<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, 1997. 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. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 19, 1998, computed by reference to the
average of the closing bid and asked price for such stock on that date
was $65,269,000. 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 19, 1998, there were outstanding 1,963,182 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 5, 1998 are incorporated by reference into Part III.
The Exhibit Index is located on page number 55.
<PAGE> 2
PART I
Item 1 - Business.
Empire Banc Corporation (the "Corporation") is incorporated in Michigan
and is a bank holding company. The Empire National Bank of Traverse City
(the "Bank"), is a wholly-owned subsidiary of the Corporation.
The Bank was established in 1912 in Empire, Michigan and is 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 consumer and business loan and deposit products. The Bank
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 from the
Bank. The Bank's principal source of revenue is interest and fees on
loans. The Bank's revenue for the three most recent years is as follows.
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans 67% 67% 71%
Other interest income 16% 17% 14%
Non-interest income 17% 16% 15%
---- ---- ----
100% 100% 100%
==== ==== ====
</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 eleven locations. The Bank has
no foreign operations.
As of December 31, 1997, the Bank employed 200 full-time and 31 part-time
employees.
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.
The majority of banking institutions with offices in this market area are
members of holding companies with substantially more assets than the
Corporation.
<PAGE> 3
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 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, 1997 totaled over $243 million. Mortgage
banking activity is detailed in 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.
The Bank is a member of the Federal Home Loan Bank of Indianapolis, which
is 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
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
<PAGE> 4
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, 1997 and 1996, 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, 1997, 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. Under the Reigle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Act"), 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. Both national and state-
chartered banks are permitted to branch and merge across state lines.
The State of Michigan allows 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.
The Comptroller of the Currency has guidelines for appropriate levels of
capital for the Bank. The Federal Reserve Board has similar guidelines
for the Corporation. Such guidelines 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.
Under Federal Deposit Insurance Corporation Improvement Act of 1991,
the FDIC has implemented risk based premiums for deposit insurance,
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. The effective assessment rate ranged from 0 basis points for
<PAGE> 5
well-capitalized institutions displaying little risk, to 27 basis points
for undercapitalized institutions displaying high risk. 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 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.
Management is not aware of any existing trends, events, uncertainties or
current recommendations by regulatory authorities that are expected to
have a material impact on the Corporation's operating results or financial
condition.
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 seven additional branch and automated
teller machine locations. The leases expire at various times through
the years 2011 and all include renewal periods. Net aggregate annual
rentals for banking facilities in 1997 were $437,000.
In addition, the Bank owns and operates six additional branch facilities,
none of which are encumbered. The Bank operates drive-thru facilities at
most of its office locations and has on location and remote automatic
teller machines for customer use in its market area.
<PAGE> 6
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
(54) of the Corporation and Empire National
Bank
Robert L. Israel President and Chief Operating Officer
(54) of the Corporation and Empire National
Bank
William T. Fitzgerald, Jr. Vice President, Secretary/Treasurer
(52) of the Corporation; Division Vice
President and Chief Financial
Officer of Empire National Bank
Marilyn J. McCool Vice President of the Corporation;
(51) Division Vice President and Director
of Personnel of Empire National Bank
James M. Merenda Vice President of the Corporation;
(53) Division Vice President and Senior
Trust Officer of Empire National
Bank
Bruce W. Reavely Vice President of the Corporation;
(49) Division Vice President and Senior
Operations Officer of Empire
National Bank
Daniel G. Stoudt Vice President of the Corporation;
(51) Division Vice President and Senior
Loan Officer of Empire National Bank
</TABLE>
<PAGE> 7
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 1997 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 OTC Bulletin
Board, 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 525
holders of the Corporation's common stock as of December 31, 1997.
Quarterly cash dividends were declared during 1997 and 1996 totaling
$1.30 and $1.10 per common share per year. Note 20 of the 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 ten percent stock dividend paid in
November 1997.
