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, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to
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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 (I.R.S. Employer Identification No.)
of 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 July 31, 2001: 1,562,143
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
EMPIRE FEDERAL BANCORP, INC.
INDEX TO FORM 10-QSB
Page
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PART I FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000 (unaudited) . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2001 and 2000 (unaudited) . . . 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000 (unaudited). . . . . . . . . . . 3
Notes to Unaudited Interim Consolidated Financial Statements. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 10
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Part I, Item 1 - Financial Statements
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000
(unaudited)
June 30, December 31,
Assets 2001 2000
------ ------------ ------------
Cash and due from banks $ 2,696,647 $ 2,482,564
Interest-bearing deposits 5,519,981 165,136
------------ ------------
Cash and cash equivalents 8,216,628 2,647,700
Investment and mortgage-backed securities
available-for-sale 30,590,773 29,374,395
Investment and mortgage-backed securities
held-to-maturity (estimated market value
of $5,067,695 at December 31, 2000) -- 5,024,454
Loans receivable, net 84,772,093 80,362,737
Loans held for sale 4,645,405 1,497,244
Stock in Federal Home Loan Bank of Seattle,
at cost 1,613,300 1,560,700
Accrued interest receivable 618,462 528,281
Premises and equipment, net 3,666,031 3,719,566
Prepaid expenses and other assets 272,954 352,188
------------ ------------
Total assets $134,395,646 $125,067,265
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Demand deposits $ 2,008,977 $ 1,630,238
NOW accounts 10,791,669 11,487,266
Money market 12,193,095 11,261,730
Regular savings 10,724,588 11,199,567
Certificates of deposit 47,705,704 42,087,843
------------ ------------
Total deposits 83,424,033 77,666,644
Advances from Federal Home Loan Bank and
other borrowed funds 19,000,000 16,200,000
Note payable 498,207 530,749
Advances from borrowers for taxes and insurance 286,325 286,086
Accrued expenses and other liabilities 1,587,024 1,468,565
------------ ------------
Total liabilities 104,795,589 96,152,044
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 25,296,854 25,278,214
Unearned ESOP and MRDP compensation (1,799,374) (1,928,091)
MRDP shares acquired (258,864) (302,011)
Retained earnings, substantially restricted 18,587,015 18,351,208
Accumulated other comprehensive income, net 1,820,888 1,562,363
Treasury shares acquired, at cost, 1,029,957
shares at June 30, 2001 and December
31, 2000 (14,072,383) (14,072,383)
------------ ------------
Total stockholders' equity 29,600,057 28,915,221
------------ ------------
Total liabilities and stockholders'
equity $134,395,646 $125,067,265
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
1
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three and Six Months Ended June 30, 2001 and 2000
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans receivable $1,902,250 $1,413,431 $3,708,541 $ 2,701,990
Mortgage-backed
securities 467,886 604,105 991,346 1,303,844
Investment securities 8,596 36,720 16,119 83,569
Other 36,743 35,126 64,760 71,105
---------- ---------- ---------- ----------
Total interest income 2,415,475 2,089,382 4,780,766 4,160,508
---------- ---------- ---------- ----------
Interest expense:
Deposits 897,787 800,155 1,776,054 1,578,166
Note payable and other 277,335 159,753 553,842 312,685
---------- ---------- ---------- ----------
Total interest expense 1,175,122 959,908 2,329,896 1,890,851
---------- ---------- ---------- ----------
Net interest income 1,240,353 1,129,474 2,450,870 2,269,657
---------- ---------- ---------- ----------
Provision for loan losses 25,002 15,000 50,004 30,000
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 1,215,351 1,114,474 2,400,866 2,239,657
Non-interest income:
Insurance commission
income 135,553 129,720 265,227 252,447
Customer service charges 71,436 89,942 139,519 138,499
Gain on sale of invest-
ments, net -- 100,857 -- 150,171
Gain on sale of loans 61,543 -- 143,805 --
Other 2,534 8,997 12,377 17,855
---------- ---------- ---------- ----------
Total non-interest
income 271,066 329,516 560,928 558,972
Non-interest expense:
Compensation and benefits 522,183 508,195 1,134,454 997,405
Occupancy and equipment 160,031 115,166 322,284 227,196
