has examined its
computer systems, phone systems, mailing and fax capabilities, office
environmental systems, and servicer relationships related to daily business
processing, ATM processing, ACH processing, check processing, wire transfers
processing, travelers check processing, and all other relevant out-sourced
services. The general Y2K plan is currently on schedule with respect to
implementation. As of June 30, 1999 all areas of potential impact directly
addressable by the Bank appear to be Year 2000 compliant. Areas to be
addressed by third-party vendors have been represented as either fully
compliant or on schedule for full compliance. The Company's plan for a
comprehensive second round of testing of third-party provided data systems,
was completed during April 1999. Both rounds of testing, focusing on critical
operational systems, were successful.
The primary negative impact of the potential Year 2000 problem existed in the
Bank's Olivetti-America 8-window teller hardware/software system previously
used in all three offices. This system had known Year 2000 problems as well
as other inadequacies relevant to current needs on the working teller line.
During December 1998 the Bank replaced the existing teller system with a
PC-based teller system working internally at each office with a Local Area
Network (LAN) and tied together to the central office and our primary servicer
by a Wide Area Network (WAN). This conversion solved the potential Year 2000
problem in the teller system, and also positioned the Bank to take maximum
advantage of current technology in banking as it enters the 21st Century. The
cost of conversion and re-training and implementation of the new PC-based
system was approximately $225,000. Most of the estimated cost was for the new
teller system and will be depreciated over five years.
Because the Bank's operations are dependent on its computer systems and those
of third parties, the failure of these systems to be Year 2000 compliant could
cause substantial disruption of the Bank's business and could have a material
adverse financial impact. Factors that might have material adverse effects
include, but are not limited to: (1) loss of customers to other financial
institutions, resulting in a loss of revenue, if the Bank's third party
vendors are unable to properly process customer transactions; (2) the failure
of governmental agencies such as the Federal Home Loan Bank of Seattle to
provide funds to the Bank which could impair the Bank's ability to fund loans
and deposit withdrawals; (3) concern on the part of depositors that Year 2000
issues could impair access to their deposit account balances could result in
the Bank experiencing deposit outflows prior to December 31, 1999; and (4)
increased personnel costs could be incurred if additional staff is required to
manually perform functions that inoperative systems would have otherwise
performed. At the present time, it is not possible to determine whether any
such events are likely to occur, or to quantify any potential negative impact
they may have on the Bank's future results of operations and financial
condition. Because substantially all of the Bank's loan portfolio consists of
loans to individuals rather than to commercial enterprises, management
believes that Year 2000 issues will not impair the ability of the Bank's
borrowers to repay their debt.
While the Company currently has no reason to believe that the cost of
addressing such issues will materially affect Bank's products, services or
ability to compete effectively, no assurance can be made that the Company or
the third-party vendors on which it relies will become Year 2000 compliant in
a successful and timely fashion. Nevertheless, the Company does not believe
that the cost of addressing the Year 2000 issues will be a material event or
uncertainty that would cause
8
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
reported financial information not to be necessarily indicative of future
operating results or financial conditions, nor does it believe that the costs
or the consequences of incomplete or untimely resolutions of its Year 2000
issues represent a known material event or uncertainty that is reasonably
likely to affect its future financial results, or cause its reported financial
information not to be indicative of future financial condition.
In our continuing preparation for the Year 2000 the Bank has developed a
Contingency Plan to meet possible failure in our critical systems of data
processing, power, and communications. The basic Y2K Contingency Plan was
approved by the Board of Directors in the second quarter of 1999, but will
continue to be updated through the remainder of 1999.
Financial Condition
Consolidated assets decreased by approximately $795,000, or .7%, from $109.2
million at December 31, 1998 to $108.4 million at June 30, 1999.
Except for the $1.2 million decrease in the market value of investments and
mortgage-backed securities available-for-sale, the consolidated balance sheet
was not materially affected by market conditions between December 31, 1998 and
June 30, 1999. Net maturities and payments of $2.7 million reduced investment
and mortgage-backed securities held-to-maturity from $10.5 million at December
31, 1998, to $7.8 million at June 30, 1999. Net loans increased $3.1 million
or 6.4%.
Deposits increased from $66.4 million at December 31, 1998 to $69.6 million,
or 4.8% at June 30, 1999.
