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, 2001
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
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(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, 2001: 1,507,643
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 September 30, 2001 and
December 31, 2000 (unaudited)................................. 1
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2001 and 2000 (unaudited)..... 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 ............................................ 17
Item 2. Changes in Securities ........................................ 17
Item 3. Defaults upon Senior Securities .............................. 17
Item 4. Submission of Matters to a Vote of Security Holders .......... 17
Item 5. Other Information ............................................ 17
Item 6. Exhibits and Reports on Form 8-K ............................. 17
SIGNATURES ............................................................ 18
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Part I, Item 1 - Financial Statements
- -------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
(unaudited)
September 30, December 31,
Assets 2001 2000
------ ------------- ------------
Cash and due from banks $ 4,427,862 $ 2,482,564
Interest-bearing deposits 19,181,139 165,136
------------ ------------
Cash and cash equivalents 23,609,001 2,647,700
Investment and mortgage-backed securities
available-for-sale 28,194,310 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 85,716,663 80,362,737
Loans held for sale 4,201,639 1,497,244
Stock in Federal Home Loan Bank of Seattle,
at cost 1,641,700 1,560,700
Accrued interest receivable 618,653 528,281
Premises and equipment, net 4,283,028 3,719,566
Prepaid expenses and other assets 310,617 352,188
------------ ------------
Total assets $148,575,611 $125,067,265
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Demand deposits $ 4,486,961 $ 1,630,238
NOW accounts 10,067,218 11,487,266
Money market 14,225,219 11,261,730
Regular savings 10,433,035 11,199,567
Certificates of deposit 60,708,994 42,087,843
------------ ------------
Total deposits 99,921,427 77,666,644
Advances from Federal Home Loan Bank
and other borrowed funds 17,000,000 16,200,000
Note payable 481,385 530,749
Advances from borrowers for taxes and
insurance 372,987 286,086
Accrued expenses and other liabilities 1,755,914 1,468,565
------------ ------------
Total liabilities 119,531,713 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 25,309,899 25,278,214
Unearned ESOP and MRDP compensation (1,713,082) (1,928,091)
MRDP shares acquired (258,864) (302,011)
Retained earnings, substantially restricted 18,720,700 18,351,208
Accumulated other comprehensive income, net 1,851,257 1,562,363
Treasury shares acquired, at cost,
1,084,457 shares at September 30, 2001
and 1,029,957 at December 30, 2000 (14,891,933) (14,072,383)
------------ ------------
Total stockholders' equity 29,043,898 28,915,221
------------ ------------
Total liabilities and stockholders'
equity $148,575,611 $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 Nine Months Ended September 30, 2001 and 2000
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans receivable $1,853,292 $1,546,763 $5,561,833 $4,248,753
Mortgage-backed securities 390,039 575,498 1,381,385 1,879,342
Investment securities 8,514 26,053 24,633 109,623
Other 144,386 28,074 209,147 99,179
---------- ---------- ---------- ----------
Total interest income 2,396,231 2,176,388 7,176,998 6,336,897
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,035,882 858,734 2,811,937 2,436,900
Note payable and other 247,977 193,479 801,819 506,165
---------- ---------- ---------- ----------
Total interest expense 1,283,859 1,052,213 3,613,756 2,943,065
---------- ---------- ---------- ----------
Net interest income 1,112,372 1,124,175 3,563,242 3,393,832
---------- ---------- ---------- ----------
Provision for loan losses 25,002 15,000 75,006 45,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,087,370 1,109,175 3,488,236 3,348,832
Non-interest income:
Insurance commission income 168,160 146,687 433,387 399,134
Customer service charges 71,957 86,825 211,476 225,324
Gain on sale of investments,
net - 34,441 - 184,613
Gain on sale of loans 135,438 - 279,243 -
Other 4,495 1,629 16,871 19,483
---------- ---------- ---------- ----------
Total non-interest income 380,050 269,582 940,977 828,554
Non-interest expense:
Compensation and benefits 540,713 529,067 1,675,168 1,526,472
Occupancy and equipment 152,829 127,056 475,113 354,252
Deposit insurance premiums 13,326 13,350 51,321 36,450
Other 231,490 211,723 737,201 716,369
---------- ---------- ---------- ----------
Total non-interest expense 938,358 881,196 2,938,803 2,633,543
---------- ---------- ---------- ----------
Income before income taxes 529,062 497,561 1,490,410 1,543,843
Income taxes 234,233 194,750 637,047 600,355
---------- ---------- ---------- ----------
Net income $ 294,829 $ 302,811 $ 853,363 $ 943,488
========== ========== ========== ==========
Basic earnings per share $ 0.21 $ 0.21 $ 0.62 $ 0.59
========== ========== ========== ==========
Diluted earnings per share $ 0.21 $ 0.21 $ 0.62 $ 0.59
