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 March 31, 2002
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 April 30, 2002: 1,507,643
Transitional Small Business Disclosure Format (check one): YES NO X
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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 March 31, 2002 and
December 31, 2001 (unaudited)............................ 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2001 (unaudited)......... 2
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2001 (unaudited)......... 3
Notes to Unaudited Interim Consolidated Financial
Statements............................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings........................................ 13
Item 2. Changes in Securities.................................... 13
Item 3. Defaults upon Senior Securities.......................... 13
Item 4. Submission of Matters to a Vote of Security Holders...... 13
Item 5. Other Information........................................ 13
Item 6. Exhibits and Reports on Form 8-K......................... 13
SIGNATURES........................................................... 14
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Part I, Item 1 - Financial Statements
- -------------------------------------
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(unaudited)
March 31, December 31,
Assets 2002 2001
------ -------------- --------------
Cash and due from banks $ 3,565,577 $ 4,185,664
Interest-bearing deposits 58,265,596 42,350,439
-------------- --------------
Cash and cash equivalents 61,831,173 46,536,103
Investment and mortgage-backed securities
available-for-sale 54,131,631 35,945,324
Loans receivable, net 75,026,890 81,151,598
Loans held for sale 3,769,971 4,089,014
Stock in Federal Home Loan Bank of
Seattle, at cost 1,695,300 1,670,600
Accrued interest receivable 809,820 629,245
Premises and equipment, net 5,034,582 4,596,212
Prepaid expenses and other assets 448,564 293,977
-------------- --------------
Total assets $ 202,747,931 $ 174,912,073
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Demand deposits 3,753,080 3,498,227
NOW accounts 17,334,013 12,211,546
Money market 35,420,947 21,351,363
Regular savings 12,154,516 11,124,193
Certificates of deposit 91,000,184 78,754,686
-------------- --------------
Total deposits 159,662,740 126,940,015
Advances from Federal Home Loan Bank
and other borrowed funds 13,000,000 17,000,000
Note payable - 464,306
Advances from borrowers for taxes and
insurance 320,186 245,522
Accrued expenses and other liabilities 1,548,109 1,389,112
-------------- --------------
Total liabilities 174,531,035 146,038,955
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 25,335,427 25,322,946
Unearned ESOP and MRDP compensation (1,540,498) (1,626,790)
MRDP shares acquired (258,864) (258,864)
Retained earnings, substantially
restricted 18,325,581 18,852,536
Accumulated other comprehensive income,
net 1,221,262 1,449,302
Treasury shares acquired, at cost,
1,084,457 shares at March 31, 2002 and
December 31, 2001 (14,891,933) (14,891,933)
-------------- --------------
Total stockholders' equity 28,216,896 28,873,118
-------------- --------------
Total liabilities and stockholders'
equity $ 202,747,931 $ 174,912,073
============== ==============
See accompanying notes to unaudited interim consolidated financial statements.