Deposit insurance premiums 13,328 11,550 37,995 23,100
Other 253,250 309,562 505,712 504,646
---------- ---------- ---------- ----------
Total non-interest expense 948,792 944,473 2,000,445 1,752,347
---------- ---------- ---------- ----------
Income before income
taxes 537,625 499,517 961,349 1,046,282
Income taxes 235,921 193,605 402,815 405,605
---------- ---------- ---------- ----------
Net income $ 301,704 $ 305,912 $ 558,534 $ 640,677
========== ========== ========== ==========
Basic earnings per share $ 0.22 $ 0.19 $ 0.41 $ 0.39
========== ========== ========== ==========
Diluted earnings per share$ 0.22 $ 0.19 $ 0.41 $ 0.39
========== ========== ========== ==========
Dividends declared per
share $ 0.115 $ 0.11 $ 0.23 $ 0.21
========== ========== ========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
2
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000
(unaudited)
Six Months Ended
June 30,
---------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 558,534 $ 640,677
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 50,004 30,000
Depreciation 161,232 115,185
ESOP shares committed to be released 92,614 77,552
MRDP shares vested 97,890 95,274
Gain on sale of investments and mortgage-
backed securities -- (150,171)
Gain on sale of loans (143,805) --
Stock dividends reinvested in Federal
Home Loan Bank (52,600) (23,800)
Proceeds from sales of loans 10,881,380 --
Origination of loans held for sale (13,885,736) --
Decrease (increase) in accrued interest
receivable (90,181) 13,501
Decrease (increase) in prepaid expenses
and other assets 79,233 (61,004)
Increase (decrease) in accrued expenses
and other liabilities (46,827) 34,843
----------- -----------
Net cash (used) provided by
operating activities (2,298,262) 772,057
----------- -----------
Cash flows from investing activities:
Net change in loans receivable (4,459,360) (10,711,094)
Proceeds from sale of mortgage-backed
securities available-for-sale -- 4,407,853
Principal payments on mortgage-backed
securities held-to maturity -- 748,036
Proceeds from sale of securities available-
for-sale -- 2,167,738
Principal payments on mortgage-backed
securities available-for-sale 4,231,889 2,613,169
Purchases of premises and equipment (107,696) (1,134,169)
----------- -----------
Net cash used in investing activities (335,167) (1,908,467)
----------- -----------
Cash flows from financing activities:
Net change in deposits 5,757,389 2,606,419
Repayment of note payable (32,543) (29,805)
Net change in advances from borrowers for
taxes and insurance 239 61,579
Dividends paid (322,728) (380,248)
Proceeds from advances from FHLB 2,800,000 1,838,815
Purchase of treasury stock -- (2,457,271)
----------- -----------
Net cash provided by financing
activities 8,202,357 1,639,489
----------- -----------
Net increase in cash and cash equivalents 5,568,928 503,079
Cash and cash equivalents, beginning of period 2,647,700 2,372,119
----------- -----------
Cash and cash equivalents, end of period $ 8,216,628 $ 2,875,198
=========== ===========
Cash paid during the period for:
Interest $ 2,340,626 $ 1,818,222
Income taxes 256,301 435,000
=========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
3
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
Note 1 Basis of Presentation
---------------------
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America 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, 2000.
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, 2001, and
2000 are not necessarily indicative of the results which may be expected for
an entire year or any other period.
In June 2000, the Financial Accounting standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 138, "Accounting for Derivative
Instruments and Hedging Activities," an amendment to SFAS No. 133. SFAS No.
133 and SFAS No. 138 established accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. These standards require that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. As of June 30, 2001, the
Company was not engaged in hedging activities nor did it hold derivative
instruments that will require adjustments to carrying values under FAS No. 133
and No. 138. The Company adopted the standards on January 1, 2001 and the
impact of the adoption was not material. Upon adoptions of SFAS No. 133, the
Company transferred held-to-maturity securities with amortized costs of
$5,024,454 and market value of $5,067,695 into the available-for-sale
securities category. The $43,241 unrealized gain was recorded as a component
of comprehensive income as a transaction adjustment on January 2, 2001.
