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, 2000
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.
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(Exact name of registrant as specified in its charter)
Delaware 81-0512374
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 South Main Street, Livingston, Montana 59047
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(Address of principal executive offices)
(406) 222-1981
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class: Common Stock, par value $.01 per share
Outstanding at October 31, 2000: 1,562,143
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. Financial Statements
Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999....................... 1
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999 (unaudited).... 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (unaudited).... 3
Notes to Unaudited Interim Consolidated Financial
Statements.............................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings......................................... 15
Item 2. Changes in Securities..................................... 15
Item 3. Defaults upon Senior Securities........................... 15
Item 4. Submission of Matters to a Vote of Security Holders....... 15
Item 5. Other Information......................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
SIGNATURES.......................................................... 16
<PAGE>
Part I, Item 1 - Financial Statements
-------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(unaudited)
September 30, December 31,
Assets 2000 1999
------ --------------- --------------
Cash and due from banks $ 1,996,565 $ 1,688,206
Interest-bearing deposits 450,301 683,913
------------- -------------
Cash and cash equivalents 2,446,866 2,372,119
Investment and mortgage-backed securities
available-for-sale 30,758,241 41,090,151
Investment and mortgage-backed securities
held-to-maturity (estimated market value
of $5,310,433 at September 30, 2000 and
$6,367,598 at December 31, 1999) 5,336,201 6,406,467
Loans receivable, net 75,460,056 59,569,783
Stock in Federal Home Loan Bank of Seattle,
at cost 1,535,700 1,463,500
Accrued interest receivable 488,627 451,386
Premises and equipment, net 3,874,900 2,860,330
Prepaid expenses and other assets 431,954 313,032
------------- -------------
Total assets $ 120,332,545 $ 114,526,768
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Demand deposits $ 1,537,003 $ 864,132
NOW accounts 9,838,821 10,512,251
Money market 10,143,902 6,825,711
Regular savings 12,103,962 13,915,404
Certificates of deposit 41,918,502 39,235,600
------------- -------------
Total Deposits 75,542,190 71,353,098
Advances from Federal Home Loan Bank and
other Borrowed funds 14,813,016 8,800,000
Note payable 546,619 591,847
Advances from borrowers for taxes and
insurance 407,123 229,437
Accrued expenses and other liabilities 995,294 797,169
------------- -------------
Total liabilities 92,304,242 81,771,551
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 25,272,409 25,260,408
Unearned ESOP and MRDP compensation (2,012,224) (2,264,623)
MRDP shares acquired (302,011) (302,011)
Retained earnings, substantially restricted 18,231,218 17,842,091
Accumulated other comprehensive income, net 885,373 632,893
Treasury shares acquired, at cost, 1,029,957
and 590,830 shares at September 30, 2000
and December 31, 1999 respectively (14,072,383) (8,439,462)
------------- -------------
Total stockholders' equity 28,028,303 32,755,217
------------- -------------
Total liabilities and stockholders'
equity $ 120,332,545 $ 114,526,768
============= =============
See accompanying notes to unaudited interim consolidated financial statements.
