<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996. Commission file Number 0-15839
EMPIRE BANC CORPORATION MICHIGAN
(Exact name of registrant as (State or other jurisdiction of
specified in its charter) incorporation or organization)
1227 E. FRONT STREET 49686
TRAVERSE CITY, MICHIGAN (Zip code)
(Address of principal executive offices)
38-2727982 (616) 922-2111
(IRS Employer Identification Number) (Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, $5.00 par value
(title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
the Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 20, 1997, computed by reference to the
average of the closing bid and asked price for such stock on that date
was $43,305,000. For this purpose only, the affiliates of the registrant
have been assumed to be the executive officers, directors and 10% or
more shareholders.
As of February 20, 1997, there were outstanding 1,749,509 shares of the
registrants' common stock, $5.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held May 13, 1997 are incorporated by reference into Part III.
The Exhibit Index is located on page number 61.
<PAGE> 2
PART I
Item 1 - Business.
Empire Banc Corporation (the "Corporation") was incorporated under the
laws of the state of Delaware on February 6, 1987, for the purpose of
becoming a bank holding company. The Empire National Bank of Traverse
City (the "Bank"), is a wholly-owned subsidiary of the Corporation.
On June 1, 1994 the Corporation changed its state of incorporation from
Delaware to Michigan.
The Bank was established under the banking laws of the State of Michigan
in 1912 in Empire, Michigan. In 1961 the Bank converted its charter from
a state bank to a national banking association. The Bank's deposits are
insured by the Bank Insurance Fund, administered by the Federal Deposit
Insurance Corporation, and the Bank is regulated by the U.S. Comptroller
of the Currency.
The Bank is engaged in the general commercial banking business, providing
a full range of loan and deposit products. These Bank services include
customary retail and commercial banking services, including checking and
savings accounts, time deposits, interest-bearing transaction accounts,
safe deposit facilities, trust services, real estate mortgage lending and
direct and indirect consumer financing. It makes secured and unsecured
commercial loans and also operates a trust department providing fiduciary,
investment and other related trust services. The Bank has contracted with
a full-service securities brokerage firm to make available a variety of
investment products to the Bank's customers. This program operates from
two of the Bank's branch offices.
The principal source of revenue for the Corporation is dividends upstreamed
from the Bank. The Bank's principal source of revenue is interest and
fees on loans. The sources of income for the three most recent years are
as follows.
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans 67.3% 70.9% 71.1%
Other interest income 16.6% 14.2% 11.9%
Non-interest income 16.1% 14.9% 17.0%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
The Bank's primary market area is the northwestern portion of the
lower peninsula of Michigan. The Bank is headquartered in Traverse City,
Michigan, County of Grand Traverse. The Bank maintains offices in Grand
Traverse, Leelanau, Kalkaska, and Crawford counties. The population of
these counties combined is approximately 100,000. The Bank operates ten
full service offices, provides drive-in convenience at seven locations and
has automatic teller machines operating at ten locations. The Bank has
no foreign operations.
As of December 31, 1996, the Bank employed approximately 194 full-time
and 31 part-time employees.
<PAGE> 3
Banking is a highly competitive business. The Bank competes primarily with
other financial institutions in its market areas for loans, deposits, and
trust accounts. In its primary market, which includes the Grand Traverse,
Kalkaska and Leelanau counties, the Bank maintains the second largest
deposit base, or approximately 25 percent of the deposit market share.
There are principally six banking institutions with offices is this area.
Three of the competing banks with offices in this market are members of
holding companies with substantially more assets than the Corporation.
The Bank is the only independent community bank in the Crawford County
market. The Bank is the third largest in terms of deposits in the Crawford
County market and competes with three financial institutions that are
members of holding companies with substantially more assets than the
Corporation.
In addition to these other banks, the Bank also competes for loans and
deposits with savings and loan associations, credit unions, investment
firms and money market funds. In order to successfully compete,
management has developed a sales and service culture, stresses and
rewards excellent customer service and designs products to meet the
needs of the customer. The Bank also utilizes its ability to sell loans
in the secondary market.
The Bank makes mortgage, commercial and installment loans to customers
primarily in northwestern lower Michigan. Fees may be charged for these
services. Commitments to make loans and unused lines of credit
outstanding are detailed in Note 15 of the Notes to Consolidated
Financial Statements.
Historically, the Bank has predominantly sold its secondary market
conforming residential mortgage loans. The mortgage loan portfolio
serviced by the Bank for others, primarily the Federal Home Loan Mortgage
Corporation, at December 31, 1996 totaled over $220 million. Mortgage
banking activity is detailed in Note 6 of the Notes to Consolidated
Financial Statements.
The Bank supports the growth of the service industry, with its year round
resort and related businesses, manufacturing, the medical community, and
many other activities important to growth in the greater Grand Traverse
area. Designated as a Preferred Lender by the Small Business Administration
(SBA), the Bank underwrites government guaranteed business loans,
contributing to the economic growth in northern Michigan.
The Bank also arranges loan relationships with national and regional
participating banks, increasing the amount of funds available for local
businesses to grow. There are no industry concentrations in which total
loans to borrowers in one industry comprised 10% or more of total loans,
nor have material portions of the Bank's deposits been received from, a
single person, persons, industry or group.
In 1993, the Bank joined the Federal Home Loan Bank of Indianapolis, which
generates an additional source of liquidity and long-term funds. Membership
in the Federal Home Loan Bank also provides access to additional
advantageous lending programs. The Community Investment Program makes
advances to be used for funding community-oriented mortgage lending, and
the Affordable Housing Program grants advances to fund lending for long-
term low- and moderate-income owner occupied and affordable rental housing
at subsidized interest rates. Using the Affordable Housing Program, the
<PAGE> 4
Bank has sponsored the construction of two low-income homes with Habitat
for Humanity.
The economy of the market areas of the Bank is affected by summer and
winter tourism activities and, accordingly, the Bank experiences seasonal
consumer and commercial deposit growth, with substantial growth increases
from May to September. The Bank regularly assesses its ability to raise
funds through the issuance of certificates of deposit in denominations of
$100,000 or more in the local and regional market area and has established
conservative guidelines for the total funding to be provided by these
deposits. These deposits were less than three percent of total deposits
at December 31, 1996 and 1995, respectively. The Bank also uses federal
funds purchased from correspondent banks and the Federal Reserve Bank to
respond to deposit fluctuations and temporary loan demands.
As of December 31, 1996, the Bank had no risks attendant to foreign
sources. Compliance with federal, state and local statutes and/or
ordinances relating to the protection of the environment is not
expected to have material effect upon the Bank's capital expenditures,
earnings or competitive position.
SUPERVISION AND REGULATION
Banking is a highly regulated industry, with numerous federal and state
laws and regulations governing the organization and operation of banks,
bank holding companies, and their affiliates. The following summary of
certain laws and regulations affecting the Corporation and the Bank is
qualified in its entirety by such laws and regulations, which are subject
to change based on pending and future legislation and action by regulatory
agencies.
As a bank holding company under the Bank Holding Company Act of 1956,
the Corporation is regulated and examined by the Federal Reserve Board.
This Act requires that the Corporation obtain prior Federal Reserve Board
approval for bank and nonbank acquisitions and restricts the permissible
activities of the Corporation. In addition, the Act formerly restricted
the acquisition of shares of out-of-state banks unless such acquisition
is specifically authorized by the laws of the state in which the bank to
be acquired is located. Under the Reigle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), this restriction
was repealed effective September 29, 1995, and the Federal Reserve Board
generally is authorized to approve bank acquisitions by out-of-state bank
holding companies whether or not such acquisition is prohibited by state
law. The Interstate Act also provides for the nationwide interstate
branching of banks. Commencing June 1, 1997, both national and state-
chartered banks will be permitted to branch and merge across state lines.
States may opt in or out of this interstate branching authority before
June 1, 1997. The State of Michigan has adopted legislation opting in
early to the interstate branching authority, subject to the existence of
reciprocal legislation in the state of the bank wishing to acquire or
establish a branch in Michigan.
Federal law also regulates transactions between the Corporation and the
Bank, including the amount and nature of loans or other extensions of
credit. The Bank is also subject to regulation and examination by the
Comptroller of the Currency.
<PAGE> 5
The Comptroller of the Currency has established guidelines with respect
to the maintenance of appropriate levels of capital for the Bank. The
Federal Reserve Board has also established similar guidelines for the
Corporation. Noncompliance with such standards can limit the amount of
dividends which the Bank can pay to the Corporation and thus the amount
of dividends the Corporation can pay to its shareholders.
The banking industry is also affected by the monetary and fiscal
policies of the federal government, including the Federal Reserve
Board, which exerts considerable influence over the cost and
availability of funds obtained for lending and investing.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") significantly affects the operation of banks and their
relationship with federal regulatory agencies.
Under FDICIA, the FDIC has implemented a system of risk based premiums
for deposit insurance pursuant to which the premiums paid by a depository
institution are based on the probability that the applicable insurance
fund will incur a loss in respect of such institution. On September 30,
1996, the federal Deposit Insurance Funds Act ("DIFA") was enacted. DIFA
provided for a one-time special assessment by the FDIC on Savings
Association Insurance Fund ("SAIF") assessable deposits, which raised the
SAIF's reserve ratio to the designated level. This allowed the FDIC to
effectively equalize the formerly disparate deposit insurance assessment
ratios of the BIF and SAIF. As of January 1, 1996 the effective BIF
assessment rate ranged from 0 basis points for well-capitalized
institutions displaying little risk, to 27 basis points for
undercapitalized institutions displaying high risk. Going forward, both
BIF insured banks and SAIF insured thrifts are also required to pay
interest on Financing Corporation (FICO) bonds issued in connection with
the federal government's bail out of the thrift industry.
FDICIA also prescribes various supervisory or "prompt corrective" actions
by federal regulatory agencies based on an insured institution's level of
capital. These prescribed actions increase restrictions on and heighten
regulatory scrutiny of the institution as its capital declines. The Bank
is rated in the lowest risk category under regulatory guidelines, as
detailed in Note 18 of the Notes to Consolidated Financial Statements.
Proposals to change the laws and regulations governing the operations and
taxation of banks, and companies which control banks and other financial
institutions, are frequently raised in Congress. The likelihood of any
major changes and the impact such changes might have on the Corporation
are, however, impossible to predict.
<PAGE> 6
Item 2 - Properties.
The executive offices of the Corporation and the Bank are maintained at
the main office of the Bank, 1227 East Front St., Traverse City, Michigan.
The Bank leases its main office and the following branch offices and
automated teller machine facilities: Grand Traverse Mall Office, 3160
South Airport Rd, Traverse City, Michigan 49684; Kalkaska Office, 302
West Mile Road, Kalkaska, Michigan 49646; Acme Office, 3880 M-72 East,
Acme, Michigan 49610; Woodmere Office, 859 Woodmere Avenue, Traverse City,
Michigan 49686; Meijer Handy Teller ATM, 3955 South Memorial Highway,
Traverse City, Michigan 49684. The leases expire at various times through
the years 2011 and all include renewal periods. Net aggregate annual
rentals for banking facilities in 1996 were $426,000.
In addition, the Bank owns and operates the following facilities none of
which are encumbered: Northport Office, 122 Nagonaba, Northport, Michigan
49670; Leland Office, 111 North Main Street, Leland, Michigan 49654;
Empire Office, 10210 Front Street, Empire, Michigan 49630; Cherryland
Office, 1114 South Airport Road, Traverse City, Michigan 49686; Downtown
Traverse City Office, 427 West Front St. Traverse City, Michigan 49684;
Grayling Office, 2195 S. James St. Grayling, Michigan 49738.
The Bank operates drive-thru facilities at most of its office locations and
has eleven automatic teller machines for customer use in its market area.
<PAGE> 7
Information about the executive officers of the Corporation is set forth
below.
<TABLE>
<CAPTION>
Name and Age Position
- --------------------------- -------------------------------------
<S> <S>
James E. Dutmers, Jr. Chairman and Chief Executive Officer
(53) of the Corporation and Empire National
Bank
Robert L. Israel President and Chief Operating Officer
(53) of the Corporation and Empire National
Bank
William T. Fitzgerald, Jr. Vice President, Secretary/Treasurer
(51) of the Corporation; Division Vice
President and Chief Financial
Officer of Empire National Bank
Marilyn J. McCool Vice President of the Corporation;
(50) Division Vice President and Director
of Personnel of Empire National Bank
James M. Merenda Vice President of the Corporation;
(52) Division Vice President and Senior
Trust Officer of Empire National
Bank
Bruce W. Reavely Vice President of the Corporation;
(48) Division Vice President and Senior
Operations Officer of Empire
National Bank
Daniel G. Stoudt Vice President of the Corporation;
(50) Division Vice President and Senior
Loan Officer of Empire National Bank
</TABLE>
<PAGE> 8
Item 3 - Legal Proceedings.
