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, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 81-0512374
-----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 July 31, 2000: 1,748,643
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, 2000
(unaudited) and December 31, 1999 (unaudited)............ 1
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2000 and 1999 (unaudited).. 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 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
June 30, 2000 and December 31, 1999
(unaudited)
June 30, December 31,
Assets 2000 1999
------ ------------- -------------
Cash and due from banks $ 2,622,712 $ 1,688,206
Interest-bearing deposits 252,486 683,913
------------- -------------
Cash and cash equivalents 2,875,198 2,372,119
Investment and mortgage-backed securities
available-for-sale 31,573,229 41,090,151
Investment and mortgage-backed securities
held-to-maturity (estimated market value of
$5,833,447 at June 30, 2000 and $6,367,598
at December 31, 1999) 5,658,431 6,406,467
Loans receivable, net 70,250,877 59,569,783
Stock in Federal Home Loan Bank of Seattle,
at cost 1,487,300 1,463,500
Accrued interest receivable 437,885 451,386
Premises and equipment, net 3,879,314 2,860,330
Prepaid expenses and other assets 374,036 313,032
------------- -------------
Total assets $ 116,536,270 $ 114,526,768
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Demand deposits $ 942,803 $ 864,132
NOW accounts 9,884,218 10,512,251
Money market 8,976,678 6,825,711
Regular savings 12,233,656 13,915,404
Certificates of deposit 41,922,162 39,235,600
------------- -------------
Total Deposits 73,959,517 71,353,098
Advances from Federal Home Loan Bank
and other Borrowed funds 10,638,815 8,800,000
Note payable 562,042 591,847
Advances from borrowers for taxes and
insurance 291,016 229,437
Accrued expenses and other liabilities 645,462 797,169
------------- -------------
Total liabilities 86,096,852 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 25,264,969 25,260,408
Unearned ESOP and MRDP compensation (2,096,358) (2,264,623)
MRDP shares acquired (302,011) (302,011)
Retained earnings, substantially restricted 18,102,520 17,842,091
Accumulated other comprehensive income, net 341,110 632,893
Treasury shares acquired, at cost, 797,857
and 590,830 shares at June 30, 2000 and
December 31, 1999 respectively (10,896,733) (8,439,462)
------------- -------------
Total stockholders' equity 30,439,418 32,755,217
------------- -------------
Total liabilities and stockholders'
equity $ 116,536,270 $ 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 Six Months Ended June 30, 2000 and 1999
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ----------------------
2000 1999 2000 1999
----- ---- ---- ----
Interest income:
Loans receivable $1,413,431 $1,098,626 $2,701,990 $2,092,927
Mortgage-backed
securities 604,105 691,007 1,303,844 1,412,951
Investment securities 36,720 39,577 83,569 77,160
Other 35,126 56,804 71,105 123,074
---------- ---------- ---------- ----------
Total interest income 2,089,382 1,886,014 4,160,508 3,706,112
---------- ---------- ---------- ----------
Interest expense:
Deposits 800,155 705,876 1,578,166 1,388,831
Note payable and other 159,753 64,702 312,685 129,894
---------- ---------- ---------- ----------
Total interest expense 959,908 770,578 1,890,851 1,518,725
---------- ---------- ---------- ----------
Net interest income 1,129,474 1,115,436 2,269,657 2,187,387
Provision for loan losses 15,000 -- 30,000 --
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 1,114,474 1,115,436 2,239,657 2,187,387
Non-interest income:
Insurance commission
income 129,720 129,499 252,447 289,639
Customer service charges 135,442 69,332 225,499 142,823
Gain on sale of
investments, net 100,857 -- 150,171 --
Other 8,997 7,528 17,855 16,587
---------- ---------- ---------- ----------
Total non-interest
income 375,016 206,359 645,972 449,049
Non-interest expense:
Compensation and benefits 553,695 456,055 1,084,405 895,800
Occupancy and equipment 115,166 117,100 227,196 205,560
Deposit insurance premiums 11,550 9,625 23,100 34,881
Other 309,562 211,413 504,646 431,985
---------- ---------- ---------- ----------
Total non-interest expense 989,973 794,193 1,839,347 1,568,226
---------- ---------- ---------- ----------
Income before income
taxes 499,517 527,602 1,046,282 1,068,210
Income taxes 193,605 204,534 405,605 417,799
---------- ---------- ---------- ----------
Net income $ 305,912 $ 323,068 $ 640,677 $ 650,411
========== ========== ========== ==========
Basic earnings per share $ 0.19 $ 0.19 $ 0.39 $ 0.36
========== ========== ========== ==========
Diluted earnings per share $ 0.19 $ 0.19 $ 0.39 $ 0.36
========== ========== ========== ==========
Dividends declared per share $ 0.11 $ 0.10 $ 0.21 $ 0.20
========== ========== ========== ==========
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, 2000 and 1999
(unaudited)
Six Months Ended
June 30,
2000 1999