1
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2000 and 1999
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2000 1999 2000 1999
Interest income: ---- ---- ---- ----
Loans receivable $1,546,763 $1,065,305 $4,248,753 $3,158,232
Mortgage-backed securities 575,498 692,329 1,879,342 2,105,280
Investment securities 26,053 54,867 109,623 132,026
Other 28,074 46,022 99,179 169,097
---------- ---------- ---------- ----------
Total interest income 2,176,388 1,858,523 6,336,897 5,564,635
---------- ---------- ---------- ----------
Interest expense:
Deposits 858,734 728,321 2,436,900 2,117,152
FHLB advances and other
borrowings 193,479 72,657 506,165 202,552
---------- ---------- ---------- ----------
Total interest expense 1,052,213 800,978 2,943,065 2,319,704
---------- ---------- ---------- ----------
Net interest income 1,124,175 1,057,545 3,393,832 3,244,931
Provision for loan losses 15,000 - 45,000 -
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,109,175 1,057,545 3,348,832 3,244,931
Non-interest income:
Insurance commission income 146,687 145,732 399,134 435,371
Customer service charges 86,825 84,051 225,324 226,874
Gain on sale of investments,
net 34,441 - 184,613 -
Other 1,629 3,793 19,483 20,380
---------- ---------- ---------- ----------
Total non-interest income 269,582 233,576 828,554 682,625
Non-interest expense:
Compensation and benefits 529,067 475,131 1,526,472 1,370,931
Occupancy and equipment 127,056 95,360 354,252 300,920
Deposit insurance premiums 13,350 25,883 36,450 60,763
Other 211,723 165,053 716,369 597,038
---------- ---------- ---------- ----------
Total non-interest expense 881,196 761,427 2,633,543 2,329,652
---------- ---------- ---------- ----------
Income before income taxes 497,561 529,694 1,543,843 1,597,904
Income taxes 194,750 206,605 600,355 624,404
---------- ---------- ---------- ----------
Net income $ 302,811 $ 323,089 $ 943,488 $ 973,500
========== ========== ========== ==========
Basic earnings per share $ 0.21 $ 0.19 $ 0.59 $ 0.54
========== ========== ========== ==========
Diluted earnings per share $ 0.21 $ 0.19 $ 0.59 $ 0.54
========== ========== ========== ==========
Dividends declared per share $ 0.11 $ 0.10 $ 0.33 $ 0.30
========== ========== ========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
2
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
(unaudited)
Nine Months Ended
September 30,
-------------------------
2000 1999
Cash flows from operating activities: ---- ----
Net income $ 943,488 $ 973,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 45,000 -
Depreciation 186,120 177,409
ESOP shares committed to be released 121,489 123,230
MRDP shares vested 142,911 140,078
Gain on sale of investments and mortgage-
backed securities (184,613) -
Stock dividends reinvested in Federal
Home Loan Bank (72,200) (76,700)
Increase in accrued interest receivable (37,241) (68,563)
Increase (decrease) in prepaid expenses
and other assets (118,921) 73,079
Increase in accrued expenses and other
liabilities 36,702 63,122
----------- -----------
Net cash provided by operating
activities 1,062,735 1,405,155
----------- -----------
Cash flows from investing activities:
Net change in loans receivable (15,935,273) (6,735,763)
Proceeds from sale of mortgage-backed
securities available-for-sale 4,407,853 -
Principal payments on mortgage-backed
securities held-to maturity 1,070,267 3,623,738
Proceeds from sale of securities available-
for-sale 2,202,984 -
Principal payments on mortgage-backed
securities available-for-sale 4,319,589 8,453,051
Purchases of investment and mortgage-backed
securities available-for-sale - (11,576,758)
Purchases of premises and equipment (1,200,690) (845,835)
---------- ----------
Net cash used in investing activities (5,135,270) (7,081,567)
---------- ----------
Cash flows from financing activities:
Net change in deposits 4,189,092 3,907,096
Repayment of note payable (45,228) (41,345)
Net change in advances from borrowers for
taxes and insurance 177,685 152,309
Dividends paid (554,361) (568,519)
Proceeds from advances from FHLB 6,013,015 2,000,000
Purchase of treasury stock (5,632,921) (3,128,642)
---------- ----------
Net cash provided by financing activities 4,147,282 2,320,899
---------- ----------
Net increase (decrease) in cash and cash
equivalents 74,747 (3,355,513)
Cash and cash equivalents, beginning of period 2,372,119 5,153,797
---------- ----------
Cash and cash equivalents, end of period $2,446,866 $1,798,284
========== ==========
Cash paid during the period for:
Interest $2,919,000 $2,342,000
Income taxes 603,000 544,000
========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
3
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to unaudited Interim Consolidated Financial Statements
September 30, 2000
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, 1999.
The accompanying consolidated financial statements include the accounts of
Empire Federal Bancorp, Inc. (the Holding Company) and its wholly-owned
subsidiary, Empire Bank (Empire or the Bank) and Dime Service Corporation
(Dime), a wholly-owned subsidiary of Empire. The Holding Company, Empire and
Dime are herein referred to collectively as "the Company." All significant
intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentations have been included. The
results of operations for the three and nine months ended September 30, 2000,
and 1999 are not necessarily indicative of the results which may be expected
for an entire year or any other period.