The Bank is routinely engaged in litigation, both as plaintiff and
defendant, which is incident to its business. In certain proceedings,
claims or counter-claims have been asserted against it. Management,
after consultation with legal counsel, does not anticipate that the
ultimate liability, if any, arising out of such litigation and threats
of litigation will have a material effect on the financial statements
of the Corporation.
Item 4 - Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of fiscal 1996 to
a vote of the Corporation's security holders.
PART II
Item 5 - Market for Corporation's Common Equity and Related Stockholder
Matters.
The common stock of Empire Banc Corporation is traded on the electronic
bulletin board system of the National Association of Securities Dealers,
symbol EMBM. The primary market is the State of Michigan. Principal
market makers of common stock transactions are F.J. Morrisey & Co.,
First of Michigan Corp, Howe, Barnes & Co., McDonald & Co., Robert W.
Baird & Co., Roney & Co. and Stifel Nicolaus & Co. There were 496
holders of the Corporation's common stock as of December 31, 1996.
On December 30, 1996, the Corporation issued 3,950 shares of its common
stock, par value $5.00 per share, to The Empire National Bank Employee
Stock Ownership Plan (the "ESOP") in exchange for $142,000 cash. The
cash paid by the ESOP for the shares was attributable to the discretionary
annual employer contribution by the Bank pursuant to the terms of the ESOP.
The shares issued were not registered under the Securities Act of 1933 in
reliance on Section 4(2) of the Act.
Quarterly cash dividends were declared during 1996 and 1995 totaling
$1.21 and $.97 per common share per year. Note 19 of the Notes to
Consolidated Financial Statements details regulatory guidelines regarding
payment of dividends. The following table sets forth, for the periods
indicated, the high and low sale prices per share of the Corporation's
common stock. All of the prices are adjusted for a five percent stock
dividend paid in November, 1996.
<TABLE>
<CAPTION>
Price Range
Quarter High Low Dividends
- ----------------------------------------------------------------
<S> <C> <C> <C>
1996
Fourth $37.00 $35.95 $.350
Third 35.95 35.24 .286
Second 35.24 33.21 .286
First 33.21 29.76 .286
1995
Fourth 29.76 27.05 .286
Third 27.05 24.38 .229
Second 24.38 22.67 .229
First 22.67 21.52 .229
Amounts retroactively adjusted for stock dividends.
</TABLE>
<PAGE> 9
Item 6 - Selected Financial Data - Empire Banc Corporation
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest income $ 30,599 $ 28,606 $ 23,628 $ 21,775 $ 22,822
Interest expense 14,066 13,231 9,839 8,842 10,243
-------- -------- -------- -------- --------
Net interest income 16,533 15,375 13,789 12,933 12,579
Provision for loan losses 1,686 745 796 447 727
Non-interest income 5,850 5,017 4,843 5,063 4,232
Non-interest expense 13,861 13,494 12,241 12,542 11,648
-------- -------- -------- -------- --------
Income before taxes 6,836 6,153 5,595 5,007 4,436
Federal income taxes 2,259 2,007 1,841 1,600 1,359
-------- -------- -------- -------- --------
Net income $ 4,577 $ 4,146 $ 3,754 $ 3,407 $ 3,077
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------
Per Share:
Earnings $ 2.44 $ 2.25 $ 2.05 $ 1.89 $ 1.73
Dividends 1.21 .97 .88 .69 .60
Book value 18.71 17.33 15.38 14.37 13.06
- ----------------------------------------------------------------------------------
Ratios Based on Net Income:
Return on average equity 14.72% 14.81% 14.72% 14.61% 14.56%
Return on average assets 1.20 1.18 1.17 1.15 1.08
Dividend payout ratio 45.90 40.30 39.93 34.22 32.95
Average shareholders' equity
as a percent of average assets 8.14 7.96 7.92 7.85 7.43
- ----------------------------------------------------------------------------------
Balance Sheet:
Assets $400,819 $372,426 $336,951 $313,054 $293,557
Loans 272,182 259,102 243,583 218,380 197,130
Securities 98,578 84,312 64,231 65,830 64,810
Deposits 344,354 319,540 297,989 279,541 267,855
Shareholders' equity 32,673 30,005 26,332 24,504 22,215
- ----------------------------------------------------------------------------------
Per share amounts have been adjusted for stock dividends.
</TABLE>
<PAGE> 10
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis is designed to provide readers with a
comprehensive review of the results of operations and financial position.
This discussion should be read in conjunction with the Consolidated
Financial Statements and related footnotes.
Summary of Earnings
In 1996, the Corporation achieved record earnings of $4,577,000, an
increase of $431,000, or 10.4 percent, over the $4,146,000 earned in
1995. In 1995, net income increased $392,000, or 10.4 percent.
Earnings Per Share
Earnings per share, computed on the average number of common shares and
common equivalents outstanding during the year, were $2.44, compared to
$2.25 in 1995 and $2.05 in 1994.
Return on Average Shareholders' Equity
Return on average shareholders' equity measures how profitably the
shareholders' invested capital is employed. Return on average equity was
14.7 percent for 1996 compared to 14.8 percent and 14.7 percent in 1995
and 1994.
Return on Average Assets
Return on average assets, a measure of profitability, was 1.20
percent in 1996 compared to 1.18 percent and 1.17 percent in 1995 and
1994.
Book Value Per Share
Book value per share of common stock increased 8 percent to $18.71 at
December 31, 1996, compared to $17.33 and $15.38 at December 31, 1995 and
1994.
Summary of Operating Results
The following is a summary of the major components of the consolidated
operating results.
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $16,533 $15,375 $13,789
Add: taxable equivalent (TE) adjustment 127 106 116
------- ------- -------
Net interest income - (TE) 16,660 15,481 13,905
Provision for loan losses 1,686 745 796
Non-interest income 5,850 5,017 4,843
Non-interest expense 13,861 13,494 12,241
------- ------- -------
Income before tax - (TE) 6,963 6,259 5,711
Income taxes,
including TE adjustment 2,386 2,113 1,957
------- ------- -------
Net income $ 4,577 $ 4,146 $ 3,754
======= ======= =======
</TABLE>
<PAGE> 11
Net Interest Income
Net interest income is the difference between interest and fees earned on
earning assets (loans and investments) and the interest paid on deposits
and other interest-bearing funds. It is the major component of earnings
for a financial institution. For analytical purposes, to evaluate the
effective yields earned on earning assets, interest earned is expressed
on a taxable equivalent (TE) basis by increasing tax-exempt interest
income to an amount comparable to interest subject to income taxes. The
taxable equivalent adjustment is based on a federal income tax rate of 34
percent.
Net interest income is influenced by changes in the balance and
mix of earning assets and interest-bearing liabilities, the proportion
of earning assets funded by demand deposits and equity capital and
market interest rates.
Conditions beyond management's control may have a significant impact on
changes in net interest income from one period to another. Examples of
such external factors are Federal Reserve Board monetary policy,
introduction of new deposit products by bank and non-bank competitors
and the fiscal and debt management policies of the federal government.
The table on the following page details the key determinants of net
interest income: the average daily balance sheet for each year -
including the components of earning assets and supporting liabilities -
the related interest income on a TE basis and interest expense,
as well as the average rates earned and paid.
<PAGE> 12
Net Interest Income
Average Balance Sheet, Interest Income/Expense, Average Rates
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
(Taxable Equivalent, Balance Interest Rate Balance Interest Rate Balance Interest Rate
In Thousands) --------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans, including fees 1,2 $259,924 $ 24,552 9.45% $248,165 $ 23,835 9.60% $228,711 $ 20,238 8.85%
Securities
Taxable 86,783 5,397 6.22 68,634 4,004 5.83 60,676 2,904 4.79
Tax-exempt 1 4,989 361 7.23 3,348 286 8.54 4,334 349 8.05
-------- -------- -------- -------- -------- --------
Total 91,772 5,758 6.27 71,982 4,290 5.96 65,010 3,253 5.00
Federal funds sold 7,882 416 5.28 10,072 587 5.83 6,227 253 4.06
-------- -------- -------- -------- -------- --------
Total earning assets/
interest income 359,578 30,726 8.55% 330,219 28,712 8.69% 299,948 23,744 7.92%
Cash and due from banks 13,318 11,972 11,840
Other assets 9,060 9,342 10,191
-------- -------- --------
Total $381,956 $351,533 $321,979
======== ======== ========
Liabilities and Equity
CDs over $100,000 $ 11,204 595 5.31% $ 9,734 589 6.05% $ 10,867 449 4.13%
Savings and interest checking 61,987 1,351 2.18 60,703 1,371 2.26 64,547 1,407 2.18
Money market deposits 77,578 3,214 4.14 73,336 3,246 4.43 63,165 2,015 3.19
Consumer CDs 130,359 7,908 6.07 120,714 7,210 5.97 105,492 5,596 5.30
-------- -------- -------- -------- -------- --------
Total 281,128 13,068 4.65 264,487 12,416 4.69 244,071 9,467 3.88
Federal funds purchased 461 27 5.86 27 1 6.14 446 18 4.15
FHLB advances 16,262 971 5.97 11,597 814 7.02 7,499 354 4.72
-------- -------- -------- -------- -------- --------
Total interest-bearing
funds/interest expense 297,851 14,066 4.72% 276,111 13,231 4.79% 252,016 9,839 3.91%
-------- -------- -------- -------- -------- --------
Demand deposits 46,844 42,858 40,447
Other liabilities 6,172 4,568 4,021
Shareholders' equity 31,089 27,996 25,495
-------- -------- --------
Total $381,956 $351,533 $321,979
======== ======== ========
Net interest spread (TE) 3.82% 3.90% 4.01%
===== ===== =====
Net interest income (TE) $ 16,660 $ 15,481 $ 13,905
======== ======== ========
Net interest margin (TE) 4.63% 4.69% 4.64%
===== ===== =====
1 Interest income on tax-exempt securities and certain tax-exempt loans has been adjusted to a tax-equivalent basis.
2 Non-accrual loans are excluded.
</TABLE>
<PAGE> 13
An analysis of the changes in net interest income is presented in the
following table. This analysis highlights the relative effect of changes
in the average balances and interest rates.
Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
(Taxable Equivalent, In Thousands) 1996 vs. 1995 1995 vs. 1994
- -------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
Increase (decrease) due to change in: Balance Rate Change Balance Rate Change
------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans, including fees $ 1,167 $ (450) $ 717 $ 1,908 $ 1,689 $ 3,597
Securities
Taxable 1,140 253 1,393 414 686 1,100
Tax-exempt 124 (49) 75 (83) 20 (63)
-------- -------- -------- -------- -------- --------
Total 1,264 204 1,468 331 706 1,037
Federal funds sold (118) (53) (171) 196 138 334
-------- -------- -------- -------- -------- --------
Changes in interest income 2,313 (299) 2,014 2,435 2,533 4,968
- -------------------------------------------------------------------------------------------------------------
Interest expense
CDs over $100,000 112 (106) 6 (51) 191 140
Savings and interest checking 25 (45) (20) (88) 52 (36)
Money market deposits 182 (214) (32) 361 870 1,231
Consumer CDs 584 114 698 862 752 1,614
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 903 (251) 652 1,084 1,865 2,949
Federal funds purchased 26 -- 26 (23) 6 (17)
FHLB advances 291 (134) 157 243 217 460
-------- -------- -------- -------- -------- --------
Changes in interest expense 1,220 (385) 835 1,304 2,088 3,392
-------- -------- -------- -------- -------- --------
Changes in net interest income $ 1,093 $ 86 $ 1,179 $ 1,131 $ 445 $ 1,576
======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------
Any variance attributable jointly to volume and rate changes is allocated to each in proportion to the
absolute dollar amount of the changes in volume and rate.
</TABLE>
<PAGE> 14
The following table allocates net interest income on earning assets by the
interest spread earned on assets funded by interest-bearing liabilities
and the amount funded by non-interest-bearing liabilities and equity
capital. The interest spread on earning assets funded by interest-bearing
liabilities is the difference between the average rate earned on total
earning assets and the average cost of interest-bearing liabilities.
The interest spread on earning assets funded by non-interest-bearing
liabilities and equity capital is the rate earned on earning assets.