------------- -------------
Cash flows from operating activities:
Net income $ 640,677 $ 650,411
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 30,000 -
Depreciation 115,185 114,045
ESOP shares committed to be released 77,552 85,596
MRDP shares vested 95,274 90,505
Gain on sale of investments and
mortgage-backed securities afs (150,171) -
Stock dividends reinvested in
Federal Home Loan Bank (23,800) (51,000)
Decrease (increase) in accrued
interest receivable 13,501 (75,815)
Increase (decrease) in prepaid
expenses and other assets (61,004) 50,810
Increase (decrease) in accrued
expenses and other liabilities 34,843 (51,936)
Net cash provided by ------------- -------------
operating activities 772,057 812,616
------------- -------------
Cash flows from investing activities:
Net change in loans receivable (10,711,094) (3,144,287)
Proceeds from sale of mortgage-backed
securities available for sale 4,407,853 -
Principal payments on mortgage-backed
securities held-to maturity 748,036 2,255,634
Proceeds from sale of securities
available-for-sale 2,167,738 -
Principal payments on mortgage-backed
securities available-for-sale 2,613,169 6,002,307
Purchases of mortgage-backed securities
available-for-sale - (6,578,497)
Purchases of premises and equipment (1,134,169) (133,532)
------------- -------------
Net cash used in investing
activities (1,908,467) (1,598,375)
------------- -------------
Cash flows from financing activities:
Net change in deposits 2,606,419 3,163,633
Repayment of note payable (29,805) (27,410)
Net change in advances from borrowers
for taxes and insurance 61,579 51,319
Dividends paid (380,248) (386,363)
Proceeds from advances from FHLB 1,838,815 -
Purchase of treasury stock (2,457,271) (3,128,643)
------------- -------------
Net provided by (used in)
financing activities 1,639,489 (327,464)
------------- -------------
Net increase (decrease) in cash and cash
equivalents 503,079 (1,113,223)
Cash and cash equivalents, beginning of period 2,372,119 5,153,797
------------- -------------
Cash and cash equivalents, end of period $ 2,875,198 $ 4,040,574
============= =============
Cash paid during the period for:
Interest $ 951,753 $ 741,044
Income taxes 425,000 398,000
============= =============
See accompanying notes to unaudited interim consolidated financial statements.
3
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to unaudited Interim Consolidated Financial Statements
June 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 six months ended June
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:
Six Months Ended Three Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
$348,894 $(107,538) $265,723 $(157,705)
======== ========= ======== =========
Note 3 Treasury Stock
--------------
During the six months ended June 30, 2000 the Board of Directors
approved a program to repurchase up to 20% of its outstanding common stock
during the year. During the six months ended June 30, 2000, the Company
purchased 207,027 shares in the open market for $2,457,000 for an average
price of $11.87 per share. At June 30, 2000 the Company had repurchased
797,857 shares for a total of $10,897,000 or an average price of $13.66. Book
value per share at June 30, 2000 was $16.97.
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 June 30, 2000, there were 35,537 allocated
shares and 6,912 committed to be released ESOP shares. There were 52,797
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, 2000, 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
---------------------------------------------------------------------------------
2000 1999
-------------------------------------- ------------------------------------
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 $640,677 1,653,888 $0.39 $650,411 1,820,742 $0.36
======== ===== ======== =====
Effect of Dilutive
Securities
Stock Options -
granted -- --
Unvested MRDP shares -- --
--------- ---------
Diluted EPS
Income available to
common stockholders
plus assumed
conversion $640,677 1,653,888 $0.39 $650,411 1,820,742 $0.36
======== ========= ===== ======== ========= =====
For the three months ended June 30
---------------------------------------------------------------------------------
2000 1999
-------------------------------------- ------------------------------------
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 $305,912 1,587,136 $0.19 $323,068 1,696,218 $0.19
======== ===== ======== =====
Effect of Dilutive
Securities
Stock Options -
granted -- --
Unvested MRDP shares -- --
--------- ---------
Diluted EPS
Income available to
common stockholders
plus assumed
conversion $305,912 1,587,136 $0.19 $323,068 1,696,218 $0.19
======== ========= ===== ======== ========= =====
5
</TABLE>
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 5 Cash Dividend Declared
----------------------
On July 25, 2000, the Board of Directors declared a quarterly cash
dividend of $.11 per common share to stockholders of record on August 11, 2000
payable on August 25, 2000.