1
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001
(unaudited)
Three Months Ended
March 31
--------------------------------
2002 2001
----------- -----------
Interest income:
Loans receivable $ 1,559,987 $ 1,806,291
Mortgage-backed securities 374,396 523,460
Investment securities 127,199 7,523
Other 223,927 28,017
----------- -----------
Total interest income $ 2,285,509 $ 2,365,291
----------- -----------
Interest expense:
Deposits 1,389,798 878,267
FHLB advances and other borrowings 184,596 276,507
----------- -----------
Total interest expense 1,574,394 1,154,774
----------- -----------
Net interest income 711,115 1,210,517
Provision for loan losses 655,000 25,002
----------- -----------
Net interest income after provision
for loan losses 56,115 1,185,515
Non-interest income:
Insurance commission income 115,245 129,673
Customer service charges 64,341 68,083
Gain on sale of investments, net 125,789 -
Gain on sale of loans 94,949 82,262
Other 2,499 9,843
----------- -----------
Total non-interest income 402,823 289,861
Non-interest expense:
Compensation and benefits 568,179 612,271
Occupancy and equipment 167,629 162,252
Deposit insurance premiums 17,520 24,667
Other 296,263 252,462
----------- -----------
Total non-interest expense 1,049,591 1,051,652
----------- -----------
Income (loss) before income taxes (590,653) 423,724
Income taxes (benefit) (219,590) 166,894
----------- -----------
Net income (loss) $ (371,063) $ 256,830
=========== ===========
Basic earnings (loss) per share $ (0.28) $ 0.19
=========== ===========
Diluted earnings (loss) per share $ (0.28) $ 0.19
=========== ===========
Dividends declared per share $ 0.115 $ 0.115
=========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
2
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001
(unaudited)
Three Months Ended
March 31
--------------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (371,063) $ 256,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 655,000 25,002
Depreciation 88,580 83,539
ESOP shares committed to be released 49,566 44,845
MRDP shares vested 49,207 48,683
Gain on sale of investments and
mortgage-backed securities available
for sale (125,789) -
Gain on sale of loans (94,949) (82,262)
Amortization of premium & discounts
on mortgage-backed securities and
investment securities 64,902 8,838
Stock dividends reinvested in Federal
Home Loan Bank (24,700) (25,000)
Proceeds from sales of loans 8,363,101 5,023,067
Origination of loans held for sale (7,949,109) (4,940,805)
Increase in accrued interest
receivable (209,544) (51,714)
Increase in prepaid expenses
and other assets (154,587) (26,266)
Increase in accrued expenses and
other liabilities 304,792 68,419
------------ -----------
Net cash provided by operating
activities 645,407 433,176
------------ -----------
Cash flows from investing activities:
Net change in loans receivable 5,498,677 (4,977,321)
Proceeds from matured or called
investment securities available
for sale 2,000,000 -
Proceeds from sale of securities
available-for-sale 1,115,971 -
Principal payments on mortgage-backed
securities available-for-sale 3,181,980 1,530,566
Purchases of mortgage-backed securities
available-for-sale (3,248,493) -
Purchases of investment securities
available-for-sale (21,548,714) -
Purchases of premises and equipment (526,950) (36,408)
------------ -----------
Net cash used in investing
activities (13,527,529) (3,483,163)
------------ -----------
Cash flows from financing activities:
Net change in deposits 32,722,725 (902,600)
Repayment of note payable (464,306) (16,091)
Net change in advances from borrowers
for taxes and insurance 74,664 123,649
Dividends paid (155,891) (160,570)
Proceeds from advances from FHLB - 3,800,000
Repayment of advances from FHLB (4,000,000) -
------------ -----------
Net cash provided by financing
activities 28,177,192 2,844,388
------------ -----------
Net increase (decrease) in cash and
cash equivalents 15,295,070 (205,599)
Cash and cash equivalents, beginning
of period 46,536,103 2,647,700
------------ -----------
Cash and cash equivalents, end of
period $ 61,831,173 $ 2,442,101
============ ===========
Cash paid during the period for:
Interest $ 1,495,630 $ 1,221,943
Income taxes 10,000 29,000
============ ===========
See accompanying notes to unaudited interim consolidated financial statements.
3
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
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, 2001.
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 months ended
March 31, 2002, and 2001 are not necessarily indicative of the
results, which may be expected for an entire year or any other
period.
Note 2 Comprehensive Income
--------------------
The Company's only component of comprehensive income is the net
unrealized gains or losses on securities available-for-sale. The
following summarizes total comprehensive income(loss) for the noted
periods:
Three Months Ended March 31
-----------------------------
2002 2001
---- ----
($ 599,103) $ 342,035
========== ==========
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 March 31, 2002, included in the
weighted average calculations were 61,667 allocated shares, 2,304
committed to be released ESOP shares and 73,238 vested MRDP shares.