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Average Net Average Net Average Net
Earning Interest Interest Earning Interest Interest Earning Interest Interest
(Taxable Equivalent, Assets Spread Income Assets Spread Income Assets Spread Income
In Thousands) ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Source of funding
Interest-bearing liabilities $297,851 3.82% $ 11,382 $276,111 3.90% $ 10,779 $252,016 4.01% $ 10,109
Non-interest-bearing liabilities
and equity capital 61,727 8.55% 5,278 54,108 8.69% 4,702 47,932 7.92% 3,796
-------- -------- -------- -------- -------- --------
$359,578 $ 16,660 $330,219 $ 15,481 $299,948 $ 13,905
======== ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income (TE) increased $1,179,000 or 8 percent, in 1996 as
average earning assets increased $29.4 million, or 9 percent, and the
net interest margin (net interest income as a percentage of average
earning assets) decreased 6 basis points. Earning assets funded with
interest-bearing liabilities increased $21.7 million, or 8 percent, and
the net interest spread decreased by 8 basis points, adding $603,000 in
net interest income. Earning assets funded with non-interest-bearing
liabilities and equity capital increased $7.6 million, or 14 percent,
and the earning asset rate declined by 14 basis points, contributing
$576,000 to the increase in net interest income.
The increase in average earning assets was principally in investment
securities, which increased $19.8 million, or 27 percent. The average
rate on securities increased 31 basis points. Loans increased $11.8
million, or 5 percent, and the average rate decreased 15 basis points.
The primary funding source is deposits. Interest-bearing deposits
increased $16.6 million, or 6 percent, and the average rate decreased
4 basis points from 1995. Federal Home Loan Bank Advances increased
$4.7 million and the average rate decreased 105 basis points.
In 1995, net interest income increased $1,576,000, or 11 percent, due to
increases in average earning assets of $30.3 million, or 10 percent, and
the net interest margin increased 5 basis points. The increase in earning
assets funded with interest-bearing liabilities, at a decreased interest
spread, accounted for $670,000 of the increase in net interest income. The
increase in earning assets funded with non-interest-bearing liabilities, at
an improved interest spread, added $906,000 in net interest income.
<PAGE> 15
Loan Portfolio Management and Non-Performing Assets
Portfolio Quality
Loan portfolio quality, diversification of the portfolio and the monitoring
of potential problem loans are the primary functions of loan portfolio
management. The Bank has internally established written loan
policies and procedures. Management has established a loan review process
which provides for frequent review of the loan portfolio in order to
monitor loan portfolio quality and performance. In addition, management
conducts a review of loan concentrations which could have an impact on the
financial condition of the Bank. As of December 31, 1996, there were no
industry concentrations in which the total loans to borrowers in one
industry comprised 10 percent or more of total loans.
Loans outstanding at year-end for the five years ended December 31, are
shown in the following table according to the type of loan:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 122,322 $ 115,084 $ 106,447 $ 96,138 $ 88,704
Mortgage 71,346 63,809 56,009 46,967 40,075
Consumer 59,031 63,328 71,023 66,946 48,338
Revolving Credit 19,483 11,596 10,104 8,329 10,034
Commercial Paper -- 5,285 -- -- 9,979
--------- --------- --------- --------- ---------
$ 272,182 $ 259,102 $ 243,583 $ 218,380 $ 197,130
========= ========= ========= ========= =========
</TABLE>
Maturity and Rate Sensitivity of Selected Loans
The following table presents the remaining maturity of total loans
outstanding (excluding residential real estate mortgage and consumer
loans) at December 31, 1996, according to scheduled repayments of
principal. The amounts due after one year are classified according
to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
(In Thousands) Total
- --------------------------------------------------------------------------
<S> <C>
In one year or less $ 58,020
After one year but within five years
Interest rates are floating or adjustable 921
Interest rates are fixed or predetermined 56,966
After five years
Interest rates are floating or adjustable 27
Interest rates are fixed or predetermined 9,548
-------
Total $125,482
========
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 16
Non-Performing Assets and Problem Loans
The following table is a summary of non-performing assets as of
December 31:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $2,131 $ 867 $1,228 $1,497 $1,280
Renegotiated loans 408 606 644 486 196
------ ------ ------ ------ ------
Total non-performing loans 2,539 1,473 1,872 1,983 1,476
Other real estate -- 280 53 838 2,407
------ ------ ------ ------ ------
Total non-performing assets $2,539 $1,753 $1,925 $2,821 $3,883
====== ====== ====== ====== ======
Non-performing assets as
a percent of total loans .93% .68% .79% 1.29% 1.97%
Accruing loans 90 days or
more past due $ 172 $ 72 $ 128 $ 1 $ 376
- --------------------------------------------------------------------------
</TABLE>
In 1996, total non-performing assets increased $786,000, or 45 percent,
due to one long-term credit relationship. After an extensive
examination of the credit, it was determined to be in the best interest
of the Corporation to classify the credit non-accrual, reduce the
carrying value and add to the established reserves for the credit.
In addition to loans classified as non-performing or 90 days past due,
there were other loans totaling $2,062,000 at December 31, 1996, on which
management closely monitors the borrowers' ability to comply with payment
terms. Effective January 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114), as amended by Statement No. 118
(SFAS 118). Implementation of SFAS 114 and SFAS 118 did not have a
material impact on the consolidated financial position and results of
operations in 1995 as disclosed in Note 5 to the Consolidated
Financial Statements. See Note 2 to the Consolidated Financial
Statements, for a description of SFAS 114 and SFAS 118.
Management regularly reviews the loan portfolio to identify loans about
which there are concerns that the borrower will be unable to satisfy
existing payment terms. Management reports monthly to the Board of
Directors information regarding significant past-due and problem loans,
non-accrual loans and other real estate owned. Non-performing assets are
carried at estimated realizable values and the known losses of principal
have been recognized. Management cannot predict which, if any, loans will
eventually result in losses.
Included in other assets is $1,041,000 of cash value of life insurance
which has been classified non-accrual. The court-approved Plan of
Rehabilitation of the insurance carrier calls for a new insurer to assume
these policies at full value. The assumption is currently expected to be
completed by mid-1997.
<PAGE> 17
The accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that collection of interest is doubtful. The
gross interest income that would have been recorded in 1996 on the
$2,131,000 of non-accrual loans amounted to $171,000 if the loans would
have been current in accordance with their original terms and outstanding
throughout the period. The amount of interest income included in net
income on these loans amounted to $16,000.
All loans classified for regulatory purposes as loss, doubtful, or
substandard have been included in the above disclosures. There were no
other interest bearing assets at December 31, 1996 that would be required
to be disclosed as non-performing or potential problem loans.
There were no foreign loans outstanding at December 31, 1996.
Provision for Loan Losses
The following table summarizes the provision for loan losses, net loan
losses and the allowance for loan losses over the last three years:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $ 1,686 $ 745 $ 796
Net loan losses 1,361 445 526
Year-end allowance for loan losses 3,525 3,200 2,900
Allowance as a percent of
year-end loans 1.30% 1.24% 1.19%
Net loan losses to average loans
outstanding .52 .18 .23
- -------------------------------------------------------------------------
</TABLE>
In 1996, the provision for loan losses increased $941,000 due to a
$1.1 million provision related to the long-term credit relationship
discussed above under "Non-Performing Assets and Problem Loans."
The charge-down of the carrying value of the credit resulted in the
increase in net loan losses in 1996. Excluding the charge-off for this
credit, net loan losses as a percent of average loans would have been
comparable to 1995 and 1994 and substantially below historical industry
norms. The allowance for loan losses at 1.30 percent of loans was
considered adequate by management and was 139 percent of non-performing
assets at year-end compared to 183 percent and 151 percent at December
31, 1995 and 1994.
<PAGE> 18
Summary of Loan Loss Experience
Additional information relative to the allowance for possible loan
losses is presented in the following table. This table summarizes
loan balances at the end of each period and daily average balances,
changes in the allowance for possible loan losses arising from loans
charged off and recoveries on loans previously charged off by loan
category, and additions to the allowance for possible loan losses
through provisions charged to expense. Factors which influence
management's judgement in determining the provision for loan losses each
period include establishing specific loss allowances for selected loans
(including large loans, non-accrual loans, and problem and delinquent
loans) and consideration of historical loss information and local economic
conditions.
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan
losses, beginning of period $ 3,200 $ 2,900 $ 2,630 $ 2,450 $ 2,310
-------- -------- -------- -------- --------
Loans charged off:
Commercial 1,005 17 112 97 323
Real estate mortgages 7
Consumer 514 575 539 236 325
Revolving credit 49 51 67 84 106
- --------------------------------------------------------------------------
Total charge-offs 1,568 650 718 417 754
- --------------------------------------------------------------------------
Recoveries:
Commercial 11 55 85 3 58
Real estate mortgages 2
Consumer 182 135 89 119 83
Revolving credit 14 13 18 28 26
- --------------------------------------------------------------------------
Total recoveries 207 205 192 150 167
- --------------------------------------------------------------------------
Net charge-offs 1,361 445 526 267 587
- --------------------------------------------------------------------------
Provision charged to expense 1,686 745 796 447 727
- --------------------------------------------------------------------------
Allowance for possible loan
losses, end of period $ 3,525 $ 3,200 $ 2,900 $ 2,630 $ 2,450
==========================================================================
Total loans outstanding at
end of period $272,182 $259,102 $243,583 $218,380 $197,130
======== ======== ======== ======== ========
Average total loans
outstanding for the year $260,745 $249,769 $230,251 $205,410 $191,029
======== ======== ======== ======== ========
Ratio of net charge offs
to daily average loans
outstanding 0.52% 0.18% 0.23% 0.13% 0.31%
==== ==== ==== ==== ====
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 19
Allocation of the Allowance for Loan Losses
The allocation of the allowance for possible loan losses for the years
ended December 31 is:
<TABLE>
<CAPTION>
Real estate
Consumer mortgage/
(In thousands) Commercial and other construction Unallocated Total
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 Allowance amount $1,826 $ 538 $ 75 $1,086 $3,525
% loans/total loans 45.0% 28.8% 26.2% -- 100%
1995 Allowance amount $1,378 $ 602 $ 75 $1,145 $3,200
% loans/total loans 46.5% 28.9% 24.6% -- 100%
1994 Allowance amount $1,055 $ 574 $ 60 $1,211 $2,900
% loans/total loans 43.7% 33.3% 23.0% -- 100%
1993 Allowance amount $1,104 $ 495 $ 95 $ 936 $2,630
% loans/total loans 43.9% 34.5% 21.6% -- 100%
1992 Allowance amount $ 729 $ 340 $ 12 $1,369 $2,450
% loans/total loans 47.8% 30.9% 21.3% -- 100%
- -------------------------------------------------------------------------
</TABLE>
Non-Interest Income
Total non-interest income increased $833,000, or 17 percent, from 1995.
Income from the origination, sales and servicing of mortgage loans
increased $430,000, or 40 percent, due to an increase in fees and gains
on loans sold of 71 percent in 1996. Effective July 1, 1995, the
Bank adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" (SFAS 122). This standard
requires capitalizing the cost of mortgage servicing rights on loans sold
which is then amortized over the estimated period of servicing income.
The adoption of SFAS 122 increased gains on loans sold $454,000 in 1996
and $154,000 in 1995.
Trust income increased $282,000, or 16 percent, in 1996, as funds
under management increased $53 million, or 18 percent. Other service
charges and fees increased 18 percent due to income earned from the
sale of credit life insurance. Other income increased due to the 42
percent growth in fees earned from the sale of investment products
through a third party vendor with offices in the Bank's branches.
In 1995, total non-interest income increased $174,000, or 4 percent.
Income from the origination, sales and servicing of mortgage loans
decreased $71,000, or 6 percent, as fees and gains on loans sold decreased
17 percent, or $123,000, due to the reduced new loan volume resulting
from higher rates in 1995. Loan servicing income increased $52,000, or
12 percent, over 1994. Trust fees increased $254,000, or 16 percent, due
to a 17 percent increase in assets under management. Other service charges
and fees increased 7 percent due to ATM and credit card fees.
<PAGE> 20
Non-Interest Expense
In 1996, total non-interest expense increased $367,000, or 3 percent.
Total personnel expense increased $584,000, or 7 percent, as salaries
and wages increased $509,000, or 10 percent, due to increased staffing
and normal salary increases.
Equipment expense for 1996 decreased $42,000, or 5 percent, due to a
$69,000 reduction in depreciation expense.
Other operating expenses decreased $200,000, or 5 percent, in 1996.