4
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 for the noted periods:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
$ 475,025 $ 265,723 $ 817,059 $ 348,894
========= ========= ========= =========
As a result of the transfer of held-to-maturity securities to
available-for-sale comprehensive income was increased by $26,204 during the
six months ended June 30, 2001.
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, 2001, the weighted-average of allocated
shares and committed to be released ESOP shares was 47,843 and 4,032. There
were 64,941 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, 2001 and 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:
For the six months ended June 30
---------------------------------------------------------------------------
2001 2000
------------------------------------ -------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
<s> <c> <c> <c> <c> <c> <c>
Basic EPS
Net income available
to common stockholders $558,534 1,372,776 $0.41 $ 640,677 1,653,888 $0.39
Effect of Dilutive Securities
Stock Options - granted 3,639 --
Unvested MRDP shares 920 --
--------- ---------
Diluted EPS
Income available to common
stockholders plus assumed
conversion $558,534 1,377,335 $0.41 $ 640,677 1,653,888 $0.39
======== ========= ===== ========= ========= =====
5
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
For the three months ended June 30
---------------------------------------------------------------------------
2001 2000
------------------------------------ -------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
<s> <c> <c> <c> <c> <c> <c>
Basic EPS
Net income available
to common stockholders $301,704 1,376,052 $0.22 $ 305,912 1,587,136 $0.19
Effect of Dilutive Securities
Stock Options - granted 4,391 --
Unvested MRDP shares 1,077 --
--------- ---------
Diluted EPS
Income available to common
stockholders plus assumed
conversion $301,704 1,381,520 $0.22 $ 305,912 1,587,136 $0.19
======== ========= ===== ========= ========= =====
Note 4 Cash Dividend Declared
----------------------
On July 24, 2001, the Board of Directors declared a quarterly cash dividend of
$.115 per common share to stockholders of record on August 17, 2001 payable on
August 31, 2001.
Note 5 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory capital
requirements of June 30, 2001 (dollars in thousands):
Percentage
Amount of Assets
------ ----------
GAAP capital(1) $ 29,302 21.80%
======== =====
Tangible capital $ 27,045 20.66%
Tangible capital requirement 1,964 1.50%
-------- -----
Excess $ 25,081 19.16%
======== =====
Core capital $ 27,045 20.66%
Core capital requirement 5,237 4.00%
-------- -----
Excess $ 21,808 16.66%
======== =====
Total risk-based capital(2) $ 28,568 37.36%
Total risk-based capital
requirement(2) 6,117 8.00%
-------- -----
Excess $ 22,451 29.36%
======== =====
(1) Empire's GAAP capital includes unrealized gains on
certain available-for-sale securities of $1,821,000 and
$436,000 of investments in Dime, which are excluded for
purposes of calculating both tangible and core capital.
(2) Based on risk-weighted assets of $76,462,000.
6
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Note 6 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.
7
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information as of and
for the six months ended June 30, 2001 and 2000.
2001: Empire Dime Other Consolidated
------ ---- ----- ------------
Net interest income $ 2,389,791 6,517 54,562 2,450,870
Non-interest income 428,390 271,188 (138,650) 560,928
------------ -------- ---------- -----------
Total income 2,818,181 277,705 (84,088) 3,011,798
Provision for loan losses 50,004 -- -- 50,004
Other non-interest expense 1,620,918 283,962 95,565 2,000,445
------------ -------- ---------- -----------
Income (loss) before
income taxes 1,147,259 (6,257) (179,653) 961,349
Income taxes 461,241 -- (58,426) 402,815
------------ -------- ---------- -----------
Net income $ 686,018 (6,257) (121,227) 558,534
============ ======== ========== ===========
Assets $134,527,558 475,790 (607,702) 134,395,646
Net loans 84,772,093 -- -- 84,772,093
Deposits 83,879,138 -- (455,105) 83,424,033
Stockholders' equity 29,301,862 436,067 (137,872) 29,600,057
============ ======== ========== ===========
2000:
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 (loss) 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
============ ======== ========== ===========
8
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information for the
three months ended June 30, 2001 and 2000.