Note 2 Comprehensive Income
--------------------
The Company's only component of comprehensive income is the net unrealized
gains or losses on securities available-for-sale. The following summarizes
total comprehensive income (loss) for the noted periods:
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30,1999
------------------ ------------------ ------------------ -----------------
$ 847,075 $ 209,663 $1,195,969 $ 102,125
========== ========== ========== ==========
Note 3 Treasury Stock
--------------
In January and March, 2000 the Board of Directors approved programs to
repurchase a total of 20% of its outstanding common stock during the year.
During the nine months ended September 30, 2000, the Company purchased 439,127
shares in the open market for $5,633,000 for an average price of $12.83 per
share. At September 30, 2000 the Company had repurchased 1,029,957 shares for
a total of $14,072,000 or an average price of $13.66. Book value per share at
September 30, 2000 was $17.94.
4
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 4 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 September 30, 2000, there were 35,537 allocated
shares and 10,368 committed to be released ESOP shares. There were 55,779
vested MRDP shares.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or resulted in the
issuance of common stock that would share in the earnings of the entity. At
September 30, 1999, outstanding stock options and unvested MRDP shares 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:
For the nine months ended September 30
---------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
Basic EPS
Net income avail-
able to common
stockholders $943,488 1,593,899 $0.59 $ 973,500 1,803,619 $0.54
======== ===== ========= =====
Effect of Dilutive
Securities
Stock Options -
granted 786 -
Unvested MRDP shares 149 -
--------- ---------
Diluted EPS
Income available
to common stock-
holders plus
assumed conver-
sion $943,488 1,594,834 $0.59 $ 973,500 1,803,619 $0.54
======== ========= ===== ========= ========= =====
For the three months ended September 30
---------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
Basic EPS
Net income avail-
able to common
stockholders $302,811 1,470,953 $0.21 $ 323,089 1,731,840 $0.19
======== ===== ========= =====
Effect of Dilutive
Securities
Stock Options -
granted 2,306 -
Unvested MRDP shares 447 -
--------- ---------
Diluted EPS
Income available
to common stock-
holders plus
assumed conver-
sion $302,811 1,473,706 $0.21 $ 323,089 1,731,840 $0.19
======== ========= ===== ========= ========= =====
5
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 5 Cash Dividend Declared
----------------------
On October 24, 2000, the Board of Directors declared a quarterly cash dividend
of $.11 per common share to stockholders of record on November 9, 2000 payable
on November 30, 2000.
Note 6 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory capital
requirements of September 30, 2000 (dollars in thousands):
Percentage
Amount of Assets
------ ---------
GAAP capital(1) $ 27,359 22.74%
======= ======
Tangible capital $ 26,041 22.00%
Tangible capital requirement 1,775 1.50%
------- ------
Excess $ 24,266 20.50%
======= ======
Core capital $ 26,041 22.00%
Core capital requirement 3,551 3.00%
------- ------
Excess $ 22,490 19.00%
======= ======
Total risk-based capital(2) $ 27,246 42.22%
Total risk-based capital requirement(2) 5,163 8.00%
------- ------
Excess $ 22,083 34.22%
======= ======
(1) Empire's GAAP capital includes unrealized gains on certain
available-for-sale securities of $885,000 and $433,000 of
investments in Dime, which are excluded for purposes of calculating
both tangible and core capital.
(2) Based on risk-weighted assets of $64,534,000.
Note 7 Operating Segment Information
-----------------------------
The Company evaluates segment performance internally based on its two primary
lines of business, commercial banking and insurance, and thus the operating
segments are so defined. The operating segment defined as "other" includes
the Holding Company and eliminations of transactions between segments.
The accounting policies of the individual operating segments are the same as
those of the Company. Transactions between operating segments are primarily
conducted at fair value, resulting in profits that are eliminated for
reporting consolidated results of operations.
6
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information as of and
for the nine months ended September 30, 2000 and 1999.