Stockholders' equity decreased from $36.3 million at December 31, 1998, to
$32.9 million at June 30, 1999. The change is the result of net income of
$650,000, the release of ESOP shares in the amount of $87,000 and a decrease
of $758,000 related to the decrease in market value of securities available-
for-sale. In addition, 8,214 shares of MRDP vested and unearned MRDP
compensation was reduced by $90,000. Stockholders' equity was also decreased
by the payments of $386,000 in dividends. During the six months ended June
30, 1999, the Company repurchased 221,132 shares of its common stock in the
open market for an average price of $14.15 per share for a total of $3.1
million. There were 590,830 shares held in treasury at June 30, 1999, and
369,698 shares at December 31, 1998.
Asset Quality
At June 30, 1999, the Bank had two non-accrual loans amounting to $56,000.
At June 30, 1999, Empire had seventeen loans delinquent over 30 days amounting
to $1.4 million of which five loans amounting to $68,000 were delinquent over
90 days. The Bank had no real estate acquired through foreclosure.
Results of Operations
The operating results of the Bank depend primarily on its net interest income.
The Bank's net interest income is determined by its interest rate spread,
which is the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities and the degree
of mismatch in the maturity and repricing characteristics of its interest-
earning assets and interest- bearing liabilities. The Bank's net 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.
9
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Six Months Ended June 30, 1999 and
1998
Net Income. Net income decreased by $145,000 to $650,000 for the six months
ended June 30, 1999, as compared to $795,000 for the same period in 1998. The
decline in net income is primarily due to a decrease in net interest income of
$180,000 and an increase in non-interest expense of $122,000. The decrease in
net interest income was caused by a reduction in interest rate spread from
2.98% for the six months ended June 30, 1998 to 2.88% for the comparable
period in 1999. Included in the increase in non-interest expense is a $40,000
increase in occupancy expense caused by depreciation of new equipment as well
as increases in data processing, legal and marketing costs.
Interest Income. Total interest income decreased by $172,000, or 4.43%, for
the six months ended June 30, 1999 as compared to the same period in 1998.
The decline was primarily attributable to a decrease in the average yield on
interest earning assets from 7.45% for the six months ended June 30, 1998 to
7.12% for the same period in 1999 while overall average earning assets
remained approximately the same. The reduction in average yield reflects a
general decrease in interest rates on loans and investments for the comparable
periods.
Interest Expense. Total interest expense was $1.5 million for the six months
ended June 30, 1999 and 1998.
Average deposits for the six month period ended June 30, 1999 amounted to
$67.4 million as compared to $66.8 million for the same period in 1998.
Interest on deposits decreased $90,000 for the six months ended June 30, 1998
as compared to the same period in 1999. The decline in deposit interest is
primarily the result of a reduction in the average cost of deposits from 4.43%
to 4.16% for the six months ended June 30, 1998 as compared to the same period
for 1999.
Other interest expense of $32,000 for the six months ended June 30, 1998
related primarily to the debt associated with the purchase of the main office
building. Interest expense of $130,000 for the comparable period in 1999
includes, in addition to the interest on the building debt, interest on $4.0
million of advances from the Federal Home Loan Bank.
Provision for Loan Losses. There was no provision for loan losses during the
six month periods ended June 30, 1999 and 1998, and at the end of both periods
the level of reserves was deemed to be adequate by management. Loan loss
reserves as a percentage of loans was .42% at June 30, 1999 and .41% at June
30, 1998.
Non-Interest Income. Non-interest income increased $36,000 for the six months
ended June 30, 1999, as compared to the same period in 1998 primarily as the
result of a $48,000 increase in customer service charges and other
non-interest income offset by a decrease in commissions and profit sharing
contingencies from insurance companies of $12,000.
Insurance commissions received by Dime are the largest component of
non-interest income. Insurance commissions of $290,000 and $301,000 were
received for the six months ended June 30, 1999, and 1998, respectively.
10
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Non-Interest Expense. Total non-interest expense increased $122,000 or 8.4%
for the six months ended June 30, 1998, compared to the six months ended June
30, 1999. Included in this increase is a $40,000 or 24.4% increase in
occupancy and equipment expense caused by additional depreciation related to
new teller equipment purchased in late 1998. Other non-interest expense
increased from $367,000 for the six months ended June 30, 1998 to $432,000 or
17.7% for the comparable period in 1999. Included in this increase were
increases in marketing costs of $20,000, legal expenses of $12,000, internal
auditing costs of $18,000 and data processing costs of $16,000.