4
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 March 31, 2002 and 2001, 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 three months ended March 31
-----------------------------------------------------------
2002 2001
------------------------------ ---------------------------
Per-Share Per-Share
Net Loss Shares Amount Net Income Shares Amount
-------- ------ ------ ---------- ------ --------
Basic EPS
Net income (loss)
available to
common
stockholders $(371,063) 1,341,254 $(0.28) $256,830 1,369,507 $0.19
========= ====== ======== =====
Effect of Dilutive
Securities
Stock Options -
granted 5,234 2,887
Unvested MRDP
shares 990 762
--------- ---------
Diluted EPS
Income (loss)
available to
common
stockholders
plus assumed
conversion $(371,063) 1,347,478 $(0.28) $256,830 1,373,156 $0.19
========= ========= ====== ======== ========= =====
Note 4 Cash Dividend Declared
----------------------
On January 22, 2002, the Board of Directors declared a quarterly
cash dividend of $.115 per common share to stockholders of record on
February 14, 2002 payable on February 28, 2002.
Note 5 Capital Compliance
------------------
The following table presents Empire's compliance with its regulatory
capital requirements of March 31, 2002 (dollars in thousands):
Percentage
Amount of Assets
---------- ---------
GAAP capital(1) $ 27,987 13.81%
========= =====
Tangible capital $ 26,305 13.13%
Tangible capital requirement 3,006 1.50%
--------- -----
Excess $ 23,299 11.63%
========= =====
Core capital $ 26,305 13.13%
Core capital requirement 8,016 4.00%
--------- -----
Excess $ 18,289 9.13%
========= =====
Total risk-based capital(2) $ 28,304 31.89%
Total risk-based capital
requirement(2) 7,100 8.00%
--------- -----
Excess $ 21,204 23.89%
========= =====
5
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
(1) Empire's GAAP capital includes unrealized gains on
certain available-for-sale securities of $1,221,262
and $460,000 of investments in Dime, which are
excluded for purposes of calculating both tangible
and core capital.
(2) Based on risk-weighted assets of $88,851.
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 elimination 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.
Note 7 Critical Accounting Policies
----------------------------
Companies may apply certain critical accounting policies requiring
management to make subjective or complex judgments, often as a
result of the need to estimate the effect of matters that are
inherently uncertain. The Company considers its only critical
accounting policy to be the allowance for loan losses. The
allowance for loan losses is established through a provision for
loan losses charged against earnings. The balance of allowance for
loan losses are maintained at the amount management believes will be
adequate to absorb known and inherent losses in the loan portfolio.
The appropriate balance of allowance for loan losses is determined
by applying estimated loss factors to the credit exposure from
outstanding loans. Estimated loss factors are based on subjective
measurements including management's assessment of the internal risk
classifications of loans, changes in the nature of the loan
portfolio, industry concentrations and the impact of current local,
regional and national economic factors on the quality of the loan
portfolio. Changes in these estimates and assumptions are
reasonably possible and may have a material impact on the Company's
consolidated financial statements, results of operations or
liquidity.
6
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of selected operating segment information as of and
for the three months ended March 31, 2002 and 2001.