2000: Empire Dime Other Consolidated
------ ---- ----- ------------
Net interest income $ 3,291,356 10,880 91,596 3,393,832
Non-interest income 412,478 411,501 4,575 828,554
------------ -------- ---------- -----------
Total income 3,703,834 422,381 96,171 4,222,386
Provision for loan
losses 45,000 - - 45,000
Other non-interest
expense 1,913,946 426,956 292,641 2,633,543
------------ -------- ---------- -----------
Income before income
taxes 1,744,888 (4,575) (196,470) 1,543,843
Income taxes 670,825 - (70,470) 600,355
------------ -------- ---------- -----------
Net income $ 1,074,063 (4,575) (126,000) 943,488
============ ======== ========== ===========
Assets $120,412,727 518,578 (598,760) 120,332,545
Net loans 75,460,056 - - 75,460,056
Deposits 75,881,834 - (339,644) 75,542,190
Stockholders' equity 27,359,655 433,285 235,363 28,028,303
============ ======== ========== ===========
1999:
Net interest income $ 3,096,809 6,972 141,150 3,244,931
Non-interest income 262,701 440,361 (20,437) 682,625
------------ -------- ---------- -----------
Total income 3,359,510 447,333 120,713 3,927,556
Provision for loan
losses - - - -
Other non-interest
expense 1,649,847 422,925 256,880 2,329,652
------------ -------- ---------- -----------
Income before income
taxes 1,709,663 24,408 (136,167) 1,597,904
Income taxes 656,100 3,904 (35,600) 624,404
------------ -------- ---------- -----------
Net income $ 1,053,563 20,504 (100,567) 973,500
============ ======== ========== ===========
Assets $111,368,780 518,593 (493,857) 111,393,516
Net loans 56,234,919 - - 56,234,919
Deposits 70,641,599 - (321,906) 70,391,693
Stockholders' equity 30,132,237 437,352 2,399,807 32,969,396
============ ======== ========== ===========
7
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information for the
three months ended September 30, 2000
and 1999.
2000: Empire Dime Other Consolidated
------ ---- ----- ------------
Net interest income $ 1,097,493 3,642 23,040 1,124,175
Non-interest income 127,438 146,687 (4,533) 269,582
------------ -------- ---------- -----------
Total income 1,224,921 150,329 18,507 1,393,757
Provision for loan
losses 15,000 - - 15,000
Other non-interest
expense 661,550 145,346 74,300 881,196
------------ -------- ---------- -----------
Income before income
taxes 548,371 4,983 (55,793) 497,561
Income taxes 210,700 - (15,950) 194,750
------------ -------- ---------- -----------
Net income $ 337,671 4,983 (39,843) 302,811
============ ======== ========== ===========
1999:
Net interest income $ 1,017,643 2,548 37,354 1,057,545
Non-interest income 95,682 145,742 (7,848) 233,576
------------ -------- ---------- -----------
Total income 1,113,325 148,290 29,506 1,291,121
Provision for loan
losses - - - -
Other non-interest
expense 557,538 139,437 64,452 761,427
------------ -------- ---------- -----------
Income before income
taxes 555,787 8,853 (34,946) 529,694
Income taxes 214,100 1,005 (8,500) 206,605
------------ -------- ---------- -----------
Net income $ 341,687 7,848 (26,446) 323,089
============ ======== ========== ===========
8
<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 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 the origination of loans secured by
one-to-four family residential dwellings. The Bank considers Gallatin, Park
and Sweet Grass counties in south-central Montana as its primary market area.
During 1999, the Bank received regulatory approval to open a de novo branch in
Billings, Montana, and management opened the new branch in April 2000. In
addition, the Bank opened a loan production office in Missoula, Montana during
the third quarter of 2000. Lending activities also have included the
origination of multi-family, commercial, business, commercial real estate and
home equity loans. The Bank's primary business has been that of a traditional
financial institution, originating loans in its primary market area for its
portfolio. In addition, the Bank has maintained a significant portion of its
assets in investment and mortgage-backed securities. Similar to its lending
activities, the Bank's investment portfolio has been weighted toward U.S.