2001: Empire Dime Other Consolidated
------ ---- ----- ------------
Net interest income $ 2,389,791 6,517 54,562 2,450,870
Net interest income $ 1,209,553 3,126 27,674 1,240,353
Non-interest income 254,271 135,554 (118,759) 271,066
------------ -------- ---------- -----------
Total income 1,463,824 138,680 (91,085) 1,511,419
Provision for loan losses 25,002 -- -- 25,002
Other non-interest expense 799,286 139,815 9,691 948,792
------------ -------- ---------- -----------
Income (loss) before
income taxes 639,536 (1,135) (100,776) 537,625
Income taxes 266,001 -- (30,080) 235,921
------------ -------- ---------- -----------
Net income $ 373,535 (1,135) ( 70,696) 301,704
============ ======== ========== ===========
2000:
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 (loss) 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
============ ======== ========== ===========
9
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. In the past, the Bank considered
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. During the second
quarter of 2001, the Bank notified the Office of Thrift Supervision of its
intention to open a de novo branch in Missoula in late 2001 or early 2002.
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 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 six 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,
10
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 the proposed new branch in
Missoula coupled with 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 $9.3 million, or 7.5%, from
$125.1 million at December 31, 2000 to $134.4 million at June 30, 2001.
Effective January 1, 2001, the Company transferred held-to-maturity securities
with amortized costs of $5.0 million to the available-for-sale securities
category as allowed by Statement of Financial Accounting Standard No. 133.
Investment and mortgage-backed securities available-for-sale, after
reclassification on January 1, 2001, decreased $3.8 million, or 11.1%, from
$34.4 million at December 31, 2000 to $30.6 million at June 30, 2001 as the
result of maturities and payments of $4.2 million offset by an increase in
market value of $423,812.
Net loans increased $4.4 million, or 5.5%, from $80.4 million at December 31,
2000 to $84.8 million at June 30, 2001.
Deposits increased $5.8 million or 7.4%, from $77.7 million at December 31,
2000 to $83.4 million at June 30, 2001.
Premises and equipment decreased by $54,000 from $3.7 million at December 31,
2000 to $3.6 million at June 30, 2001 as the result of depreciation of
$161,000 offset by purchases of $108,000.
Stockholders' equity increased from $28.9 million at December 31, 2000, to
$29.6 million at June 30, 2001. The change is the result of net income of
$559,000, the release of ESOP shares in the amount of $93,000 and an increase
of $259,000 related to the market value of securities available-for-sale. In
addition, 6,177 shares of MRDP vested and unearned MRDP compensation was
reduced by $98,000. Stockholders' equity was also decreased by the payments
of $323,000 in dividends.
11
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Asset Quality
At June 30, 2001, the Bank had no nonaccrual loans. At June 30, 2001, the
Bank had nineteen loans delinquent over 30 days amounting to $3.2 million of
which five loans amounting to $376,000 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.
Comparison of Results of Operations for the Six Months Ended June 30, 2001 and
2000
Net Income. Net income decreased by $82,000 from $641,000 for the six months
ended June 30, 2000 to $559,000 for the six months ended June 30, 2001.
Increased costs associated with the new branch facility and the loan
production office are the main cause of the decrease. The following narrative
discusses the various components of the change.
Net Interest Income. Net interest income increased $181,000, or 8.0%, from
$2.3 million for the six months ended June 30, 2000 to $2.5 million for the
same period in 2001. The interest rate spread decreased from 2.96% for the
six months ended June 30, 2000 to 2.92% for the comparable period in 2001.