========== ========== ========== ==========
Dividends declared per share $ 0.115 $ 0.11 $ 0.345 $ 0.33
========== ========== ========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
2
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000
(unaudited)
Nine Months Ended
September 30,
---------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 853,363 $ 943,488
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 75,006 45,000
Depreciation 246,524 186,120
ESOP shares committed to be released 142,743 121,489
MRDP shares vested 147,097 142,911
Gain on sale of investments - (184,613)
Gain on sale of loans (279,243) -
Stock dividends reinvested in Federal
Home Loan Bank (81,000) (72,200)
Proceeds from sales of loans 21,004,970 -
Origination of loans held for sale (23,430,122) -
Increase in accrued interest receivable (90,371) (37,241)
Decrease (increase) in prepaid expenses and
other assets 41,571 (118,921)
Increase in accrued expenses and other
liabilities 102,648 36,702
----------- ----------
Net cash (used) provided by operating
activities (1,266,814) 1,062,735
----------- ----------
Cash flows from investing activities:
Net change in loans receivable (5,428,932) (15,935,273)
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
Proceeds from sale of securities available-for-sale - 2,202,984
Principal payments on mortgage-backed securities
available-for-sale 6,678,134 4,319,589
Purchases of premises and equipment (809,985) (1,200,690)
----------- ----------
Net cash used in investing activities 439,217 (5,135,270)
----------- ----------
Cash flows from financing activities:
Net change in deposits 22,254,783 4,189,092
Repayment of note payable (49,364) (45,228)
Net change in advances from borrowers for taxes
and insurance 86,900 177,685
Dividends paid (483,871) (554,361)
Proceeds from advances from FHLB 800,000 6,013,015
Purchase of treasury stock (819,550) (5,632,921)
----------- ----------
Net cash provided by financing activities 21,788,898 4,147,282
----------- ----------
Net increase in cash and cash equivalents 20,961,301 74,747
Cash and cash equivalents, beginning of period 2,647,700 2,372,119
----------- ----------
Cash and cash equivalents, end of period $23,609,001 $2,446,866
=========== ==========
Cash paid during the period for:
Interest $ 3,589,575 $2,919,000
Income taxes 576,067 603,00
=========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
3
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated Financial Statements
September 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
nine months ended September 30, 2001, and 2000 are not necessarily
indicative of the results that 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 September 30, 2001, the Company was not
engaged in hedging activities nor did it hold derivative
instruments that will require adjustments to carrying values under
SFAS No. 133 and No. 138. The Company adopted the standards on
January 1, 2001 and the impact of the adoption was not material.
Upon adoption 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 1,
2001.
4
EMPIRE FEDERAL BANCORP, INC. AND SUBISIARIES
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
$ 325,198 $ 847,075 $1,142,257 $1,195,969
--------- --------- ---------- ----------
As a result of the transfer of held-to-maturity securities to
available-for-sale comprehensive income was increased by $26,204
during the nine months ended September 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 that 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, 2001, the
weighted-average of allocated shares and committed to be released
ESOP shares was 47,843 and 5,760. There were 68,052 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, 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 nine months ended September 30
------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ --------- ---------- ------ ---------
Basic EPS
Net income
available to
common
stockholders $853,363 1,374,112 $0.62 $943,488 1,593,899 $0.59
======== ===== ======== =====
Effect of
Dilutive Securities
Stock Options
- granted 4,258 786
Unvested MRDP shares 1,028 149
--------- ----------
Diluted EPS
Income available
to common
stockholders
plus assumed
conversion $853,363 1,379,398 $0.62 $943,488 1,594,834 $0.59
======== ========= ===== ======== ========= =====
5
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
For the three months ended September 30
---------------------------------------------------------
2001 2000
---------------------------- ---------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ -------- ---------- ------ -------
BASIC EPS
Net income available
to common
stockholders $294,829 1,376,809 $0.21 $302,811 1,470,953 $0.21
EFFECT OF DILUTIVE
SECURITIES
Stock Options
- granted 5,497 2,306
Unvested MRDP
shares 1,245 447
-------- ---------
DILUTED EPS
Income available to
common stockholders
plus assumed
conversion $294,829 1,383,551 $0.21 $302,811 1,473,706 $0.21
=========== ======== ====== =========== ========= ======
Note 4 Cash Dividend Declared
----------------------
On October 23, 2001, the Board of Directors declared a quarterly cash
dividend of $.115 per common share to stockholders of record on
November 16, 2001 payable on November 30, 2001.