Note 6 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory
capital requirements of June 30, 2000 (dollars in thousands):
Percentage
Amount of Assets
------ ---------
GAAP capital(1) $ 28,046 24.07%
========== =======
Tangible capital $ 27,277 23.63%
Tangible capital requirement 1,732 1.50%
---------- -------
Excess $ 25,545 22.13%
========== =======
Core capital $ 27,277 23.63%
Core capital requirement 3,463 3.00%
---------- -------
Excess $ 23,814 20.63%
========== =======
Total risk-based capital(2) $ 28,239 46.41%
Total risk-based capital
requirement(2) 4,868 8.00%
---------- -------
Excess $ 23,371 38.41%
========== =======
(1) Empire's GAAP capital includes unrealized gains on
certain available-for-sale securities of $341,000 and
$428,000 of investments in Dime, which are excluded for
purposes of calculating both tangible and core capital.
(2) Based on risk-weighted assets of $60,849,000.
Note 7 Operating Segment Information
-----------------------------
As of December 31, 1998, the Company adopted SFAS No. 131, "Financial
Reporting for Segments of a Business Enterprise." This statement requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. According to the statement,
operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
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 at or for
the six months ended June 30, 2000 and 1999.
2000: Empire Dime Other Consolidated
------ ---- ----- ------------
Net interest
income $ 2,146,177 7,239 116,241 2,269,657
Non-interest income 419,286 264,814 (38,128) 645,972
------------ --------- --------- -----------
Total income 2,565,463 272,053 78,113 2,915,629
Provision for
loan losses 30,000 -- -- 30,000
Other non-interest
expense 1,338,947 281,610 218,790 1,839,347
------------ --------- --------- -----------
Income before
income taxes 1,196,516 (9,557) (140,677) 1,046,282
Income Taxes 460,125 -- (54,520) 405,605
------------ --------- --------- -----------
Net Income $ 736,391 (9,557) (86,157) 640,677
============ ========= ========= ===========
Assets $116,594,829 533,189 (591,748) 116,536,270
Net loans 70,250,877 -- -- 70,250,877
Deposits 74,292,638 -- (333,121) 73,959,517
Stockholders'
equity 28,046,215 428,302 1,964,901 30,439,418
============ ========= ========= ===========
1999:
Net interest
income $ 2,028,105 4,423 154,859 2,187,387
Non-interest income 218,083 294,619 (63,653) 449,049
------------ --------- --------- -----------
Total income 2,246,188 299,042 91,206 2,636,436
Provision for loan
losses -- -- -- --
Other non-interest
expense 1,092,311 283,487 192,428 1,568,226
------------ --------- --------- -----------
Income before
income taxes 1,153,877 15,555 (101,222) 1,068,210
Income taxes 442,000 2,899 (27,100) 417,799
------------ --------- --------- -----------
Net income $ 711,877 12,656 (74,122) 650,411
============ ========= ========= ===========
Assets $108,348,050 543,245 (485,549) 108,405,746
Net loans 52,643,443 -- -- 52,643,443
Deposits 69,921,121 -- (344,891) 69,576,230
Stockholders'
equity 29,903,976 429,505 2,521,199 32,854,680
============ ========= ========= ===========
7
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information for the
three months ended June 30, 2000 and 1999.
2000: Empire Dime Other Consolidated
------ ---- ----- ------------
Net interest
income $ 1,068,872 3,709 56,893 1,129,474
Non-interest
income 261,584 135,941 (22,509) 375,016
------------ --------- --------- -----------
Total income 1,330,456 139,650 34,384 1,504,490
Provision for loan
losses 15,000 -- -- 15,000
Other non-interest
expense 719,272 141,173 129,528 989,973
------------ --------- --------- -----------
Income before
income taxes 596,184 (1,523) (95,144) 499,517
Income Taxes 229,325 -- (35,720) 193,605
------------ --------- --------- -----------
Net Income $ 366,859 (1,523) (59,424) 305,912
============ ========= ========= ===========
1999:
Net interest
income $ 1,050,752 2,235 62,449 1,115,436
Non-interest income 82,600 130,241 (6,482) 206,359
------------ --------- --------- -----------
Total income 1,133,352 132,476 55,967 1,321,795
Provision for loan
losses -- -- -- --
Other non-interest
expense 551,076 147,757 95,360 794,193
------------ --------- --------- -----------
Income before
income taxes 582,276 (15,281) (39,393) 527,602
Income taxes 221,500 3,234 (20,200) 204,534
------------ --------- --------- -----------
Net income $ 360,776 (18,515) (19,193) 323,068
============ ========= ========= ===========
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 will be opening 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
will be used as a supplemental source of funds.