Interest Income. Total interest income increased by $620,000, or 14.9% from
$4.2 million for the six months ended June 30, 2000 to $4.8 million for the
same period in 2001. The increase was primarily attributable to an increase
in average interest earning assets of $11.9 million, or 10.9% from $109.8
million for the six months ended June 30, 2000 as compared to the comparable
period in 2001. Average outstanding loans increased $21.7 million offset by
decreases in the average outstanding balances of investments and
mortgage-backed securities of $9.6 million. The yield on interest earning
assets for the six months ended June 30, 2001, was 7.9% as compared to 7.6%
for the comparable period in 2000.
Interest Expense. Total interest expense was $2.3 million for the six months
ended June 30, 2001, as compared to $1.9 million for the same period in 2000.
Interest on deposits increased by $198,000, or 12.5%, and interest on notes
payable and other debt increased by $241,000, or 77.1%.
Average deposits for the six months ended June 30, 2001 amounted to $75.1
million as compared to $71.5 million for the same period in 2000. In addition
to the increase in average deposits, the cost of deposits increased from 4.4%
for the six months ended June 30, 2000 to 4.7% for the same period in 2001
reflecting a general increase in interest rates in the Bank's markets.
Other interest expense of $554,000 for the six months ended June 30, 2001
includes $530,000 related to borrowings from the FHLB and $23,000 associated
with other debt. Other interest
12
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
expense for the comparable period in 2000 included $286,000 related to FHLB
borrowings and $26,000 associated with other debt.
Provision for Loan Losses. The provision for loan losses was $50,004 for six
months ended June 30, 2001 as compared to $30,000 for the same period in 2000.
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 .45% at June 30,
2001, and .36% at June 30, 2000. 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 was $561,000 for the six months
ended June 30, 2001, as compared to $559,000 for the same period in 2000.
During the six months ended June 30, 2001, the Bank recorded $144,000 in gains
on sale of loans. This gain is the result of the Bank's activity in
underwriting mortgage loans for sale in the secondary market. There were only
nominal sales to the secondary market during the six-month period ended June
30, 2000.
During the six months ended June 30, 2000, the Bank had $150,000 in gain on
the sale of investments as compared to no sales of securities for the
comparable period in 2001.
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $265,000 and $252,000 were
received for the six months ended June 30, 2001 and 2000, respectively.
Non-Interest Expense. Total non-interest expense increased $248,000 or 14.2%
for the six months ended June 30, 2001, compared to the same period in 2000.
Included in this increase is a $137,000 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 $95,000 for the six months ended
June 30, 2000 to $322,000 for the comparable period in 2001 primarily as the
result of additional cost associated with the new branch facility.
Income Taxes. The effective combined federal and state tax rate was 41.9%
and 38.8% for the six months ended June 30, 2001 and 2000, respectively. The
primary difference between the expected and actual tax calculation relates to
state taxes and the mark-to-market adjustment on ESOP shares committed to be
released.
13
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended June 30, 2001
and 2000
Net Income. Net income decreased by $4,000 to $302,000 for the three months
ended June 30, 2001. The following narrative discusses the various components
of the change.
Net Interest Income. Net interest income increased $111,000, or 9.8%, from
$1.1 million for the three months ended June 30, 2000 to $1.2 million for the
same period in 2001. The interest rate spread decreased from 3.02% for the
three months ended June 30, 2000 to 2.93% for the comparable period in 2001.
Interest Income. Total interest income increased by $326,000, or 15.6% from
$2.1 million for the three months ended June 30, 2000 to $2.4 million for the
same period in 2001. The increase was primarily attributable to an increase
in average interest earning assets of $15.2 million, or 14.0% from $108.4
million for the three months ended June 30, 2000 as compared to $123.6 million
for the comparable period in 2001. Average outstanding loans increased $21.6
million offset by decreases in the average outstanding balances of investments
and mortgage-backed securities of $6.6 million. The yield on interest earning
assets for the three months ended June 30, 2001, was 7.8% as compared to 7.7%
for the comparable period in 2000.
Interest Expense. Total interest expense was $1.2 million for the three
months ended June 30, 2001, as compared to $959,000 for the same period in
2000. Interest on deposits increased by $98,000, or 12.2%, and interest on
notes payable and other debt increased by $118,000, or 73.6%.