Note 5 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory
capital requirements as of September 30, 2001 (dollars in thousands):
Percentage
Amount of Assets
------ ----------
GAAP capital(1) $ 28,935 19.48%
======= ======
Tangible capital $ 26,614 18.33%
Tangible capital requirement 2,178 1.50%
------- ------
Excess $ 24,436 16.83%
======= ======
Core capital $ 26,614 18.33%
Core capital requirement 5,807 4.00%
------- ------
Excess $ 20,807 14.33%
======= ======
Total risk-based capital(2) $ 28,182 34.97%
Total risk-based capital requirement(2) 6,447 8.00%
------- ------
Excess $ 21,735 26.97%
======= ======
(1) Empire's GAAP capital includes unrealized gains on
certain available-for-sale securities of $1,851,000
and $470,000 of investments in Dime, which are
excluded for purposes of calculating both tangible
and core capital.
(2) Based on risk-weighted assets of $80,586,000.
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 nine months ended September 30, 2001 and 2000.
2001: EMPIRE DIME OTHER CONSOLIDATED
------ ---- ----- ------------
Net interest income $ 3,470,905 9,310 83,027 3,563,242
Non-interest income 702,987 439,348 (201,358) 940,977
Total income 4,173,892 448,658 (118,331) 4,504,219
----------- -------- --------- -----------
Provision for loan
losses 75,006 - - 75,006
Other non-interest
expense 2,344,341 417,490 176,972 2,938,803
----------- -------- --------- -----------
Income (loss) before
income taxes 1,754,545 31,168 (295,303) 1,490,410
Income taxes 716,042 3,151 (82,146) 637,047
----------- -------- --------- -----------
Net income $ 1,038,503 28,017 (213,157) 853,363
=========== ======== ========= ===========
Assets $148,674,974 544,547 (643,910) 148,575,611
Net loans 89,918,302 - - 89,918,302
Deposits 100,218,733 - (297,306) 99,921,427
Stockholders' equity 28,934,715 470,341 (361,158) 29,043,898
=========== ======== ========= ===========
2000:
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
=========== ======== ========= ===========
8
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information for the
three months ended September 30, 2001 and 2000.
2001: EMPIRE DIME OTHER CONSOLIDATED
---------- ------- -------- ------------
Net interest income $1,081,114 2,793 28,465 1,112,372
Non-interest income 274,597 168,160 (62,707) 380,050
---------- -------- -------- ----------
Total income 1,355,711 170,953 (34,242) 1,492,422
Provision for loan
losses 25,002 - - 25,002
Other non-interest
expense 723,423 133,528 81,407 938,358
---------- -------- -------- ----------
Income (loss) before
income taxes 607,286 37,425 (115,649) 529,062
Income taxes 254,801 3,151 (23,719) 234,233
---------- -------- -------- ----------
Net income $ 352,485 34,274 (91,930) 294,829
========== ======== ======== ==========
2000:
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
========== ======== ======== ==========
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'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 level of
other income and expenses also affects the Bank's profitability. 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
EMPIRES 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 sales to the secondary market,
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 $23.5 million, or 18.8%, from
$125.1 million at December 31, 2000 to $148.6 million at September 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 $6.2 million, or 18.0%, from
$34.4 million at December 31, 2000 to $28.2 million at September 30, 2001 as
the result of maturities and payments of $6.7 million offset by an increase in
market value of $473,595.
Net loans increased $5.4 million, or 6.7%, from $80.4 million at December 31,
2000 to $85.7 million at September 30, 2001.
Deposits increased $22.3 million or 28.7%, from $77.7 million at December 31,
2000 to $99.9 million at September 30, 2001. This increase is the result of a
program to attract depositors in all of the Bank's market. The majority of
this increase in deposits was in one to two year certificates of deposits.