The Bank's profitability depends primarily on its net interest income, which
is the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits
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.
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
9
<PAGE>
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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.
Year 2000 Issues
The Bank places significant reliance on computers to process information
necessary to conduct its business. During the past few years industry and
regulatory agencies advised the business community that some computers may not
be able to interpret certain information related to the year 2000. The Bank
successfully completed the year-end closings and all computer systems were
totally operable following January 1, 2000, and management did not identify
any errors or experience any computer malfunctions. The major financial
impact related to the Year 2000 issue was the replacement of teller hardware
and software. The cost of conversion and retraining amounted to $225,000. The
Bank has not been informed of any such problem experienced by its vendors or
its customers.
While there were no disruptions of any services provided to our customers,
management will continue to monitor all data processing applications into the
Year 2000. Management does not believe at this time that any potential
problems will materially impact the ability of the Bank to continue its
operation, however, no assurance can be given that this will be the case.
Financial Condition
Consolidated assets increased by approximately $2.0 million, or 1.75%, from
$114.5 million at December 31, 1999 to $116.5 million at June 30, 2000.
Investments and mortgage-backed securities available-for-sale decreased $9.5
million, or 23.2% from $41.1 million at December 31, 1999 to $31.6 million at
June 30, 2000 as the result of sales amounting to $6.4 million and maturities
and payments of $2.6 million and a decline in market value of $478,000. Net
loans increased $10.7 million, or 17.9%, from $59.6 million at December 31,
1999 to $70.3 million at June 30, 2000.
Deposits increased from $71.4 million at December 31, 1999 to $74.0 million at
June 30, 2000.
Premises and equipment increased by $1.0 million, or 35.6% from $2.9 million
at December 31, 1999 to $3.9 million June 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
$30.4 million at June 30, 2000. The change is the result of net income of
$641,000, the release of ESOP shares in the amount of $78,000 and a decrease
of $292,000 related to the market value of securities available-for-sale. In
addition, 5,962 shares of MRDP vested and unearned MRDP compensation was
reduced by $95,000. Stockholders' equity was also decreased by the payments
of $380,000 in dividends. During the six months ended June 30, 2000, the
Company repurchased 207,027 shares of its common stock in the open market for
an average price of $11.87 per share for a total of $2.5 million. There were
797,857 shares held in treasury at June 30, 2000, and 590,830 shares at
December 31, 1999.
Asset Quality
At June 30, 2000, the Bank had no nonaccrual loans. At June 30, 2000, the
Bank had eight loans delinquent over 30 days amounting to $407,000 of which
one loan amounting to $9,000 was delinquent over 90 days. The Bank had no
real estate acquired through foreclosure.
10
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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.
Comparison of Results of Operations for the Six Months Ended June 30, 2000 and
1999
Net Income. Net income decreased by $10,000 to $641,000 for the six months
ended June 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 $82,000, or 3.8%, from
$2.1 million for the six months ended June 30, 1999 to $2.2 million for the
same period in 2000. The interest rate spread increased from 2.88% for the
six months ended June 30, 1999 to 2.96% for the comparable period in 2000.
Interest Income. Total interest income increased by $454,000, or 12.3% from
$3.7 million for the six months ended June 30, 1999 to $4.2 million for the
same period in 2000. The increase was primarily attributable to an increase
in average interest earning assets of $5.8 million, or 5.6% from $104.1
million for the six months ended June 30, 1999 as compared to the comparable
period in 2000. Average outstanding loans increased $14.5 million offset by
decreases in the average outstanding balances of investments and mortgage-
backed securities of $8.7 million. The yield on interest earning assets for
the six months ended June 30, 2000, was 7.6% as compared to 7.1% for the
comparable period in 1999.
Interest Expense. Total interest expense was $1.9 million for the six months
ended June 30, 2000, as compared to $1.5 million for the same period in 1999.
Interest on deposits increased by $189,000, or 13.6%, and interest on notes
payable and other debt increased by $183,000, or 140.7%.
Average deposits for the six months ended June 30, 2000 amounted to $71.5
million as compared to $67.4 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 six months ended June 30, 1999 to 4.4% for the same period in 2000
reflecting a general increase in interest rates in the Bank's markets.
Other interest expense of $313,000 for the six months ended June 30, 2000
includes $286,000 related to borrowings from the FHLB and $27,000 associated
with the purchase of the main office building. Other interest expense for the
comparable period in 1999 included $101,000 related to FHLB borrowings and
$29,000 associated with the purchase of the main office building.