Average deposits for the three months ended June 30, 2001 amounted to $76.2
million as compared to $71.8 million for the same period in 2000. In addition
to the increase in average deposits, the cost of deposits increased from 4.5%
for the three months ended June 30, 2000 to 4.7% for the same period in 2001
reflecting a general increase in interest rates in the Bank's markets.
Other interest expense of $277,000 for the three months ended June 30, 2001
includes $266,000 related to borrowings from the FHLB and $11,000 associated
with other debt. Other interest expense for the comparable period in 2000
included $147,000 related to FHLB borrowings and $13,000 associated with other
debt.
Provision for Loan Losses. The provision for loan losses was $25,002 for
three months ended June 30, 2001 as compared to $15,000 for the same period in
2000. 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 .45%
at June 30, 2001, and .36% at June 30, 2000.
Non-Interest Income. Non-interest income decreased $58,000 for the three
months ended June 30, 2001, as compared to the same period in 2000 as the
result of several factors. During the three months ended June 30, 2001, the
Bank recorded $62,000 in gains on sale of loans. This gain is the result of
the Bank's activity in underwriting mortgage loans for sale in the secondary
market. There were only nominal sales to the secondary market during the
three-month period ended June 30, 2000. Customer service charges decreased
$19,000 from $90,000 for the three months ended June 30, 2000 to $71,000 for
the comparable period in 2001.
During the three months ended June 30, 2000, the Bank had a gain of $101,000
on the sale of investments as compared to no sales of securities for the
comparable period in 2001.
14
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Insurance commissions received from Dime are the largest component of
non-interest income. Insurance commissions of $136,000 and $130,000 were
received for the three months ended June 30, 2001 and 2000, respectively.
Non-Interest Expense. Total non-interest expense increased $4,000 for the
three months ended June 30, 2001, compared to the same period in 2000.
Included in this change is a $14,000 decrease in compensation expense.
Occupancy expense increased from $115,000 for the three months ended June 30,
2000 to $160,000 for the comparable period in 2001 primarily as the result of
additional cost associated with the new branch facility.
Income Taxes. The effective combined federal and state tax rate was 43.9% and
38.8% for the three months ended June 30, 2001 and 2000, respectively. The
primary difference between the expected and actual tax calculation relates to
state taxes and the mark-to-market adjustment on ESOP shares committed to be
released.
15
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)
9.1 Employment Agreement with Kenneth P. Cochran(4)
10.2 Employment Agreement with William H. Ruegamer (3)
10.2a Contract Extension with William H. Ruegamer(5)
10.2b Contract Extension with William H. Ruegamer
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)
(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.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the three months ended June 30, 2000.
(b) Report on Form 8-K
No Form 8-K's were filed during the quarter ended June 30,
2001.
16
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 10, 2001
------------------------------------- ---------------
William H. Ruegamer Date
President & Chief Executive Officer
(Principal Executive Officer)
By s/s Linda M. Alkire August 10, 2001
------------------------------------- ---------------
Linda M. Alkire Date
Treasurer & Chief Financial Officer
17
Exhibit 10.2b
EXTENSION TO EMPLOYMENT AGREEMENT
The EMPLOYMENT AGREEMENT dated the 6th day of January, 1999, between
EMPIRE BANK, formerly known as EMPIRE FEDERAL SAVINGS BANK, 123 South Main
Street, P. O. Box 1099, Livingston, MT 59047; and WILLIAM H. RUEGAMER, of 439
Old Clyde Park Road, Livingston, MT 59047, is extended by three (3) years, and
shall continue for a period of thirty-six (36) full calendar months after
January 6, 2002, upon the same terms and conditions set forth in said
Employment Agreement dated January 6, 1999.
DATED this 24TH day of July, 2001.
EMPIRE BANK
By s/s Edwin H. Doig
--------------------------
Its Chairman
ATTEST:
s/s Ann Worthington
- -------------------
(SEAL)
s/s William H. Ruegamer
---------------------------
WILLIAM H. RUEGAMER
WITNESS:
s/s Kenneth P. Cochran
- ----------------------