A majority of the increase in deposits has been temporarily invested in
interest bearing deposits, which amounted to $19.2 million at September 30,
2001 as compared to $165,000 at December 31, 2000.
Premises and equipment increased by $563,000 from $3.7 million at December 31,
2000 to $4.3 million at September 30, 2001 as the result of purchases of
$810,000, which includes the purchase of $649,000 for property in Missoula for
a planned branch. Depreciation of $247,000 offset this increase.
11
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Stockholders' equity increased from $28.9 million at December 31, 2000, to
$29.0 million at September 30, 2001. The change is the result of net income
of $853,000, the release of ESOP shares in the amount of $143,000 and an
increase of $289,000 related to the market value of securities
available-for-sale. In addition, 9,291 shares of MRDP vested and unearned
MRDP compensation was reduced by $147,000. Stockholders' equity was also
decreased by the payments of $484,000 in dividends. During the nine months
ended September 30, 2001, the Company repurchased 54,500 shares of its common
stock in the open market at an average price of $15.04 per share for a total
of $820,000. There were 1,084,457 shares held in treasury at September 30,
2001 with an average price of $13.73. Book value per share at September 30,
2001 was $19.26.
Asset Quality
At September 30, 2001, the Bank had no nonaccrual loans. At September 30,
2001, the Bank had twenty-nine loans delinquent over 30 days amounting to $5.5
million of which six loans amounting to $2.6 million 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 Nine Months Ended September 30,
2001 and 2000
Net Income. Net income decreased by $90,000 from $943,000 for the nine months
ended September 30, 2000 to $853,000 for the nine months ended September 30,
2001. The following narrative discusses the various components of the change.
Net Interest Income. Net interest income increased $169,000, or 5.0%, from
$3.4 million for the nine months ended September 30, 2000 to $3.6 million for
the same period in 2001. The interest rate spread decreased from 2.92% for
the nine months ended September 30, 2000 to 2.72% for the comparable period in
2001.
Interest Income. Total interest income increased by $840,000, or 13.3% from
$6.3 million for the nine months ended September 30, 2000 to $7.2 million for
the same period in 2001. The increase was primarily attributable to an
increase in average interest earning assets of $15.5 million, or 14.0% from
$110.4 million for the nine months ended September 30, 2000 as compared to the
comparable period in 2001. Average outstanding loans increased $20.0 million
offset by decreases in the average outstanding balances of investments and
mortgage-backed securities of $9.0 million. The yield on interest earning
assets for the nine months ended September 30, 2001, was 7.6% as compared to
7.7% for the comparable period in 2000.
12
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Interest Expense. Total interest expense was $3.6 million for the nine months
ended September 30, 2001, as compared to $2.9 million for the same period in
2000. Interest on deposits increased by $375,000, or 15.4%, and interest on
notes payable and other debt increased by $296,000, or 58.4%.
Average deposits for the nine months ended September 30, 2001 amounted to
$79.4 million as compared to $72.3 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 nine months ended September 30, 2000 to 4.7% for the same
period in 2001 reflecting a general increase in the Bank's interest rates.
Continued increases in cost of deposits is projected for the three months
ending December 30, 2001 based on the significant increase in certificates of
deposit during the three months ended September 30, 2001.
Other interest expense of $802,000 for the nine months ended September 30,
2001 includes $767,000 related to borrowings from the FHLB and $35,000
associated with other debt. Other interest expense for the comparable period
in 2000 included $467,000 related to FHLB borrowings and $39,000 associated
with other debt. The weighted average interest rate on the FHLB advances was
5.06% and 6.07% at September 30, 2001 and 2000, respectively.
Provision for Loan Losses. The provision for loan losses was $75,000 for the
nine months ended September 30, 2001 as compared to $45,000 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 .48% at September 30, 2001, and .36% at September 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 $941,000 for the nine months
ended September 30, 2001, as compared to $829,000 for the same period in 2000.
During the nine months ended September 30, 2001, the Bank recorded $279,000 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 nine-month period ended
September 30, 2000.
During the nine months ended September 30, 2000, the Bank had $185,000 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 $433,000 and $399,000 were
received for the nine months ended September 30, 2001 and 2000, respectively.