FDIC insurance expense decreased $211,000, or 58 percent. As of
June 1, 1995 FDIC rates were reduced from $.23 per $100 of deposits to
$.04, and for 1996, the rate was the statutory minimum of $2,000 per year
for well-capitalized banks. Included in 1996 expense was a $113,000
congressionally mandated payment to the Savings Association Insurance
Fund (SAIF). For 1997, congress mandated a fee of $.013 per $100 of
deposits for the FICO Bonds as part of the SAIF resolution (see "Item 1 -
Business, Supervision and Regulation"). Other areas of expense were
comparable to 1995.
In 1995, total non-interest expense increased $1,253,000, or 10 percent.
Personnel expense increased $1,079,000, or 16 percent, due to the $698,000,
or 38 percent, increase in benefit costs related to the change in the
Corporation's stock price from year to year and the increase in the profit
sharing incentive award of $110,000, or 25 percent. Occupancy expense
increased 7 percent for branch remodeling costs.
Other operating expense increased $59,000, or 2 percent, in 1995. FDIC
insurance expense decreased $254,000, or 41 percent, due to the reduction
in FDIC rates. Legal and professional fees increased $69,000, or 25
percent. Other areas of expense increased due to the growth of the Bank.
Federal Income Taxes
Federal income tax expense for 1996 was $2,259,000, compared to $2,007,000
in 1995 and $1,841,000 in 1994, due to the increased profitability of the
Corporation. The Corporation's effective tax rate has been substantially
unchanged from 1994 through 1996 due to the consistency of statutory tax
rates and the relative percentage of tax-exempt income.
Capital Resources and Cash Dividends
The foundation of a strong financial institution is a strong capital base.
Shareholders' equity in 1996 increased $2.7 million, or 9 percent, to
$32.7 million at year-end 1996. During 1995, total shareholders' equity
increased $3.7 million, or 14 percent, over 1994. Shareholders' equity
was 8.2 percent of total assets at December 31, 1996, comparable to 1995.
<PAGE> 21
The federal bank regulatory agencies have established capital standards
for financial institutions. The Corporation's capital ratios are all
significantly above the guidelines for well-capitalized institutions, the
highest capital standard. Note 18 to the Consolidated Financial Statements
details the Corporation's regulatory capital and the capital standards.
Total dividends in 1996 were $2,100,000, or $1.21 per share, compared to
the $1,671,000, or $.97 per share in 1995, a 26 percent increase. The
dividend payout ratio was 46 percent in 1996 and 40 percent in 1995 and
1994. A 5 percent and a 25 percent stock dividend were paid in November
of 1996 and 1995. Cash dividends per share have increased at an average
annual rate of 19 percent since 1991. Future dividends, if any, are
declared at the discretion of the Board of Directors and may be determined
by the financial performance, future prospects and capital requirements of
the Corporation.
The Corporation's principal source of funds to pay cash dividends is the
earnings of its subsidiary, Empire National Bank. Consequently, cash
dividends depend upon the earnings, capital needs, regulatory restraints
and other factors affecting the Bank. See Note 19 to the Consolidated
Financial Statements.
The Corporation maintains a five-year capital plan and utilizes a formal
strategic planning process. Management and the Board continue to monitor
long-term goals, which include maintaining capital growth in relation to
asset growth and the retention of earnings to fund growth while providing
returns to shareholders.
Interest Rate Sensitivity and Liquidity
Asset and liability management involves the development and implementation
of strategies to maximize net interest income, minimize the vulnerability
of earnings to major changes in interest rates and allow the Bank to
profitably compete in all phases of the business cycle. This process is
carried out through monthly meetings of senior officers representing
lending, deposit-gathering, funds management and marketing.
Interest rate risk arises when the maturity or repricing characteristics
of assets differ significantly from the maturity or the repricing
characteristics of liabilities. One of the goals of asset and liability
management is to balance the various factors that create interest rate
risk, thereby maintaining the interest rate risk of the Bank within
acceptable levels.
While controlling interest rate risk is an important objective,
accommodating customer maturity and repricing preferences is an equally
important objective. It is the function of asset and liability management
to develop strategies to reconcile these objectives. Management has
developed definitive policies and procedures to sell the current production
of long-term residential mortgages in the secondary market to mitigate
interest rate risk. Long-term commercial loans are generally written with
three- and five-year balloons and long-term fixed rate SBA guaranteed loans
are sold in the secondary market.
<PAGE> 22
One measure of interest rate risk is "gap," which represents the cumulative
difference between the amount of assets and liabilities maturing or
repricing at various time intervals. In measuring the interest rate risk
gap, management estimates loan repayments and early withdrawals of deposits
and the interest sensitivity of assets and liabilities which do not mature
or reprice. Because assets and liabilities do not reprice in the same
manner as interest levels change, the gap should not be viewed as a sole
indicator of how the net interest income of the Bank will be affected by
changes in interest rates. The Bank continually monitors and has
maintained within its policy a one-year rate sensitive asset-to-liability
ratio (RSA-RSL) of between 0.8 and 1.2. The one-year RSA-RSL ratio was
0.8 and 0.9 at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
The following table represents rate sensitivity analysis of interest-
bearing assets and liabilities at December 31, 1996:
Interest Sensitivity Period
0-90 91-365 0-365 OVER 1
(In Thousands) DAYS DAYS DAYS YEAR TOTAL
- ----------------------------------------------------------------------------
<S>
Assets <C> <C> <C> <C> <C>
Loans $ 87,774 $56,121 $143,895 $128,287 $272,182
Securities 10,242 21,493 31,735 66,843 98,578
Federal funds sold -- -- -- -- --
-------- ------- -------- -------- --------
Total interest-earning
assets 98,016 77,614 175,630 195,130 370,760
-------- ------- -------- -------- --------
Liabilities and Equity
Savings & Interest Checking 63,807 -- 63,807 -- 63,807
Money Market Deposits 83,117 -- 83,117 -- 83,117
Time Deposits 23,261 46,158 69,419 73,454 142,874
Federal Funds Purchased 5,500 -- 5,500 -- 5,500
FHLB advances 4,000 -- 4,000 8,000 12,000
-------- ------- ------- -------- --------
Total interest-bearing
liabilities 179,685 46,158 225,843 81,454 307,298
-------- ------- ------- -------- --------
Interest-earning assets
less interest-bearing
liabilities ($81,669) $31,456 ($50,213) $113,676 $ 63,462
======== ======= ========= ======== ========
- ----------------------------------------------------------------------------
</TABLE>
The Bank measures the impact of changes in interest rates on net interest
income through a comprehensive analysis of the Bank's interest rate
sensitive assets and liabilities. This analysis takes into consideration
projected changes in market interest rates and alternative rate scenarios,
change in the rate of individual interest rate sensitive assets and
liabilities and the effect of competition. Through this quarterly
analysis, management is able to measure the projected effect on net
interest income. During the annual planning process, net interest income
is projected using alternative interest rate scenarios to determine the
effect of changing interest rates on net interest income.
<PAGE> 23
The period of 1994 through 1996 included periods of sustained significant
interest rate decreases and increases as well as changes in the shape of
the yield curve. A stable net interest margin and the steady increase
in net interest income demonstrates the effectiveness of these risk
management techniques.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Margin 4.63% 4.69% 4.64% 4.76% 4.88%
- -----------------------------------------------------------------
</TABLE>
Liquidity management is closely related to asset and liability management.
Liquidity management maintains the resources to fund withdrawals and
other operating requirements. Monitoring maturities and future
commitments and the use of short-term investments are integral parts of
liquidity management.
The primary objective of the Bank's investment portfolio is to invest in
securities of high quality that will provide a reasonable return and will
allow the Bank to maintain a sound liquidity position. Management of the
portfolio is an integral part of liquidity and interest rate risk
management. The Bank does not have complex or leveraged derivatives or
structured notes in its portfolio.
The Board of Directors has established policies regarding the potential
price fluctuation of the portfolio of securities available for sale.
This portfolio had net unrealized gains of $264,000 and $506,000 at
December 31, 1996 and 1995. The price fluctuations experienced during
1996 and 1995 were primarily due to changes in market interest rates and
were well within the policies established by the Board of Directors.
Realization of any unrealized gain or loss will depend upon the future
portfolio management, interest rate risk management and liquidity needs
of the Bank. The regulatory agencies do not include the net unrealized
gain in the calculation of regulatory capital.
<TABLE>
<CAPTION>
An analysis of securities for the five years ended December 31 were as
follows:
Available for sale
(In Thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity $ 2,453 $ 2,425 $ 1,495 $ -- $ --
US Government
and agency 32,119 27,154 21,857 -- --
------- ------- ------- ------- -------
Total $34,572 $29,579 $23,352 $ -- $ --
======= ======= ======= ======= =======
Mortgage-backed $27,202 $18,250 $ 7,980 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
Held to maturity
(In Thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Government
and agency $17,489 $23,530 $24,320 $46,148 $37,848
State and municipal 7,872 5,171 3,354 6,339 7,120
Other 11,443 7,782 4,414 6,220 4,659
------- ------- ------- ------- -------
Total $36,804 $36,483 $32,088 $58,707 $49,627
======= ======= ======= ======= =======
Mortgage-backed $ -- $ -- $ 811 $ 7,123 $15,183
======= ======= ======= ======= =======
- -----------------------------------------------------------------------
</TABLE>
Other than securities guaranteed by the US Government or its agencies,
the Bank held no investment securities from any one issuer that exceed
ten percent of stockholders' equity at December 31, 1996.
Deposit growth through core deposits provides the primary funding for
increases in loans and investment securities. Core deposits include
demand deposits, savings and money market accounts and certificates of
deposit of consumer and corporate customers. Core deposits represented
98 percent and 97 percent of total deposits at December 31, 1996 and 1995.
Management regularly assesses the ability of the Bank to raise funds
through certificates of deposit in denominations of $100,000 or more in
the local and regional market area and has established conservative
guidelines for the total funding to be provided by these deposits.
These deposits were less than 3 percent of total deposits at December
31, 1996 and 1995.
Management also believes that an integral part of liquidity management is
the development of other sources of funding. It is management's policy to
actively cultivate and maintain relationships with correspondent and other
banks for sales of loans for liquidity, credit and interest rate risk
management. Additionally, the Bank has federal funds lines with
correspondent banks and may borrow from the Federal Reserve Bank.
The Bank is a member of the Federal Home Loan Bank of Indianapolis, which
provides an additional source of liquidity and long-term funds to meet
the borrowing needs of customers. Advances from the Federal Home Loan Bank
of Indianapolis are secured through the pledge of investment securities or
mortgage loans. Federal Home Loan Bank advances were $12 million and $17
million at December 31, 1996 and 1995. Management believes that with the
combination of federal funds lines and borrowings from the Federal Reserve
Bank and the Federal Home Loan Bank, the Bank has more than adequate
resources available to meet liquidity needs and to provide for growth.
<PAGE> 25
Sources and Uses of Funds Trends
This table is an analysis of the changes in the average balances for the
last two years:
Analysis of Changes in Average Balances
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Average ------------------ Average ------------------- Average
Balance Amount Percent Balance Amount Percent Balance
-------------------------------- -------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans $259,924 $ 11,759 4.7% $248,165 $ 19,454 8.5% $228,711
Securities
Taxable 86,783 18,149 26.4 68,634 7,958 13.1 60,676
Tax-exempt 4,989 1,641 49.0 3,348 (986) (22.8) 4,334
-------- -------- -------- -------- --------
Total 91,772 19,790 27.5 71,982 6,972 10.7 65,010
Federal funds sold 7,882 (2,190) (21.7) 10,072 3,845 61.7 6,227
-------- -------- -------- -------- --------
Total earning assets 359,578 29,359 8.9 330,219 30,271 10.1 299,948
Cash and due from banks 13,318 1,346 11.2 11,972 132 1.1 11,840
Other assets 9,060 (282) (3.0) 9,342 (849) (8.3) 10,191
-------- -------- -------- -------- --------
Total $381,956 $ 30,423 8.7% $351,533 $ 29,554 9.2% $321,979
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Equity
CDs over $100,000 $ 11,204 $ 1,470 15.1% $ 9,734 $ (1,133) (10.4)% $ 10,867
Savings and interest checking 61,987 1,284 2.1 60,703 (3,844) (6.0) 64,547
Money market deposits 77,578 4,242 5.8 73,336 10,171 16.1 63,165
Consumer CDs 130,359 9,645 8.0 120,714 15,222 14.4 105,492
-------- -------- -------- -------- --------
Total 281,128 16,641 6.3 264,487 20,416 8.4 244,071
Federal funds purchased 461 434 1,607.4 27 (419) (93.9) 446
FHLB advances 16,262 4,665 40.2 11,597 4,098 54.6 7,499
-------- -------- -------- -------- --------
Total interest-bearing funds 297,851 21,740 7.9 276,111 24,095 9.6 252,016
Demand deposits 46,844 3,986 9.3 42,858 2,411 6.0 40,447
Other liabilities 6,172 1,604 35.1 4,568 547 13.6 4,021
Shareholders' equity 31,089 3,093 11.0 27,996 2,501 9.8 25,495
-------- -------- -------- -------- --------
Total $381,956 $ 30,423 8.7% $351,533 $ 29,554 9.2% $321,979
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total average earning assets increased $29.4 million, or 9 percent,
in 1996. The increase in average loans was primarily in mortgage loans,
which increased $6.8 million, or 11 percent, particularly in residential
construction loans. Commercial loans increased $7.3 million, or 7
percent. Average consumer loans decreased $2.3 million, or 3 percent,
due to run-off on the indirect loan portfolio. Direct consumer lending
increased substantially, particularly in home equity lines of credit.