Government agency mortgage-backed securities secured by one-to-four family
residential properties. The portfolio also includes U. S. Government agency
securities. The Bank plans to continue to fund its assets primarily with
deposits, although FHLB advances are used as a supplemental source of funds.
The Bank relies to a significant extent on borrowings from the FHLB of Seattle
to finance its short-term and, to a certain extent, its longer term financing
needs. The FHLB of Seattle functions as the central reserve bank providing
credit for savings institutions and certain other member financial
institutions. In recent periods, borrowings from the FHLB of Seattle have
been available at rates that are more favorable than the rates that the Bank
would be required to pay on deposits. Further, borrowings from the FHLB are
available at various maturities, facilitating the accurate matching of asset
and liability maturity dates. The Bank has used these available borrowings
during the past nine months in part to fund expansion of its lending
activities and treasury stock repurchases.
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
and FHLB advances. 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, insurance commissions and net gains or losses on the sale of
investments. 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.
9
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
As evidenced by the new branch in Billings and an increase in commercial and
business loans, the Bank's strategy is changing from its historical role as a
mortgage lender to a growth-oriented expansion strategy by pursuing internal
and external growth opportunities, when appropriate. This new strategy may
subject the Company to a greater degree of risk. Risks associated with this
new business strategy include increased risk of losses on loans, provision to
loan losses which exceed historical levels, difficulties in integrating or
managing new branches or acquired institutions and problems related to the
management of growth. There can be no assurance that the Company will be
successful in implementing this new business strategy or in managing growth.
Financial Condition
Consolidated assets increased by approximately $5.8 million, or 5.1%, from
$114.5 million at December 31, 1999 to $120.3 million at September 30, 2000.
Investments and mortgage-backed securities available-for-sale decreased $10.3
million, or 25.1% from $41.1 million at December 31, 1999 to $30.8 million at
September 30, 2000 as the result of sales amounting to $6.6 million and
maturities and payments of $4.3 million and an increase in market value of
$414,000. Net loans increased $15.9 million, or 26.7%, from $59.6 million at
December 31, 1999 to $75.5 million at September 30, 2000.
Deposits increased from $71.4 million at December 31, 1999 to $75.5 million at
September 30, 2000.
Premises and equipment increased by $1.0 million, or 35.5% from $2.9 million
at December 31, 1999 to $3.9 million at September 30, 2000 primarily as the
result of the remodeling costs associated with the property in Billings,
Montana for the new branch facility.
Stockholders' equity decreased from $32.8 million at December 31, 1999, to
$28.0 million at September 30, 2000. The change is the result of net income
of $943,000, the release of ESOP shares in the amount of $121,000 and an
increase of $252,000 related to the market value of securities available-for-
sale. In addition, 8,942 shares of MRDP vested and unearned MRDP compensation
was reduced by $143,000. Stockholders' equity was also decreased by the
payments of $554,000 in dividends. During the nine months ended September 30,
2000, the Company repurchased 439,127 shares of its common stock in the open
market for an average price of $12.83 per share for a total of $5.6 million.
There were 1,029,957 shares held in treasury at September 30, 2000, and
590,830 shares at December 31, 1999.
Asset Quality
At September 30, 2000, the Bank had no nonaccrual loans. At September 30,
2000, the Bank had sixteen loans delinquent over 30 days amounting to
$1,039,000 of which one loan amounting to $8,000 was 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.
10
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Nine Months Ended September 30,
2000 and 1999
Net Income. Net income decreased by $30,000 to $944,000 for the nine months
ended September 30, 2000 as compared to the same period in 1999. While the
net income is approximately the same for the two comparative periods, several
components of net income changed and are discussed in the following narrative.
Net Interest Income. Net interest income increased $149,000, or 4.6%, from
$3.2 million for the nine months ended September 30, 1999 to $3.4 million for
the same period in 2000. The interest rate spread increased from 2.89% for
the nine months ended September 30, 1999 to 2.92% for the comparable period in
2000.