Provision for Loan Losses. The provision for loan losses was $30,000 for six
months ended June 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 June 30, 2000, and .42% at June 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
11
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 $197,000 for the six
months ended June 30, 2000, as compared to the same period in 1999 primarily
as the result of a $83,000 increase in customer service charges and other
non-interest income, net gain on the sale of investments of $150,000, offset
by a decrease in commissions from insurance companies of $37,000.
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 6,800 shares of FHLMC stock for a gain of $310,000. Most of the
proceeds of these sales were used to fund the repurchase of treasury shares
during the six months ended June 30, 2000.
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $252,000 and $290,000 were
received for the six months ended June 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 $271,000 or 17.3%
for the six months ended June 30, 2000, compared to the same period in 1999.
Included in this increase is a $189,000 increase in compensation expense
which is primarily related to the additional salaries and benefits for the
employees at the new branch in Billings. Occupancy expense also increased
from $206,000 for the six months ended June 30, 1999 to $227,000 primarily as
the result of additional cost associated with the new branch facility.
Additional increases in other non-interest expense amounting to $73,000 were
the result of increased legal, consulting and auditing costs.
Income Taxes. Income taxes were approximately the same for the six months
ended June 30, 2000 and 1999. The effective combined federal and state tax
rate was 38.77% and 39.11% for the six months ended June 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 June 30, 2000
and 1999
Net Income. Net income decreased by $17,000 to $306,000 for the three months
ended June 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 $14,000, or 1.3%, from the
three months ended June 30, 1999 compared to the same period in 2000. The
interest rate spread increased from 2.82% for the three months ended June 30,
1999 to 3.02% for the comparable period in 2000.
Interest Income. Total interest income increased by $203,000, or 10.8% from
$1.9 million for the three months ended June 30, 1999 to $2.1 million for the
same period in 2000. The increase was primarily attributable to an increase
in average interest earning assets of $4.2 million, or 4.1% from $104.2
million for the three months ended June 30, 1999 as compared to the comparable
period in 2000. Average outstanding loans increased $17.5 million offset by
decreases in the average outstanding balances of investments and mortgage-
backed securities of $13.3 million. The yield on interest earning assets for
the three months ended June 30, 2000, was 7.7% as compared to 7.0% for the
comparable period in 1999.
Interest Expense. Total interest expense was $960,000 for the three months
ended June 30, 2000, as compared to $771,000 for the same period in 1999.
Interest on deposits increased by $94,000, or 13.4%, and interest on notes
payable and other debt increased by $95,000, or 146.9%.
Average deposits for the three months ended June 30, 2000 amounted to $71.8
million as compared to $66.9 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 three months ended June 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 $160,000 for the three months ended June 30, 2000
includes $147,000 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 $51,000 related to FHLB borrowing 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 June 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 June 30, 2000, and .42% at June 30, 1999.
Non-Interest Income. Non-interest income increased $169,000 for the three
months ended June 30, 2000, as compared to the same period in 1999 primarily
as the result of a $66,000 increase in customer service charges and other
non-interest income, net gain on the sale of investments of $101,000 for the
three month period ended June 30, 2000. Commissions from insurance companies
was $130,000 for both three month periods ended June 30, 2000 and 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.
The net gain on sale of investments was the result of the sale of $3.1 million
of mortgage-backed securities and bonds for a loss of $80,000 offset by the
sale of 4,000 shares of FHLMC stock for a gain of $181,000.
Non-Interest Expense. Total non-interest expense increased $196,000 or 24.7%
for the three months ended June 30, 2000, compared to the same period in 1999.
Included in this increase is a $97,000 increase in compensation expense which
is primarily related to the additional salaries and benefits for the employees
at the new branch in Billings.
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EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Other non-interest expense increased 46.4% from $211,000 for the three month
period ended June 30, 1999 to $310,000 for the comparable period in 2000. The
increases are primarily related to costs associated with opening of the new
branch in Billings, and increases in consulting, legal and auditing costs.
Income Taxes. Income taxes were approximately the same the three months ended
June 30, 2000 and 1999. The effective combined federal and state tax rate
was 38.76% and 38.77% for the three months ended June 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 (5)
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)
10.6 Financial Institution's Thrift Plan 401(k)(4)
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, 997.
(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, 1999.
(5) 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 A Form 8-K was filed on April 11, 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 William H. Ruegamer August 11, 2000
------------------------------------ ------------------
William H. Ruegamer Date
President & Chief Executive Officer
(Principal Executive Officer)
By s/s Linda M. Alkire August 11, 2000
------------------------------------ ------------------
Linda M. Alkire Date
Treasurer & Chief Financial Officer
16
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