The substantial increase in the securities portfolio was in mortgage-
backed and corporate securities with average lives and terms of five years
or less.
<PAGE> 26
The increase in average earning assets was primarily funded by a $21.7
million, or 8 percent, increase in average total interest-bearing funds.
The increase in average interest-bearing deposits was in consumer
certificates of deposit and money market accounts. Total non-interest
bearing funds invested in earning assets increased $7.6 million, or 14
percent. Average time certificates in denominations of $100,000 or more
represented 3 percent of average total deposits in 1996 and 1995 and 4
percent in 1994, significantly below the levels of banks of comparable
size. With the growth in average earning assets, deposit funding was
augmented with Federal Home Loan Bank advances.
In 1995, total average earning assets increased $30.3 million, or 10
percent, which was primarily in loans. The loan portfolio increase was
in mortgage loans of $12.4 million, or 26 percent, and commercial loans
of $10.5 million, or 10 percent. Consumer loans decreased $3.5 million,
or 4 percent, due to a reduced emphasis on indirect lending and a
concentration on direct lending.
The increase in average earning assets was funded primarily with interest-
bearing deposits. Total non-interest-bearing funds invested in earning
assets increased $6.2 million, or 13 percent.
<PAGE> 27
Item 8 - Financial Statements and Supplementary Data
Consolidated Balance Sheet-Empire Banc Corporation
<TABLE>
<CAPTION>
(In Thousands, Except Share Data) December 31
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 22,603 $ 13,858
Federal funds sold -- 8,000
-------- --------
Cash and cash equivalents 22,603 21,858
Securities
Available for sale, at fair value 34,572 29,579
Held to maturity 36,804 36,483
(fair value: 1996-$37,038, 1995-$36,946)
Mortgage-backed securities
Available for sale, at fair value 27,202 18,250
Loans 272,182 259,102
Less: allowance for loan losses (3,525) (3,200)
-------- --------
Net loans 268,657 255,902
Premises and equipment, net 3,985 3,623
Other real estate -- 280
Accrued income and other assets 6,996 6,451
-------- --------
Total assets $400,819 $372,426
======== ========
Liabilities
Deposits
Non-interest-bearing $ 54,556 $ 46,702
Interest-bearing 289,798 272,838
-------- --------
Total deposits 344,354 319,540
Federal funds purchased 5,500 --
Federal Home Loan Bank advances 12,000 17,000
Accrued expense and other liabilities 6,292 5,881
-------- --------
Total liabilities 368,146 342,421
Shareholders' equity
Preferred stock-$1 par value,
2,000,000 shares authorized, none outstanding
Common stock-$5 par value, 5,000,000 shares authorized,
shares outstanding: 1996-1,746,009; 1995-1,648,767 8,730 8,244
Paid-in-capital 12,350 9,377
Retained earnings 11,419 12,050
Net unrealized gain on securities available for sale,
net of tax: 1996- $89, 1995- $172 174 334
-------- --------
Total shareholders' equity 32,673 30,005
-------- --------
Total liabilities and shareholders' equity $400,819 $372,426
======== ========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
</TABLE>
<PAGE> 28
Consolidated Statement of Income-Empire Banc Corporation
<TABLE>
<CAPTION>
Year Ended December 31
(In Thousands, Except Share Data) 1996 1995 1994
<S> <C> <C> <C>
Interest Income
Loans, including fees $24,536 $23,820 $20,233
Taxable securities
Available for sale 3,548 2,233 1,481
Held to maturity 1,849 1,771 1,422
Tax-exempt securities - held to maturity 250 195 239
Federal funds sold 416 587 253
------- ------- -------
Total interest income 30,599 28,606 23,628
Interest Expense
Deposits 13,068 12,416 9,467
Federal funds purchased 27 1 18
Federal Home Loan Bank advances 971 814 354
------- ------- -------
Total interest expense 14,066 13,231 9,839
------- ------- -------
Net interest income 16,533 15,375 13,789
Provision for loan losses 1,686 745 796
------- ------- -------
Net interest income after
provision for loan losses 14,847 14,630 12,993
Non-Interest Income
Mortgage sales and servicing 1,500 1,070 1,141
Service charges on deposit accounts 1,276 1,302 1,324
Trust income 2,099 1,817 1,563
Other service charges and fees 570 482 450
Other income 405 351 354
Security (losses)/gains -- (5) 11
------- ------- -------
Total non-interest income 5,850 5,017 4,843
Non-Interest Expense
Salaries and employee benefits 8,450 7,866 6,787
Occupancy 1,031 1,006 938
Furniture and equipment 817 859 812
Other expense 3,563 3,763 3,704
------- ------- -------
Total non-interest expense 13,861 13,494 12,241
------- ------- -------
Income before federal income taxes 6,836 6,153 5,595
Federal income taxes 2,259 2,007 1,841
------- ------- -------
Net income $ 4,577 $ 4,146 $ 3,754
======= ======= =======
Earnings per share * $ 2.44 $ 2.25 $ 2.05
Average shares outstanding* 1,875,754 1,841,716 1,832,205
* Retroactively adjusted for a 5% stock dividend in November 1996.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
</TABLE>
<PAGE> 29
Consolidated Statement of Cash Flows-Empire Banc Corporation
<TABLE>
<CAPTION>
(In Thousands) Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Operating Activities
Net income $ 4,577 $ 4,146 $ 3,754
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 704 780 747
Provision for loan losses 1,686 745 796
Mortgage loans originated for sale (60,761) (42,904) (49,533)
Sale of mortgage loans 60,936 42,210 51,655
Net loss/(gain) on securities available for sale -- 5 (11)
Net amortization/accretion on securities 315 471 987
Change in:
Deferred taxes (361) (504) (234)
Interest receivable (9) (407) (271)
Interest payable -- 211 128
Other assets 187 216 1,249
Other liabilities 294 1,090 296
------- ------- -------
Total adjustments 2,991 1,913 5,809
------- ------- ------
Net cash from operating activities 7,568 6,059 9,563
------- ------- -------
Investing activities
Securities available for sale
Proceeds from sales -- 1,995 1,010
Proceeds from maturities 20,145 10,130 7,247
Purchases (34,542) (24,645) (12,710)
Securities held to maturity
Proceeds from maturities 15,272 17,271 22,010
Purchases (15,698) (24,028) (17,708)
Loans granted, net of repayments (14,616) (15,270) (27,851)
Premises and equipment expenditures (1,117) (464) (514)
Proceeds from disposal of assets 51 -- --
-------- -------- -------
Net cash from investing activities (30,505) (35,011) (28,516)
-------- -------- -------
Financing activities
Net increase in deposits 24,814 21,550 18,448
Net increase in federal funds purchased 5,500 -- --
Cash dividends paid (1,983) (1,698) (1,302)
Federal Home Loan Bank advances (5,000) 9,000 3,000
Issuance of common stock 351 331 84
------- ------- -------
Net cash from financing activities 23,682 29,183 20,230
------- ------- -------
Net increase in cash and cash equivalents 745 231 1,277
Cash and cash equivalents at January 1 21,858 21,627 20,350
------- ------- -------
Cash and cash equivalents at December 31 $22,603 $21,858 $21,627
======= ======= =======
</TABLE>
<PAGE> 30
Consolidated Statement of Cash Flows-Empire Banc Corporation (continued)
<TABLE>
<CAPTION>
(In Thousands)
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Interest paid $14,066 $13,019 $ 9,712
Income taxes paid 2,575 2,315 2,103
Transfer of securities from held to
maturity to available for sale upon
adoption of SFAS 115 and interpretations -- 2,883 26,708
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated
Financial Statements.
</TABLE>
<PAGE> 31
Consolidated Statement of Changes in Shareholders' Equity
Empire Banc Corporation
<TABLE>
<CAPTION>
Net Total
Unrealized Share-
Common Paid-In Retained Gain holders'
(In Thousands, Except Share Data) Shares Stock Capital Earnings (Loss) Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 1,299,302 $ 6,496 $ 9,039 $ 8,969 $ $ 24,504
Net unrealized gain on securities
available for sale, net of tax of $55 107 107
Net income for 1994 3,754 3,754
Common stock issued 5,000 25 59 84
Change in net unrealized gain/(loss)
on securities available for sale,
net of tax of $318 (618) (618)
Cash dividends - $.88 per share (1,499) (1,499)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 1,304,302 6,521 9,098 11,224 (511) 26,332
Net income for 1995 4,146 4,146
Common stock issued 15,650 79 257 336
25% stock dividend 328,815 1,644 (1,649) (5)
Directors' deferred compensation plan 22 22
Change in net unrealized gain/(loss)
on securities available for sale,
net of tax of $435 845 845
Cash dividends - $.97 per share (1,671) (1,671)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 1,648,767 8,244 9,377 12,050 334 30,005
Net income for 1996 4,577 4,577
Common stock issued 14,352 72 250 322
5% stock dividend 82,890 414 2,694 (3,108)
Directors' deferred compensation plan 29 29
Change in net unrealized gain/(loss)
on securities available for sale,
net of tax of $82 (160) (160)
Cash dividends - $1.21 per share (2,100) (2,100)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 1,746,009 $ 8,730 $ 12,350 $ 11,419 $ 174 $ 32,673
========= ========= ========= ========= ========= =========
Per share amounts have been adjusted for stock dividends.
The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>
<PAGE> 32
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations
Empire Banc Corporation, a one-bank holding company for Empire National
Bank, is the largest independent bank holding company in northern Michigan.
The Bank is in the general commercial, retail and mortgage banking
business, providing a full range of loan and deposit products. It
operates a trust department providing fiduciary, investment and other
related services and has contracted with a full-service brokerage firm to
make available a variety of investment products to the Bank's customers.
The Bank is headquartered in Traverse City, Michigan, which is the retail,
medical and financial hub for northern Michigan. The Bank's primary market
area is the northwestern portion of northern Michigan.
Note 2 - Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of Empire Banc Corporation (the Corporation) and its wholly-
owned subsidiary, Empire National Bank (the Bank), after elimination of
significant intercompany transactions and accounts.
Statement of Cash Flows - Cash and cash equivalents includes cash on hand,
demand deposits in other institutions and federal funds sold. Cash flows
for customer loan and deposit transactions and for deposits made with other
financial institutions are reported net.
Securities - Securities available for sale may be sold prior to maturity
due to changes in interest rates, prepayment risks, yield and availability
of alternative investments, liquidity needs or other factors. Securities
available for sale are reported at fair value and the net unrealized gain
or loss is reported, net of related tax, as a separate component of
shareholders' equity. If a security is sold or called, the adjusted cost of
the specific security is used to compute the gain or loss. Securities held
to maturity are those securities which management has the ability and
positive intent to hold to maturity. Securities held to maturity are
stated at amortized cost. Premiums and discounts are recognized in
interest income using the interest method.
Allowance for Loan Losses - The allowance for loan losses represents the
amount management estimates is adequate to provide for losses
inherent in the loan portfolio. Management determines the allowance for
loan losses by reviewing selected loans (including large loans, non-accrual
loans and problem and delinquent loans) and establishing specific loss
allocations on these loans. Historical loss information and local
economic conditions are considered in establishing allowances on the
remaining loans. The allowance is increased by provisions charged
to expense and reduced by loan losses, net of recoveries.