Interest Income. Total interest income increased by $772,000, or 13.9% from
$5.6 million for the nine months ended September 30, 1999 to $6.3 million for
the same period in 2000. The increase was primarily attributable to an
increase in average interest earning assets of $5.7 million, or 5.4% from
$104.7 million for the nine months ended September 30, 1999 as compared to the
comparable period in 2000. Average outstanding loans increased $15.6 million
offset by decreases in the average outstanding balances of investments and
mortgage-backed securities of $7.6 million. The yield on interest earning
assets for the nine months ended September 30, 2000, was 7.7% as compared to
7.1% for the comparable period in 1999.
Interest Expense. Total interest expense was $2.9 million for the nine months
ended September 30, 2000, as compared to $2.3 million for the same period in
1999. Interest on deposits increased by $320,000, or 15.1%, and interest on
notes payable and other debt increased by $304,000, or 149.9%.
Average deposits for the nine months ended September 30, 2000 amounted to
$72.3 million as compared to $68.3 million for the same period in 1999. In
addition to the increase in average deposits, the cost of deposits increased
from 4.1% for the nine months ended September 30, 1999 to 4.5% for the same
period in 2000 reflecting a general increase in interest rates in the Bank's
markets.
Other interest expense of $506,000 for the nine months ended September 30,
2000 includes $467,000 related to borrowings from the FHLB and $39,000
associated with the purchase of the main office building. Other interest
expense for the comparable period in 1999 included $160,000 related to FHLB
borrowings and $43,000 associated with the purchase of the main office
building.
Provision for Loan Losses. The provision for loan losses was $45,000 for nine
months ended September 30, 2000 as compared to no provision for the same
period in 1999. 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
were .36% at September 30, 2000, and .39% at September 30, 1999. Management's
periodic evaluation of the adequacy of the allowance is based on factors such
as the 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 Bank's allowance for loan losses. Such agencies may
require the 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 judgments regarding future events, and thus,
there can be no assurance that additional provisions 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 Bank's control. Any increase or decrease in the provision for loan losses
has a corresponding negative or positive effect on net income.
Non-Interest Income. Non-interest income increased $145,000 for the nine
months ended September 30, 2000, as compared to the same period in 1999
primarily as the result of the net gain on the sale of investments of
$185,000, offset by a decrease in commissions from insurance companies of
$36,000.
11
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The net gain on sale of investments was the result of the sale of $6.4 million
of mortgage-backed securities and bonds for a loss of $160,000 offset by the
sale of 7,500 shares of FHLMC stock for a gain of $344,000. Most of the
proceeds of these sales were used to fund the repurchase of treasury shares
and to fund loan originations during the nine months ended September 30, 2000.
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $399,000 and $435,000 were
received for the nine months ended September 30, 2000 and 1999, respectively.
The decrease in commission income resulted primarily from decreases in
premiums and commissions from key companies represented by Dime. Increased
competition and possible future decreases in commissions will continue to
impact Dime's financial results.
Non-Interest Expense. Total non-interest expense increased $304,000 or 13.0%
for the nine months ended September 30, 2000, compared to the same period in
1999. Included in this increase is a $155,000 increase in compensation
expense which is primarily related to the additional salaries and benefits for
the employees at the new branch in Billings and the Missoula loan production
office. Occupancy expense also increased from $301,000 for the nine months
ended September 30, 1999 to $354,000 primarily as the result of additional
cost associated with the new branch facility.
Additional net increases in other non-interest expense amounting to $95,000
were primarily the result of increased legal, consulting and auditing costs as
well as additional costs associated with the opening of the branch office in
Billings and the loan production office in Missoula.
Income Taxes. Income taxes were approximately the same for the nine months
ended September 30, 2000 and 1999. The effective combined federal and state
tax rate was 38.9% and 39.1% for the nine months ended September 30, 2000 and
1999, respectively.
12
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended September 30,
2000 and 1999
Net Income. Net income decreased by $20,000 to $303,000 for the three months
ended September 30, 2000 as compared to $323,000 for the same period in 1999.
While the net income is approximately the same for the two comparative
periods, several components of net income changed and are discussed in the
following narrative.
Net Interest Income. Net interest income increased $67,000, or 6.3%, from the
three months ended September 30, 1999 compared to the same period in 2000.
The interest rate spread increased from 2.73% for the three months ended
September 30, 1999 to 2.93% for the comparable period in 2000.