2002: Empire Dime Other Consolidated
------ ---- ----- -----------
Net interest income $ 684,512 1,887 24,716 711,115
Non-interest income 293,272 115,295 (5,744) 402,823
------------ ------- -------- -----------
Total income 977,784 117,182 18,972 1,113,938
Provision for loan
losses 655,000 - - 655,000
Other non-interest
expense 813,235 136,149 100,207 1,049,591
------------ ------- -------- -----------
Income (loss)
before income
taxes (490,451) (18,967) (81,235) (590,653)
Income taxes
(benefit) (188,600) - (30,990) (219,590)
------------ ------- -------- -----------
Net income (loss) $ (301,851) (18,967) (50,245) (371,063)
============ ======= ======== ===========
Assets 202,854,073 486,280 (592,422) 202,747,931
Net loans 78,796,862 - - 78,796,862
Deposits 160,024,530 - (361,790) 159,662,740
Stockholders' equity 27,986,714 460,814 (230,632) 28,216,896
============ ======= ======== ===========
2001:
Net interest income $ 1,180,238 3,391 26,888 1,210,517
Non-interest income 174,119 135,634 (19,892) 289,861
------------ -------- -------- -----------
Total income 1,354,357 139,025 6,996 1,500,378
Provision for loan
losses 25,002 - - 25,002
Other non-interest
expense 821,632 144,148 85,872 1,051,652
------------ -------- -------- -----------
Income before
income taxes 507,723 (5,123) (78,876) 423,724
Income taxes 195,240 - (28,346) 166,894
------------ -------- -------- -----------
Net income $ 312,483 (5,123) (50,530) 256,830
============ ======== ======== ===========
Assets $128,570,590 461,841 (606,738) 128,425,693
Net loans 85,289,353 - - 85,289,353
Deposits 77,347,723 - (583,679) 76,764,044
Stockholders' equity 28,755,006 437,202 (1,993) 29,190,215
============ ======== ======== ===========
7
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.
Special Note Regarding Forward-Looking Statements
Certain matters in this quarterly report on Form 10-QSB constitute forward-
looking statements within the meaning of the Private Securities Litigation Act
of 1995. These forward-looking statements relate to, among others,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market,
potential future credit experience, and statements regarding the Company's
business strategy. Specifically, the Company has changed its role as a
traditional mortgage lender to that of a commercial bank by increasing its
commercial and business lending during fiscal 2001. This reflects the
Company's new growth-oriented expansion strategy, which is to pursue internal
and external growth opportunities when management deems it appropriate. This
new strategy may subject the Company to a greater degree of risk. Risks
associated with his new business strategy include increased risk of losses on
loans, provision for 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.
These forward-looking statements are based upon current management
expectations, and may, therefore, involve risks and uncertainties. The
Company's actual results, performance, or achievements may differ materially
from those suggested, expressed, or implied by forward-looking statements due
to a wide range of factors including, but not limited to, the general business
environment, the direction of future interest rates, the local real estate
market, competitive conditions between banks and non-bank financial services
providers, regulatory changes, labor market competitiveness, and other risks
detailed in the Company's reports filed with the Securities and Exchange
Commission.
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 2001. In addition, the Bank opened a loan production office
in Missoula, Montana during the third quarter of 2000, which was converted to
a full service branch that opened during March 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
8
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
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 and
loans. 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 branches in Billings and 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. Further, during 2001 and the first quarter of 2002, the Bank has
undertaken an aggressive solicitation of deposits by paying higher than the
usual interest rates in its markets. Retention of these new depositors will
require an increased emphasis on personal service, more products and expanded
locations. The reinvestment of these new deposits into loans and investments
that will provide acceptable interest margins will be a critical element of
this part of the growth strategy. 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 investment of deposit
growth. There can be no assurance that the Company will be successful in
implementing this new business strategy or in managing growth.
9
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Financial Condition
Consolidated assets increased by approximately $27.8 million, or 15.9%, from
$174.9 million at December 31, 2001 to $202.7 million at March 31, 2002.
Short term interest bearing deposits, primarily with the FHLB, increased from
$42.4 million at December 31, 2001 to $58.3 million at March 31, 2002, an
increase of $15.9 million, or 37.6%.
Investment and mortgage-backed securities available-for-sale increased $18.2
million, or 50.6%, from $35.9 million at December 31, 2001 to $54.1 million at
March 31, 2002 as the result of purchases totaling $24.8 million offset by
maturities, sales and payments of $6.2 million and a decrease in market value
of $374,000.
Net loans decreased $6.4 million, or 7.6%, from $85.2 million at December 31,
2001 to $78.8 million at March 31, 2002.