Effective January 1, 1995 the Corporation adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114) and Statement No. 118 (SFAS 118),
on loan impairment. Impaired loans are measured based on the present
value of expected cash flows discounted at each loan's effective interest
rate or at the fair value of collateral if the loan is collateral
<PAGE> 33
dependent. Impaired loans are reduced to the present value of expected
future cash flows or to the fair value of collateral by allocating a
portion of the allowance for loan losses. Adopting these standards in
1995 was not material.
Smaller-balance homogeneous loans include residential first mortgage,
residential construction, automobile, home equity and second mortgage
loans, and are collectively evaluated for impairment. Commercial loans and
first mortgage loans secured by other properties are evaluated individually
for impairment. Non-accrual loans rated substandard, doubtful and loss
under the Corporation's loan evaluation system, are considered impaired.
Loans, or portions thereof, are charged off when deemed uncollectible.
SFAS 114 and SFAS 118 disclosures for impaired loans are not materially
different from non-accrual and renegotiated loan disclosures or non-
performing asset and past-due disclosures.
Premises and Equipment - Premises and equipment are depreciated over their
estimated useful lives and are stated at cost less accumulated
depreciation. Depreciation is computed principally using the straight-line
method.
Other Real Estate - Other real estate is carried at the lower of cost or
fair value less estimated costs to sell. Reduction to fair value at
acquisition from a related loan is accounted for as a loan loss.
Subsequent reduction in fair value is charged to other non-interest
expense. Costs incurred to carry other real estate are expensed.
Interest and Fees on Loans - Interest on loans is accrued over the term
of the loans based upon the principal outstanding. Interest accrual is
discontinued when management believes, after considering economic
and business conditions and collection efforts, that collection of
interest is doubtful. Loans are generally moved to non-accrual status
at 90 days or more past due. Under SFAS 114 and SFAS 118, the carrying
value of impaired loans is periodically adjusted for cash payments,
revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
of interest income are reported as such.
Loan origination and commitment fees and related costs are recognized over
the life of the loan as a yield adjustment. Fees on loans sold are
recognized upon sale.
Loan Servicing Rights - The Bank originates and purchases mortgage loans
for sale to the secondary market and sells the loans with servicing
retained. Effective July 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 122 (SFAS 122). For servicing
retained, this Statement requires capitalizing the cost of mortgage
servicing rights, regardless of whether those rights were acquired
through purchase or origination activities. Prior to adoption of SFAS 122,
only purchased loan servicing rights were capitalized.
Beginning July 1, 1995, the cost of mortgage loans originated with the
intent to sell is allocated between the servicing right and the loan
<PAGE> 34
without servicing, based on their relative fair values. The capitalized
cost of loan servicing rights is amortized in proportion to and over the
period of estimated net servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment by
stratifying them based on predominant risk characteristics of the
underlying serviced loans. These risk characteristics include loan
type (i.e., conventional or government insured, fixed or adjustable rate),
term (i.e., 15-year or 30-year), and note rate. Impairment represents
the excess of cost of an individual mortgage rights stratum over its fair
value and is recognized through a valuation allowance.
Income Taxes - Income tax expense is based on the taxes due on the tax
return plus the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, using
current tax rates. Valuation allowances reduce deferred tax assets to the
amounts expected to be realized.
Use of Estimates - Preparing financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Areas where estimates are used include the
allowance for loan losses, carrying value of mortgage servicing rights,
fair values of financial instruments, the accrued liability associated
with the defined benefit pension plan and supplemental retirement plan,
the carrying value of impaired loans, deferred tax assets, the estimated
life of loans and securities and the carrying value of other real estate.
Estimates more susceptible to change in the near term include the allowance
for loan losses, carrying value of mortgage servicing rights, fair value of
financial instruments and the defined benefit pension plan and supplemental
retirement plan liabilities.
Earnings Per Share - Earnings per share of common stock are computed by
dividing net income by the weighted average number of common shares and
common stock equivalents outstanding during the period. All per share
data presented is retroactively adjusted for all stock dividends and
splits. The Corporation declared and issued a 5% stock dividend in
November 1996 and a stock split effected in the form of a 25% stock
dividend in November 1995.
Long-lived Assets - Long-lived assets and certain identifiable intangibles
are reviewed for impairment, pursuant to Statement of Financial Accounting
Standards No. 121(SFAS 121), whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Stock-Based Compensation - The Financial Accounting Standards Board (FASB)
recently issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123). This Statement
establishes a fair value based method of accounting for employee stock
options and similar equity instruments and encourages all companies to
adopt this method. However, the Statement allows companies to continue
measuring compensation cost for such plans using accounting guidelines
in place prior to SFAS 123. The accounting recognition provisions of
SFAS 123 have not been adopted, as the Corporation measures compensation
for employee stock plans using accounting guidance in place prior to
<PAGE> 35
SFAS 123. There were no stock options granted in 1996 or 1995 requiring
pro-forma disclosures of net income and earnings per share under SFAS 123.
Reclassifications - Certain prior year amounts have been reclassified
to conform with current year's presentation.
Note 3 - Cash and Cash Equivalents
The Bank is required to maintain non-interest-bearing reserve balances
with the Federal Reserve. Required reserve balances at December 31,
1996 and 1995 were $4,849,000 and $3,976,000.
Note 4 - Securities
Securities and their fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Available for sale
Unrealized Fair
(In Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
U.S. government and agency $ 32,073 $ 143 $ 97 $ 32,119
Equity 2,330 123 -- 2,453
-------- -------- -------- --------
$ 34,403 $ 266 $ 97 $ 34,572
======== ======== ======== ========
Mortgage-backed $ 27,107 $ 158 $ 63 $ 27,202
======== ======== ======== ========
1995
U.S. government and agency $ 26,930 $ 301 $ 77 $ 27,154
Equity 2,330 95 -- 2,425
-------- -------- -------- --------
$ 29,260 $ 396 $ 77 $ 29,579
======== ======== ======== ========
Mortgage-backed $ 18,063 $ 221 $ 34 $ 18,250
======== ======== ======== ========
</TABLE>
<PAGE> 36
Note 4 - Securities (continued)
<TABLE>
<CAPTION>
Held to maturity
Unrealized Fair
(In Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
U.S. government and agency $ 17,489 $ 120 $ -- $ 17,609
State and municipal 7,872 79 14 7,937
Other 11,443 52 3 11,492
-------- -------- -------- --------
$ 36,804 $ 251 $ 17 $ 37,038
======== ======== ======== ========
1995
U.S. government and agency $ 23,530 $ 292 $ 20 $ 23,802
State and municipal 5,171 101 7 5,265
Other 7,782 101 4 7,879
-------- -------- -------- --------
$ 36,483 $ 494 $ 31 $ 36,946
======== ======== ======== ========
- ---------------------------------------------------------------------------
</TABLE>
Sales of available for sale securities:
There were no sales of securities available for sale during 1996.
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Proceeds $ -- $ 1,995 $ 1,010
Gross gains -- -- 11
Gross losses -- 5 --
- -----------------------------------------------------------------
</TABLE>
Pursuant to the FASB Special Report on Statement No. 115, securities with
a carrying value of $2,853,000, fair value of $2,883,000 and unrealized
gain of $30,000, were transferred at fair value to available for sale
on December 31, 1995.
<PAGE> 37
Note 4 - Securities (continued)
Scheduled maturities of securities available for sale and held to
maturity at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Available for sale
Fair
(In Thousands) Cost Value Yield
- -----------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 8,193 $ 8,185 5.96%
Due from one to five years 23,880 23,934 6.14%
Equity 2,330 2,453 6.97%
------- -------
$34,403 $34,572 6.15%
======= =======
Mortgage-backed $27,107 $27,202 6.53%
======= =======
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
Fair
(In Thousands) Cost Value Yield
- -----------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $12,259 $12,303 6.73%
Due from one to five years 23,690 23,863 6.54%
Due from five to ten years 855 872 6.68%
------- -------
$36,804 $37,038 6.61%
======= =======
- -----------------------------------------------------------
</TABLE>
Investment securities with a book value of $21,417,000 at December 31,
1996 were pledged to secure public deposits, Federal Home Loan Bank
advances and for other purposes.
<PAGE> 38
Note 5 - Loans
<TABLE>
<CAPTION>
The following is a summary of loans at December 31:
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Commercial $122,322 $115,084
Mortgage 71,346 63,809
Consumer 59,031 63,328
Revolving credit 19,483 11,596
Commercial paper -- 5,285
-------- --------
272,182 259,102
Less: allowance for loan losses (3,525) (3,200)
-------- --------
$268,657 $255,902
======== ========
- --------------------------------------------------------------------------
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1 $3,200 $2,900 $2,630
Loans charged off (1,568) (650) (718)
Recoveries 207 205 192
------ ------ ------
Net loans charged off (1,361) (445) (526)
Provision for loan losses 1,686 745 796
------ ------ ------
Balance December 31 $3,525 $3,200 $2,900
====== ====== ======
- --------------------------------------------------------------------------
</TABLE>
Impaired loans
Accounting and disclosure regarding impaired loans under SFAS 114 and
SFAS 118 became effective in 1995.
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Loans for which:
Allowance for loan losses allocated $ 2,138 $ 1,173
Allowance for loan losses not allocated 278 256
------- -------
Impaired loans outstanding at year-end $ 2,416 $ 1,429
======= =======
Average of impaired loans during the year $ 1,578 $ 1,919
Interest income recognized during impairment 86 98
Cash-basis interest income recognized 79 96
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 39
Note 5 - Loans (continued)
Non-accrual loans
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans outstanding December 31 $ 2,131 $ 867
Non-accrual loans considered impaired 1,974 777
</TABLE>
If the non-accrual loans were accruing, additional interest income would
have been $155,000, $122,000 and $146,000 in 1996, 1995 and 1994.
Mortgage loans held for sale at December 31, 1996 and 1995, at the lower
of aggregate cost or market, were $1,879,000 and $2,054,000.
Loans of $21,924,000 at December 31, 1996 were pledged to secure Federal
Home Loan Bank advances.
Note 6 - Mortgage Banking
<TABLE>
<CAPTION>
Mortgage loans serviced for others are not included in the balance sheet.
Unpaid balances of these loans at December 31 are as follows:
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation $190,817 $164,514
Federal National Mortgage Association 26,700 23,633
Other investors 3,073 2,211
-------- --------
$220,590 $190,358
======== ========
- --------------------------------------------------------------------------
Loans serviced for others originated and sold after July 1, 1995, which
correspond to servicing rights that have been capitalized (as shown below)
had an outstanding principal balance of $76,378,000 and $20,355,000 at
December 31, 1996 and 1995. The remaining balance of loans serviced for
others also have servicing rights associated with them; however, the
related servicing rights arose prior to adoption of SFAS 122 and
accordingly have not been capitalized.
</TABLE>
<PAGE> 40
Note 6 - Mortgage Banking (continued)
<TABLE>
<CAPTION>
The carrying value and fair value of capitalized loan servicing rights
consisted of the following as of December 31:
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Unamortized cost $537 $151
Valuation allowance 0 0
---- ----
Carrying value $537 $151
==== ====
Fair value $840 $256
==== ====
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Following is an analysis of the activity for loan servicing rights:
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Amortized cost
Balance January 1 $151 $ 0
Additions 454 154
Amortization (68) (3)
---- ----
Balance December 31 $537 $151
==== ====
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 41
Note 6 - Mortgage Banking (continued)
<TABLE>
<CAPTION>
Mortgage banking income and expense consists of the following:
- --------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net gains on sales of loans $ 785 $ 542 $ 421
Loan servicing income 491 481 429
Net fees 224 47 291
------ ------ ------
Income 1,500 1,070 1,141
------ ------ ------
Salaries and employee benefits 909 763 765
Other direct expense 249 189 172
------ ------ ------
Expense 1,158 952 937
------ ------ ------
Income before income taxes $ 342 $ 118 $ 204
====== ====== ======
- --------------------------------------------------------------------------
</TABLE>
Note 7 - Premises and Equipment
<TABLE>
<CAPTION>
Premises and equipment at December 31:
(In Thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 426 $ 410
Buildings and improvements 4,645 4,577
Equipment 6,557 5,680
------- -------
Total cost 11,628 10,667
Less: accumulated depreciation and amortization (7,643) (7,044)
------- -------
Net book value $ 3,985 $ 3,623
======= =======
- --------------------------------------------------------------------------
Rental expenses for 1996, 1995 and 1994 were $426,000, $415,000 and
$392,000. Depreciation and amortization for 1996, 1995 and 1994 was
$704,000, $780,000 and $747,000.