Interest Income. Total interest income increased by $318,000, or 17.1% from
$1.9 million for the three months ended September 30, 1999 to $2.2 million for
the same period in 2000. The increase was primarily attributable to an
increase in average interest earning assets of $4.1 million, or 3.8% from
$106.4 million for the three months ended September 30, 1999 as compared to
the comparable period in 2000. Average outstanding loans increased $18.0
million offset by decreases in the average outstanding balances of investments
and mortgage-backed securities of $12.2 million. The yield on interest earning
assets for the three months ended September 30, 2000, was 7.9% as compared to
7.0% for the comparable period in 1999.
Interest Expense. Total interest expense was $1.1 million for the three
months ended September 30, 2000, as compared to $801,000 for the same period
in 1999. Interest on deposits increased by $130,000, or 17.9%, and interest
on notes payable and other debt increased by $121,000, or 166.3%.
Average deposits for the three months ended September 30, 2000 amounted to
$73.9 million as compared to $70.1 million for the same period in 1999. In
addition to the increase in average deposits, the cost of deposits increased
from 4.2% for the three months ended September 30, 1999 to 4.7% for the same
period in 2000 reflecting a general increase in interest rates in the Bank's
markets.
Other interest expense of $194,000 for the three months ended September 30,
2000 includes $181,000 related to borrowings from the FHLB and $13,000
associated with the purchase of the main office building. Other interest
expense for the comparable period in 1999 included $59,000 related to FHLB
borrowings and $14,000 associated with the purchase of the main office
building.
Provision for Loan Losses. The provision for loan losses was $15,000 for
three months ended September 30, 2000 as compared to no provision for the same
period in 1999. 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
.36% at September 30, 2000, and .39% at September 30, 1999.
Non-Interest Income. Non-interest income increased $36,000 for the three
months ended September 30, 2000, as compared to the same period in 1999
primarily as the result of the net gain on the sale of investments of $34,000
for the three month period ended September 30, 2000. Commissions from
insurance companies was $146,000 for the three month period ended September
30, 2000, an increase of $1,000 over the comparable period in 1999. Insurance
commissions received from Dime are the largest component of non-interest
income. Increased competition and possible future decreases in commissions
will continue to impact Dime's financial results.
Non-Interest Expense. Total non-interest expense increased $120,000 or 15.7%
for the three months ended September 30, 2000, compared to the same period in
1999. Included in this increase is a $54,000 increase in compensation
expense which is primarily related to the additional salaries and benefits for
the employees at the new branch in Billings and the Missoula loan production
office.
13
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Other non-interest expense increased 28.3% from $165,000 for the three month
period ended September 30, 1999 to $212,000 for the comparable period in 2000.
The increases are primarily related to costs associated with opening of the
new branch in Billings and the loan production office in Missoula, and
increases in consulting, legal and auditing costs.
Income Taxes. Income taxes decreased $12,000 from the three-month period
ended September 30, 1999 as compared to the same period in 2000 as the result
of the decrease in income before income taxes. The effective combined
federal and state tax rate was 39.1% and 39.0% for the three months ended
September 30, 2000 and 1999, respectively.
14
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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 Kenneth P. Cochran(4)
10.2 Employment Agreement with William H. Ruegamer (3)
10.3 Employee Stock Ownership Plan (1)
10.4 Management Recognition and Development Plan (2)
10.5 Stock Option Plan (2)
10.6 Financial Institution's Thrift Plan 401(k)(3)
21 Subsidiaries of the Registrant (3)
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 Meeting Proxy Statement
dated March 16, 1998.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1999.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-
QSB for the three months ended March 31, 2000.
(b) Report on Form 8-K Three Form 8-K's were filed on April 11,
2000, September 18, 2000 and September 26,
2000.
15
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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 Kenneth P. Cochran November 10, 2000
------------------------------------ ----------------------
Kenneth P. Cochran Date
President & Chief Executive Officer
(Principal Executive Officer)
By s/s Linda M. Alkire November 10, 2000
------------------------------------ ----------------------
Linda M. Alkire Date
Treasurer & Chief Financial Officer
16
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