13
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Non-Interest Expense. Total non-interest expense increased $305,000 or 11.6%
for the nine months ended September 30, 2001, compared to the same period in
2000. Included in this increase is a $149,000 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 $121,000 during the nine
months ended September 30, 2001 to $475,000 from the comparable period in 2000
primarily as the result of additional cost associated with the new branch
facility and loan production office.
Income Taxes. The effective combined federal and state tax rate was 42.7%
and 38.9% for the nine months ended September 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.
14
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended September 30,
2001 and 2000
Net Income. Net income decreased by $8,000 to $295,000 for the three months
ended September 30, 2001. The following narrative discusses the various
components of the change.
Net Interest Income. Net interest income decreased $12,000, or 1.0%, from
$1.1 million for the three months ended September 30, 2000. The interest rate
spread decreased from 2.93% for the three months ended September 30, 2000 to
2.34% for the comparable period in 2001.
Interest Income. Total interest income increased by $220,000, or 10.1% from
$2.2 million for the three months ended September 30, 2000 to $2.4 million for
the same period in 2001. The increase was primarily attributable to a $23.5
million increase in average interest earning assets. This is a 21.3% increase
from the same period in 2000. Included in the increase of average earning
assets is an increase of $16.9 million in average outstanding loans offset by
a $6.9 million decrease in other interest earning assets and mortgage-backed
securities.
Interest earning assets increased to $15.2 million for the three months ended
September 30, 2001. This is a $13.6 million increase for the comparable
period in 2000. This increase is the result of the Bank's program to attract
new deposits in all of its markets. These funds have been temporarily
invested in other earning assets and interest bearing deposits with the FHLB.
The yield on interest earning assets for the three months ended September 30,
2001 was 7.1% compared to 7.7% for the same period in 2000.
Interest Expense. Total interest expense was $1.3 million for the three
months ended September 30, 2001, as compared to $1.1 million for the same
period in 2000. Interest on deposits increased by $177,000, or 20.6%, and
interest on notes payable and other debt increased by $54,000, or 28.2%.
Average deposits for the three months ended September 30, 2001 amounted to
$88.0 million as compared to $73.9 million for the same period in 2000.
Included in the average deposits for the three months ended September 30, 2001
was $53.8 million in certificates of deposit as compared to $41.9 million for
the comparable period in 2000, an increase of $11.9 million or 28.4%. In
addition to the increase in average deposits, the cost of deposits increased
from 4.6% for the three months ended September 30, 2000 to 4.7% for the same
period in 2001 reflecting a general increase in the Bank's interest rates.
Continued increases in cost of deposits is projected for the three months
ending December 31, 2001 based on the significant increase in certificates of
deposit during the three months ended September 30, 2001.
Other interest expense of $248,000 for the three months ended September 30,
2001 includes $237,000 related to borrowings from the FHLB and $11,000
associated with other debt. Other interest expense for the comparable period
in 2000 included $181,000 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 September 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 .48% at September 30, 2001 and .36% at September 30, 2000.
Non-Interest Income. Non-interest income increased $110,000 for the three
months ended September 30, 2001, as compared to the same period in 2000 as the
result of several factors.
15
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
During the three months ended September 30, 2001, the Bank recorded $135,000
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
September 30, 2000. Customer service charges decreased $15,000 from $87,000
for the three months ended September 30, 2000 to $72,000 for the comparable
period in 2001.
During the three months ended September 30, 2000, the Bank had a gain of
$34,000 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 $168,000 and $147,000 were
received for the three months ended September 30, 2001 and 2000, respectively.
Non-Interest Expense. Total non-interest expense increased $57,000 for the
three months ended September 30, 2001, compared to the same period in 2000.
Included in this change is a $12,000 increase in compensation expense.
Occupancy expense increased from $127,000 for the three months ended September
30, 2000 to $153,000 for the comparable period in 2001 primarily as the result
of additional cost associated with the new branch facility and the loan
production office.
Income Taxes. The effective combined federal and state tax rate was 44.3% and
39.1% for the three months ended September 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.
16
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)
10.3 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, 2001.
(b) Report on Form 8-K No Form 8-K's were filed during the quarter
ended June 30, 2001.
17
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 November 13, 2001
------------------------- -------------------
William H. Ruegamer Date
President & Chief Executive Officer
(Principal Executive Officer)
By /s/ Linda M. Alkire November 13, 2001
-------------------------- -------------------
Linda M. Alkire Date
Treasurer & Chief Financial Officer
18