Deposits increased $32.7 million or 25.8% from $126.9 million at December 31,
2001 to $159.7 million at March 31, 2002. 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 and money market
accounts. The increase in deposits has been invested primarily in short-term
interest bearing deposits and investments as previously noted.
Premises and equipment increased by $438,000 from $4.6 million at December 31,
2001 to $5.0 million at March 31, 2002 primarily as the result of costs of
$515,000 related to the construction of a new branch in Missoula.
Depreciation of $89,000 offset this increase.
Stockholders' equity decreased from $28.9 million at December 31, 2001, to
$28.2 million at March 31, 2002. The change is the result of net loss of
$371,000, the release of ESOP shares in the amount of $50,000 and a decrease
of $228,000 (net of taxes) related to the market value of securities
available-for-sale. In addition, 3,112 shares of MRDP vested and unearned
MRDP compensation was reduced by $49,000. Stockholders' equity was also
decreased by the payments of $156,000 in dividends. There were 1,084,457
shares held in treasury at March 31, 2002 with an average price of $13.73.
Book value per share at March 31, 2002 was $18.72. Stockholders' equity as a
percentage of total assets amounted to 13.9% at March 31, 2002.
Asset Quality
At March 31, 2002, the Bank had five nonaccrual loans amounting to $3.1
million. At March 31, 2002, the Bank had 26 loans delinquent over 30 days
amounting to $2.1 million of which six loans amounting to $114,000 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.
10
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Comparison of Results of Operations for the Three Months Ended March 31, 2002
and 2001
Net Income. Net income decreased by $628,000 from $257,000 for the three
months ended March 31, 2001 to a loss of $371,000 for the three months ended
March 31, 2002. The major cause of this decrease in net income is the result
of an increase in the reserve for loan losses of $655,000 related to the
deterioration of one multi-family construction loan. This loan was placed on
non-accrual and all accrued interest was charged off as of March 31, 2002.
Further the Bank experienced a significant growth in interest bearing deposits
over the past several months including a $32.7 million increase during the
three months ended March 31, 2002. Most of the deposit growth has been
invested in short-term interest bearing deposits or investment securities.
The effect of this deposit activity on the Bank's net interest income,
interest rate spread and other factors are discussed in the following
narrative.
Net Interest Income. Net interest income decreased $499,000, or 41.3%, from
$1.2 million for the three months ended March 31, 2001 to $711,000 for the
same period in 2002. The interest rate spread decreased from 2.90% for the
three months ended March 31, 2001 to 1.05% for the comparable period in 2002.
Interest Income. Total interest income decreased by $80,000, or 3.4% from
$2.4 million for the three months ended March 31, 2001 to $2.3 million for the
same period in 2002. The change reflects an increase in average interest
earning assets of $57.1 million, or 47.6% from $119.9 million for the three
months ended March 31, 2001 to $177.0 million for the same period in 2002.
The major component of this increase was from other interest earning assets,
primarily short-term interest bearing deposits of $46.0 million. The
significant growth in average interest earning
assets is offset by a decline in the yield from 7.9% for the three month
period ended March 31, 2001 to 5.2% for the comparable period in 2002.
Interest Expense. Total interest expense was $1.6 million for the three
months ended March 31, 2002, as compared to $1.2 million for the same period
in 2001. Interest on deposits increased by $512,000, or 58.2%, from $878,000
for the three months ended March 31, 2001 to $1.4 million for the comparable
period in 2002. Interest on notes payable and other debt decreased $92,000,
or 33.2% from the three months ended March 31, 2001 as compared for the same
period in 2002.