</TABLE>
<PAGE> 42
Note 8 - Time Deposits
<TABLE>
<CAPTION>
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, at December 31, 1996 and 1995 was $8,334,000
and $8,899,000.
Following are the scheduled maturities of CDs at December 31:
(In Thousands) 1996
- -----------------------------------------------------------------------
<S> <C>
1997 $ 69,419
1998 22,153
1999 22,465
2000 12,717
2001 6,096
After 10,023
--------
$142,873
========
- -----------------------------------------------------------------------
</TABLE>
Note 9 - Federal Home Loan Bank Advances
<TABLE>
<CAPTION>
Advances from the Federal Home Loan Bank of Indianapolis at December
31 were as follows:
(In Thousands) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
7.15% advance, due March 1997 $ 4,000 $ 4,000
5.05% advance, due January 1998 5,000
6.09% advance, due March 1999 3,000 3,000
Floating rate advance due January 1999 -- 5,000
5.49% advance, due November 1996 -- 5,000
------- -------
$12,000 $17,000
======= =======
- -------------------------------------------------------------------
</TABLE>
The fixed rate advances have no prepayment provisions. Securities and
mortgage loans have been pledged to fully collateralize these advances.
<PAGE> 43
Note 10 - Other Non-Interest Expense
<TABLE>
<CAPTION>
Other non-interest expense for the years ended December 31 was:
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Deposit insurance $ 153 $ 364 $ 618
Outside services 617 454 466
Legal and professional 326 341 272
Business taxes 336 371 317
Other 2,131 2,233 2,031
------ ------ ------
$3,563 $3,763 $3,704
====== ====== ======
- -------------------------------------------------------------------
</TABLE>
Note 11 - Federal Income Taxes
<TABLE>
<CAPTION>
Federal income taxes for the years ended December 31 were:
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current expense $2,339 $2,511 $2,083
Deferred benefit (80) (504) (242)
------ ------ ------
Total federal income tax $2,259 $2,007 $1,841
====== ====== ======
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The following reconciles federal income tax expense and the amount
computed by applying the federal statutory rate of 34% to income
before federal income tax:
(In Thousands) 1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income
before federal income tax $2,324 $2,092 $1,902
(Deduct) add:
Effect of tax-exempt interest (83) (69) (76)
Other 18 (16) 15
------ ------ ------
Total federal income tax $2,259 $2,007 $1,841
====== ====== ======
Effective tax rate 33.0% 32.6% 32.9%
====== ====== ======
</TABLE>
<PAGE> 44
Note 11 - Federal Income Taxes (continued)
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at
December 31 are presented below:
(In Thousands) 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 794 $ 683
Deferred compensation 1,217 959
Other 153 246
------ ------
Total deferred tax assets 2,164 1,888
------ ------
Deferred tax liabilities
Securities accretion (74) (50)
Cash value of life insurance (34) (33)
Mortgage servicing (183) --
Net unrealized appreciation on
securities available for sale (89) (172)
Other (8) (20)
------ ------
Total deferred tax liabilities (388) (275)
------ ------
Net deferred tax asset $1,776 $1,613
====== ======
A valuation allowance for deferred tax assets is not considered
necessary as it is more likely than not that future taxable income
will be sufficient to realize the tax benefit of these assets.
</TABLE>
<PAGE> 45
Note 12 - Employee Benefit Plans
An integrated employee benefit plan structure provides basic retirement
income and the opportunities to build retirement savings through tax-
deferred voluntary contributions and participate in stock ownership of
the Corporation. A description of the individual plan components of this
integrated structure follows.
A defined benefit pension plan covers substantially all full-time
employees. The maximum amount that can be deducted for federal income tax
purposes is contributed annually and employees do not contribute. Plan
assets consist of equity and fixed income securities. The plan's funded
status and amounts included in the balance sheet at December 31 are:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value
Accumulated benefit obligation
Vested $ (782) $ (702)
Non-vested (68) (72)
------- -------
Total $ (850) $ (774)
======= =======
Projected benefit obligation
for service rendered to date $(1,374) $(1,293)
Plan assets at fair value 1,012 770
------- -------
Funded status (362) (523)
Unrecognized net transition obligation 305 335
Unrecognized prior service cost (16) (17)
Unrecognized loss 40 192
------- -------
Accrued pension liability $ (33) $ (13)
======= =======
</TABLE>
Pension expense includes the following for the years ended December 31:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned $ 103 $ 76 $ 86
Interest cost on projected benefit
obligation 99 79 74
Actual return on plan assets (119) (119) --
Net amortization and deferral 83 98 (4)
-------- -------- --------
Net pension expense $ 166 $ 134 $ 156
======== ======== ========
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 46
Note 12 - Employee Benefit Plans (continued)
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1996
and 7% and 8% in 1995 and 1994. The increase in future compensation
was 4.5% in each year. The change in the discount rate for 1996
decreases the accumulated benefit obligation and the projected benefit
obligation by $76,000 and $136,000. The expected long-term rate of
return on assets was 9% for all years.
A supplemental retirement program for certain executive officers provides
benefits which are integrated with the other benefit plans.
<TABLE>
<CAPTION>
(In Thousands) 1996 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $ (221) $ (184)
====== ======
Projected benefit obligation $ (694) $ (651)
Unrecognized net transition obligation 137 149
Unrecognized prior service cost 26 28
Unrecognized loss 5 66
------ ------
Accrued pension liability $ (526) $ (408)
====== ======
- ------------------------------------------------------------------------
</TABLE>
Net plan cost includes the following:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned $ 58 $ 50 $ 45
Interest cost on projected
benefit obligation 45 52 36
Net amortization 14 18 16
------ ------ ------
Net plan cost $ 117 $ 120 $ 97
====== ====== ======
- ------------------------------------------------------------------------
</TABLE>
The weighted average discount rate and the rate of increase in future
compensation used in determining the projected benefit obligation were
7.5% and 5% in 1996, 7% and 5% in 1995 and 8% and 6% in 1994.
A 401 (k) profit sharing plan covers substantially all full-time employees.
Participants may defer up to 12.5% of their salaries and the Bank may match
50% of the employees' deferrals to a maximum of 3%. Expenses for 1996,
1995 and 1994 were $121,000, $107,000 and $103,000.
<PAGE> 47
Note 12 - Employee Benefit Plans (continued)
An Employee Stock Ownership Plan (ESOP) covers substantially all full-time
employees. At December 31, 1996 the plan had no indebtedness and held
239,955 shares of stock allocated and voted by employees. The annual
contribution to the ESOP is determined by the Board of Directors.
Contributions for 1996, 1995, and 1994 were $142,000, $129,000 and
$123,000.
Agreements granting death benefits funded with life insurance are provided
to certain officers while employed. The financial statement impact of
these arrangements is not material.
Note 13 - Long-Term Incentive Plan
A long-term incentive plan grants certain officers stock options and
tandem stock appreciation rights. All options and rights under the plan
have been granted. The rights vest over five years and expire ten years
from grant. As of December 31, 1996, 179,184 stock options and 84,540
stock appreciation rights were vested. The weighted average exercise
price of the stock options at year-end 1996 was $10.59 and the weighted
average remaining option life was 3.5 years. The expenses on the stock
appreciation rights for 1996, 1995 and 1994 were $672,000, $798,000 and
$100,000. The following is a summary of stock options and rights,
granted and exercised, for the years presented, restated for all stock
dividends and splits:
<TABLE>
<CAPTION>
Options/Rights
--------------
Exercise Price Stock Appreciation
Per Share Options Rights
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding - December 31, 1993 $ 7.26 - $15.41 221,842 103,701
Exercised in 1994 7.26 (6,563) (3,281)
------- -------
Outstanding - December 31, 1994 7.26 - 15.41 215,279 100,420
Exercised in 1995 7.26 (15,291) (7,644)
------- -------
Outstanding - December 31, 1995 7.26 - 15.41 199,988 92,776
Exercised in 1996 7.26 (10,862) (5,431)
------- -------
Outstanding - December 31, 1996 $ 7.26 - $17.49 189,126 87,345
======= =======
- -------------------------------------------------------------------------
</TABLE>
Note 14 - Related Party Transactions
Certain directors and executive officers of the Corporation and the
Bank (including family members, affiliates and companies in which
they are principal owners) had loans with the Bank in the ordinary
course of business. The aggregate amount of loans to such related
parties at December 31, 1996 amounted to $3,939,000. During 1996,
new loans to such related parties amounted to $3,366,000 and repayments
amounted to $2,986,000.
<PAGE> 48
Note 15 - Off-Balance Sheet Financial Instruments
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to make loans
and unused lines of credit. The exposure to credit loss is the contractual
amount of these instruments, assuming the amounts are fully advanced and
collateral or other security is of no value. Collateral for loans and
letters of credit is usually in the form of cash, inventory, securities or
other real estate and personal property. The Bank's policy is to require
suitable collateral prior to the disbursement of funds. The following is
a summary of commitments as of December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Commitments to make loans $26,285 $22,712
Unused lines of credit 45,513 35,313
Standby letters of credit 1,563 1,707
- ------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, commitments to make loans included $7.4
million and $5.8 million of primarily variable rate commercial loans.
These commitments generally have termination dates of 90 days or less
and may require a fee. Commitments to make loans also include commitments
for primarily fixed rate mortgage loans of $11.7 million and $11.3 million
at December 31, 1996 and 1995, which are intended for sale in the secondary
market upon closing. Other commitments include variable rate mortgage
loans of $4.3 million and $4.5 million at December 31, 1996 and 1995.
Note 16 - Shareholder Rights Plan
The Shareholder Rights Plan is designed to protect shareholders against
unsolicited attempts to acquire control of the Corporation without offering
a fair price to all shareholders. Five hundred thousand shares Series A
Junior Participating Preferred Stock are reserved for purchase rights
issued to holders of and in tandem with shares of common stock.
Generally, if a person or group acquires or announces a tender offer
for 20% or more of the Corporation's common stock and the acquiror
engages in certain business transactions, each right, other than those held
by the acquiror, entitles the holder to acquire common stock or other
securities with a market value twice the $50 per right exercise price.
The Corporation may redeem the rights at one cent per right until 20 days
after a 20% position has been acquired.
<PAGE> 49
Note 17 - Fair Value Disclosure
Fair values of financial instruments as estimated as follows:
Short-term financial instruments: The carrying value is a reasonable
estimate of fair value for cash and cash equivalents and accrued interest.
Securities held to maturity and available for sale: Fair values are
based on quoted market prices.
Loans: Fair value for certain homogeneous categories of loans, such
as some residential mortgages, is estimated using quoted market prices
for similar loans, adjusted for differences in loan characteristics.
The fair values of other types of loans are estimated by discounting
future cash flows, including estimates of prepayments, using current
rates at which similar loans would be made to borrowers with similar
credit ratings and for the same maturities.
Deposits: The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit is estimated using rates
currently offered for deposits of similar maturities.
Federal funds purchased: The carrying amounts of borrowings maturing
within 90 days approximate their fair value.
Federal Home Loan Bank advances: Fair values are estimated using
discounted cash flow based on current borrowing rates for similar
arrangements.
Off-balance sheet instruments: Fair values for off-balance sheet
lending commitments are based on fees currently charged for similar
agreements, considering the terms of the agreements and credit standing.
<PAGE> 50
Note 17 - Fair Value Disclosure - (continued)
Estimated fair values of financial instruments were as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 22,603 $ 22,603 $ 21,858 $ 21,858
Securities:
Available for sale 61,774 61,774 47,829 47,829
Held to maturity 36,804 37,038 36,483 36,946
Loans net of allowance 268,657 277,077 255,902 259,016
Accrued interest receivable 2,631 2,631 2,622 2,622
Financial liabilities
Deposits 344,354 345,822 319,540 322,431
Federal Home Loan Bank Advances 12,000 11,987 17,000 17,094
Accrued interest payable 1,033 1,033 1,033 1,033
- -------------------------------------------------------------------------
</TABLE>
The fair value of off-balance sheet instruments at December 31, 1996 and
1995 is not material.