Income Taxes. Income taxes decreased $121,000 from the six month period ended
June 30, 1998, as compared to the same period in 1999 as the result of the
decrease in income before income taxes. The effective combined federal and
state tax rate was 39.11% and 40.40% for the six months ended June 30, 1999
and 1998, respectively.
11
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended June 30, 1999
and 1998
Net Income. Net income decreased by $69,000 to $323,000 for the three months
ended June 30, 1999, as compared to $392,000 for the same period in 1998. The
decline in net income is primarily due to a decrease in net interest income of
$70,000 which was caused by a reduction in interest spread for the three
months ended June 30, 1998 as compared to the comparable period in 1999.
Average earning assets and liabilities remained approximately the same for the
two comparable periods. This reduction in interest rate spread reflects a
general decrease in interest rates on loans, investments, and deposits for the
comparable periods.
Interest Income. Total interest income decreased by $56,000, or 2.90%, for
the three months ended June 30, 1999 as compared to the same period in 1998.
The decline was primarily attributable to a decrease in the average yield on
interest earning assets from 7.41% for the three months ended June 30, 1998 to
7.05% for the same period in 1999 while overall average earning assets
remained relatively stable. The reduction in average yield reflects a general
decrease in interest rates on loans and investments for the comparable period.
Interest Expense. Total interest expense was $771,000 for the three months
ended June 30, 1999, as compared to $757,000 for the same period in 1998. The
$14,000 increase was the result of a $35,000 decrease in interest on deposits
offset by a $49,000 increase in other interest expense.
Average deposits for the three month period ended June 30, 1999 amounted to
$68.0 million as compared to $66.6 million for the same period in 1998. The
decline in deposit interest is the result of a reduction in the average cost
of deposits from 4.55% to 4.15% for the three months ended June 30, 1998 as
compared to the same period for 1999.
Other interest expense of $16,000 for the three months ended June 30, 1998
related primarily to the debt associated with the purchase of the main office
building. Interest expense of $65,000 for the comparable period in 1999
includes, in addition to the interest on the building debt, interest on $4.0
million of advances from the Federal Home Loan Bank.
Provision for Loan Losses. There was no provision for loan losses during the
three month periods ended June 30, 1999 and 1998, and at the end of both
periods the level of reserves was deemed to be adequate by management. Loan
loss reserves as a percentage of loans was .42% at June 30, 1999 and .41% at
June 30, 1998.
Non-Interest Income. Non-interest income increased $11,000 for the three
months ended June 30, 1999, as compared to the same period in 1998 primarily
as the result of a $21,000 increase in customer service charges and other
non-interest income offset by a decrease in commissions and profit sharing
contingencies from insurance companies of $10,000.
Insurance commissions received by Dime are the largest component of non-
interest income. Insurance commissions of $129,000 and $139,000 were received
for the three months ended June 30, 1999, and 1998, respectively.
Non-Interest Expense. Total non-interest expense increased $82,000 or 11.58%
for the three months ended June 30, 1998, compared to the three months ended
June 30, 1999. Included in this increase is a $26,000 or 28.07% increase in
occupancy and equipment expense caused by additional depreciation related to
new teller equipment purchased in late 1998. Other non-interest expense
12
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
increased from $162,000 for the three months ended June 30, 1998 to $211,000
for the comparable period in 1999. Included in this increase were increases
in marketing, legal and internal auditing costs.
Income Taxes. Income taxes decreased $73,000 from the three month period
ended June 30, 1998, as compared to the same period in 1999 as the result of
the decrease in income before income taxes. The effective combined federal
and state tax rate was 38.77% and 41.42% for the three months ended June 30,
1999 and 1998, respectively.
13
<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 William H. Ruegamer (4)
10.3 Employee Stock Ownership Plan (1)
10.4 Management Recognition and Development Plan (3)
10.5 Stock Option Plan (3)
21 Subsidiaries of the Registrant (4)
27 Financial Data Schedule
- -----------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-1, as amended (File No. 333-12653).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(3) Incorporated by reference to the Company's Annual Meeting Proxy
Statement dated March 16, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
(b) Report on Form 8-K
No forms 8-K were filed during the quarter ended June 30, 1999.
14
<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 William H. Ruegamer August 13,1999
------------------------------------ ----------------
William H. Ruegamer Date
President & Chief Executive Officer
(Principal Executive Officer)
By s/s Linda M. Alkire August 13, 1999
------------------------------------ ----------------
Linda M. Alkire Date
Chief Financial Officer
15
<PAGE>
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