Average deposits for the three months ended March 31, 2002 amounted to $138.3
million as compared to $73.8 million for the same period in 2001, an increase
of $64.5 million or 87.4%. Included in the average deposits for the three
months ended March 31, 2002 was $85.1 million in certificates of deposit as
compared to $41.6 million for the comparable period in 2001, an increase of
$43.5 million or 104.6%. Offsetting the increase in average deposits, the
cost of deposits decreased from 4.8% of the three months ended March 31, 2001
to 4.0% for the same period in 2002. Outstanding certificates of deposits at
March 31, 2002 amounted to $91.0 million as compared to $41.5 million at March
31, 2001, an increase of $49.5 million or 119.3%. This increase is the result
of a strategic emphasis by management to attract new depositors and borrowers.
Continued increases in cost of deposits are projected for the year ended
December 31, 2002, based on the significant increase in deposits during the
past four quarters.
Other interest expense of $185,000 for the three months ended March 31, 2002
includes $178,000 related to borrowings from the FHLB and $7,000 associated
with other debt. Other interest expense for the comparable period in 2001
included $264,000 related to FHLB borrowings and $13,000 associated with other
debt. During the three months ended March 31, 2002, the Bank
11
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
repaid all of the other debt amounting to $464,000. The weighted average
interest rate on the FHLB advances was 4.95% and 5.34% at March 31, 2002 and
2001 respectively.
Provision for Loan Losses. The provision for loan losses was $655,000 for
three months ended March 31, 2002 as compared to $25,000 for the same period
in 2001. The significant increase is the result of deterioration in a
multi-family construction loan. 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 1.52% at March 31, 2002, and .42% at March 31, 2001.
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 $403,000 for the three months
ended March 31, 2002, as compared to $290,000 for the same period in 2001.
During the three months ended March 31, 2002, the Bank recorded $95,000 in
gains on sale of loans as compared to $82,000 for the same period in 2001.
During the three months ended March 31, 2002, the Bank had $126,000 in gain on
the sale of investments as compared to no sales of securities for the
comparable period in 2001.
Insurance commissions received by Dime are one of the largest components of
non-interest income. Insurance commissions of $115,000 and $130,000 were
received for the three months ended March 31, 2002 and 2001, respectively.
Non-Interest Expense. Total non-interest expense amounted to $1.0 million for
the three months ended March 31, 2002 as compared to $1.1 million for the same
period in 2001. Included in this expense is $568,000 in compensation and
benefits for the three months ended March 31, 2002 as compared to $612,000 for
the same period in 2001, a decrease of $44,000, or 7.2%.
Income Taxes. Income taxes decreased $387,000 to $220,000 (benefit) for the
three months ended March 31, 2002, compared to $167,000 for the same period in
2001 as a result of the loss before income taxes. The effective combined
federal and state tax rate was 39.4% and 37.2% (benefit) for the three months
ended March 31, 2001 and 2002, respectively. The primary difference between
the expected and actual tax calculation relates to state taxes and
mark-to-market adjustments on ESOP shares committed to be released and MRDP
shares awarded during the period.
12
EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
There are no pending material legal proceedings to which the
registrant or its subsidiaries are a party.
Item 2. Changes in Securities
None.
Item 3. Defaults on Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Empire Federal Bancorp, Inc. (1)
3.2 Bylaws of Empire Federal Bancorp, Inc. (1)
10.1 Employment Agreement with Kenneth P. Cochran(4)
10.2 Employment Agreement with William H. Ruegamer (3)
10.3 Employee Stock Ownership Plan (1)
10.4 Management Recognition and Development Plan (2)
10.5 Stock Option Plan (2)
10.6 Financial Institution's Thrift Plan 401(k)(3)
21 Subsidiaries of the Registrant (3)
(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, 2001.
(b) Report on Form 8-K Two Form 8-K's were filed on January 23,
2002 and March 12, 2002.
13
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/ William H. Ruegamer May 14, 2002
-------------------------------------- ------------
William H. Ruegamer Date
President & Chief Executive Officer
(Principal Executive Officer)
By /s/ Linda M. Alkire May 14, 2002
--------------------------------------- ------------
Linda M. Alkire Date
Treasurer & Chief Financial Officer
14