<PAGE> 51
Note 18 - Regulatory Capital
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. The regulations require
meeting specific capital adequacy guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital
classification is also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. To be considered
adequately capitalized (as defined) under the regulatory framework for
prompt corrective action, minimum capital ratios must be maintained. The
tier 1 leverage, tier 1 risk-based and total risk-based ratios are set
forth in the table below. Capital ratios for the Bank are consistent
with the Corporation's capital ratios. The Bank and Corporation's capital
ratios are significantly above the well-capitalized standards. The
following summarizes the consolidated Corporation's capital amounts and
ratios:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital
Shareholders' equity $32,673 $30,005
Less: Goodwill (397) (437)
Net unrealized gains (174) (334)
------- -------
Total tier 1 capital 32,102 29,234
Tier 2 capital 3,509 3,200
------- -------
Total qualifying capital $35,611 $32,434
======= =======
Risk-weighted assets $280,705 $260,163
Average quarterly assets 396,033 362,767
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 52
Note 18 - Regulatory Capital (continued)
<TABLE>
<CAPTION>
Regulatory
Capital Standards
------------------------
Adequately Well Actual Actual
Capitalized Capitalized 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based ratios
Tier 1 leverage ratio 4% 5% 8.11% 8.06%
Tier 1 risk-based capital 4% 6% 11.44% 11.24%
Total risk-based capital 8% 10% 12.69% 12.47%
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Regulatory
Capital Standards
------------------------
Adequately Well Actual Actual
Capitalized Capitalized 1996 1995
- --------------------------------------------------------------------------
Risk-based capital amounts
(In Thousands)
<S> <C> <C> <C> <C>
1996
Tier 1 leverage $15,841 $19,802 $32,102
Tier 1 risk-based 11,228 16,842 32,102
Total risk-based 22,456 28,071 35,611
1995
Tier 1 leverage $14,511 $18,138 $29,234
Tier 1 risk-based 10,407 15,610 29,234
Total risk-based 20,813 26,016 32,434
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 53
Note 19 - Empire Banc Corporation
(Parent Company Only)
Condensed Financial Statements
<TABLE>
<CAPTION>
The Corporation's primary source of funds to pay dividends to shareholders
is the dividends it receives from the Bank. The Bank is subject to certain
restrictions on the amount of dividends that it may declare without prior
regulatory approval. At December 31, 1996, $5,100,000 of retained earnings
were available for dividend declaration without prior regulatory approval.
Dividends paid to the Corporation by the Bank were $2,100,000 in 1996 and
$1,700,000 in 1995.
Following are condensed parent company financial statements:
Condensed Balance Sheet
December 31
(In Thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,105 $ 865
Investment in subsidiary 31,646 29,234
Other assets 282 304
------- -------
Total assets $30,033 $30,403
======= =======
Liabilities and shareholders' equity
Other liabilities $ 360 $ 398
Shareholders' equity 32,673 30,005
------- -------
Total liabilities and
shareholders' equity $33,033 $30,403
======= =======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended December 31
(In Thousands) 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary $ 2,100 $ 1,700 $ 1,564
Net expense (142) (126) (169)
Federal income tax benefit 48 43 57
Equity in undistributed net
income of subsidiary 2,571 2,529 2,302
-------- -------- --------
Net Income $ 4,577 $ 4,146 $ 3,754
======== ======== ========
</TABLE>
<PAGE> 54
Note 20 - Empire Banc Corporation
(Parent Company Only)
Condensed Financial Statements - (continued)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended December 31
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities
Net income $ 4,577 $ 4,146 $ 3,754
Adjustments
Other (134) 32 (68)
Subsidiary net income (4,671) (4,229) (3,866)
------ ------ ------
Net cash from operating activities (228) (51) (180)
Cash flow from investing activities
Subsidiary dividends received 2,100 1,700 1,564
Cash flow from financing activities
Dividends paid (1,983) (1,698) (1,302)
Issuance of common stock 351 353 84
------- ------- -------
Net change in cash and due from banks 240 304 166
Cash and due from banks at January 1 865 561 395
------- ------- -------
Cash and due from banks at December 31 $ 1,105 $ 865 $ 561
======= ======= =======
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 55
Independent Auditor's Report
CROWE CHIZEK
To the Shareholders and
Board of Directors
Empire Banc Corporation
Traverse City, Michigan
We have audited the accompanying consolidated balance sheet of Empire
Banc Corporation as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Empire
Banc Corporation as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
- ---------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 23, 1997
<PAGE> 56
Quarterly Financial Data
Empire Banc Corporation
The following is a summary of selected quarterly results of operations
for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(In Thousands, Quarter Ended
Except Share Data) 12/31 9/30 6/30 3/31
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net interest income $4,237 $4,206 $4,062 $4,028
Provision for loan losses 809 416 210 251
Non-interest income 1,600 1,499 1,392 1,359
Non-interest expense 3,163 3,525 3,591 3,582
Income before income taxes 1,865 1,764 1,653 1,554
Net income 1,249 1,181 1,104 1,043
Earnings per share .66 .63 .59 .56
- -----------------------------------------------------------------------
1995
Net interest income $4,143 $3,918 $3,709 $3,605
Provision for loan losses 120 266 118 241
Non-interest income 1,331 1,339 1,188 1,159
Non-interest expense 3,591 3,414 3,334 3,155
Income before income taxes 1,763 1,577 1,445 1,368
Net income 1,188 1,062 973 923
Earnings per share .64 .57 .53 .51
- -----------------------------------------------------------------------
Per share amounts have been adjusted for stock dividends.
</TABLE>
<PAGE> 57
Item 9 - Changes in and disagreements with Accountants on Accounting
and Financial Disclosure.
None
PART III
The information called for by the items within this part is
included in the Corporation's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held May 13, 1997,
to be filed with the Commission, and is incorporated herein
by reference, as follows:
<TABLE>
<CAPTION>
Pages in 1997
Proxy Statement
<S> <C>
Item 10. Directors and Executive Officers
of the Corporation 2-4, 11
In addition, the information set
forth on page 6 of Part I of this
Form 10-K, is incorporated herein
by reference.
Item 11. Executive Compensation 5-7, 10-11
The information under the captions
"Compensation Committee Report on
Executive Compensation" and "Performance
Graph" is not incorporated herein.
Item 12. Security Ownership of Certain Beneficial
Owners and Management 2-4
Item 13. Certain Relationships and Related
Transactions: 10
The information appearing in Note 14 of
the Notes to Consolidated Financial
Statements of this Form 10-K, is also
incorporated herein by reference in
response to this Item.
</TABLE>
<PAGE> 58
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a) The following documents are filed as part of this report:
1. The following financial statements of the Corporation and
related items are included in this report on the pages
indicated:
Page(s)
-------
Consolidated Balance Sheet 27
Consolidated Statement of Income 28
Consolidated Statement of Cash Flows 29-30
Consolidated Statement of Changes
in Shareholders' Equity 31
Notes to Consolidated Financial
Statements 32-54
Independent Auditor's Report 55
2. All financial statement schedules for which provision is made
in the applicable accounting regulations of the Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. The following exhibits are required for this Report by Item
601 of Regulation S-K.
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession. Not applicable.
(3a) Articles of Incorporation. Previously filed as Exhibit
B to Corporation's definitive Proxy Statement filed March
27, 1994 in connection with the Corporation's 1994 annual
meeting of shareholders and incorporated herein by
reference.
(3b) Bylaws. Previously filed as an exhibit to Corporation's
Current Report on Form 8-K, dated January 26,1995 and
incorporated herein by reference.
(4) Instruments defining the rights of security holders are
contained in the Articles of Incorporation
(see Exhibit 3a), Bylaws (see Exhibit 3b), and Rights
Agreement dated December 19, 1990 between Corporation and
the Bank as Rights Agent (previously filed as an exhibit
to Corporation's Current Report on Form 8-K, dated
December 19, 1990 and incorporated herein by reference).
(9) Voting Trust Agreement dated June 1, 1990 with respect
to the Corporation's common stock (previously filed as
an exhibit to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1990 and
incorporated herein by reference).
(10) Material Contracts. * Denotes executive compensation
plans and arrangements in which the Corporation's
executive officers participate.
</TABLE>
<PAGE> 59
<TABLE>
<S> <C>
(10a) * Form of Management Continuity Agreement (with
amendment) entered into and between the Corporation and
each of six executive officers (previously filed as
Exhibit (10a) to Corporation's Annual Report on Form 10-K
for the year ended December 31, 1990 and incorporated
herein by reference).
(10b) * Empire Banc Corporation Stock Option Plan, as
amended to date (previously filed as Exhibit (10b) to
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by
reference).
(10c) * Empire National Bank Supplemental Executive
Retirement Plan (previously filed as Exhibit (10c) to
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1991 and incorporated herein by
reference).
(10d) * Empire Bank Corporation Directors' Deferred
Compensation and Stock Investment Plan (previously filed
as Exhibit (10d) to Corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference).
(10e) * Empire Banc Corporation Directors' Fee Deferral
Plan (previously filed as Exhibit (10e) to Corporation's
Annual Report on Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
(11) Statement re computation of per share earnings.
Not applicable.
(12) Statements re computation of ratios. Not applicable.
(18) Letter re change in accounting principles. Not applicable.
(21) Subsidiaries of Corporation. The Bank is the only
subsidiary of the Corporation.
(22) Published report regarding matters submitted to vote of
security holders. Not applicable.
(23) Consent of Crowe, Chizek and Company LLP.
(24) Power of attorney. Not applicable.
(27) Financial Data Schedule
(28) Information from reports furnished to state insurance
regulatory authorities. Not applicable.
(99) Additional exhibits. Not applicable.
<PAGE> 60
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized, on February 20, 1997.
<TABLE>
<S> <S>
EMPIRE BANC CORPORATION
-----------------------
(Registrant)
\s\ James E. Dutmers, Jr.
-------------------------
James E. Dutmers, Jr.
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed by the following persons on behalf of
the Corporation and in the capacities indicated on February 20, 1997.
\s\ James E. Dutmers, Jr. \s\ Robert L. Israel
----------------------------- -----------------------------
James E. Dutmers, Jr. Robert L. Israel
Director and Chief Executive Director
Officer (principal executive
officer)
\s\ William T. Fitzgerald, Jr.
------------------------------ -----------------------------
William T. Fitzgerald, Jr. John R. Anderson
Chief Financial Officer Director
(principal financial and
accounting officer)
\s\ Don A. Good, M.D.
----------------------------- -----------------------------
Michael H. Dennos Don A. Good, M.D.
Director Director
\s\ Louis A. Smith
----------------------------- -----------------------------
Deborah J. Knudsen Louis A. Smith
Director Director
\s\ Thomas G. McIntyre \s\ Ronald G. Reffitt, Sr.
----------------------------- -----------------------------
Thomas G. McIntyre Ronald G. Reffitt, Sr.
Director Director
\s\ John M. Rockwood, Jr. \s\ Laurence P. Skendzel, M.D.
----------------------------- ------------------------------
John M. Rockwood, Jr. Laurence P. Skendzel, M.D.
Director Director
</TABLE>
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
- -----------------------------------------------------------
<S> <C>
23 Consent of Crowe Chizek and Company
27 Financial Data Schedule
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Empire Banc Corporation on Form S-8 (Registration Statement No. 33-
58578), of our report dated January 23, 1997 on the consolidated financial
statements of Empire Banc Corporation, as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996,
which report is included in the 1996 Annual Report on Form 10-K of Empire
Banc Corporation.
<TABLE>
<S> <S>
/s/ Crowe, Chizek and Company LLP
----------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 20, 1997
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,508
<INT-BEARING-DEPOSITS> 95
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,774
<INVESTMENTS-CARRYING> 36,804
<INVESTMENTS-MARKET> 37,038
<LOANS> 272,182
<ALLOWANCE> 3,525
<TOTAL-ASSETS> 400,819
<DEPOSITS> 344,354
<SHORT-TERM> 9,500
<LIABILITIES-OTHER> 6,292
<LONG-TERM> 8,000
0
0
<COMMON> 8,730
<OTHER-SE> 23,943
<TOTAL-LIABILITIES-AND-EQUITY> 400,819
<INTEREST-LOAN> 24,536
<INTEREST-INVEST> 5,647
<INTEREST-OTHER> 416
<INTEREST-TOTAL> 30,599
<INTEREST-DEPOSIT> 13,068
<INTEREST-EXPENSE> 14,066
<INTEREST-INCOME-NET> 16,533
<LOAN-LOSSES> 1,686
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,861
<INCOME-PRETAX> 6,836
<INCOME-PRE-EXTRAORDINARY> 6,836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,577
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.44
<YIELD-ACTUAL> 4.63
<LOANS-NON> 2,131
<LOANS-PAST> 172
<LOANS-TROUBLED> 408
<LOANS-PROBLEM> 2,062
<ALLOWANCE-OPEN> 3,200
<CHARGE-OFFS> 1,568
<RECOVERIES> 207
<ALLOWANCE-CLOSE> 3,525
<ALLOWANCE-DOMESTIC> 2,439
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,086
</TABLE>