<TABLE>
<CAPTION>
Price Range
Quarter High Low Dividends
- ----------------------------------------------------------------
<S> <C> <C> <C>
1997
Fourth $46.00 $40.91 $.350
Third 40.91 37.05 .318
Second 37.05 35.46 .318
First 35.46 33.64 .318
1996
Fourth 33.64 32.68 .318
Third 32.68 32.04 .260
Second 32.04 30.19 .260
First 30.19 27.05 .260
Amounts retroactively adjusted for stock dividends.
</TABLE>
<PAGE> 8
Item 6 - Selected Financial Data - Empire Banc Corporation
<TABLE>
<CAPTION>
(in thousands, except per share data)
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest income $ 33,419 $ 30,599 $ 28,606 $ 23,628 $ 21,775
Interest expense 15,189 14,066 13,231 9,839 8,842
-------- -------- -------- -------- --------
Net interest income 18,230 16,533 15,375 13,789 12,933
Provision for loan losses 1,459 1,686 745 796 447
Non-interest income 6,809 5,850 5,017 4,843 5,063
Non-interest expense 15,737 13,861 13,494 12,241 12,542
-------- -------- -------- -------- --------
Income before taxes 7,843 6,836 6,153 5,595 5,007
Federal income taxes 2,598 2,259 2,007 1,841 1,600
-------- -------- -------- -------- --------
Net income $ 5,245 $ 4,577 $ 4,146 $ 3,754 $ 3,407
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------
Per Share:
Earnings per share $ 2.71 $ 2.39 $ 2.19 $ 2.00 $ 1.82
Diluted earnings per share 2.52 2.22 2.05 1.86 1.72
Dividends 1.30 1.10 .88 .80 .63
Book value 18.63 17.01 15.75 13.98 13.06
- ----------------------------------------------------------------------------------
Ratios Based on Net Income:
Return on average equity 15.36% 14.72% 14.81% 14.72% 14.61%
Return on average assets 1.26 1.20 1.18 1.17 1.15
Dividend payout ratio 48.08 45.90 40.30 39.93 34.22
Average shareholders' equity
as a percent of average assets 8.23 8.14 7.96 7.92 7.85
- ----------------------------------------------------------------------------------
Balance Sheet:
Assets $442,953 $400,819 $372,426 $336,951 $313,054
Loans 302,469 272,182 259,102 243,583 218,380
Securities 98,754 98,578 84,312 64,231 65,830
Deposits 386,670 344,354 319,540 297,989 279,541
Shareholders' equity 36,199 32,673 30,005 26,332 24,504
- ----------------------------------------------------------------------------------
Per share amounts have been adjusted for stock dividends.
</TABLE>
<PAGE> 9
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 1997, the Corporation achieved record earnings of $5,245,000, an
increase of $668,000, or 14.6 percent, over the $4,577,000 earned in
1996. In 1996, net income increased $431,000, or 10.4 percent.
Earnings Per Share
Earnings per share were $2.71 for 1997, compared to $2.39 in 1996 and $2.19
in 1995. Diluted earnings per share were $2.52, compared to $2.22 in 1996
and $2.05 in 1995. Diluted earnings per share, as disclosed, are consistent
with per share reporting in prior years.
Return on Average Shareholders' Equity
Return on average shareholders' equity measures how profitably the
shareholders' invested capital is employed. Return on average equity was
15.4 percent for 1997, compared to 14.7 percent and 14.8 percent in 1996
and 1995.
Return on Average Assets
Return on average assets, a measure of profitability, was 1.26
percent in 1997, compared to 1.20 percent and 1.18 percent in 1996 and
1995.
Book Value Per Share
Book value per share of common stock increased 10 percent to $18.63 at
December 31, 1997, compared to $17.01 and $15.75 at December 31, 1996 and
1995.
<PAGE> 10
Summary of Operating Results
The following is a summary of the major components of the consolidated
operating results:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $18,230 $16,533 $15,375
Add: Taxable equivalent (TE) adjustment 135 127 106
------- ------- -------
Net interest income - (TE) 18,365 16,660 15,481
Provision for loan losses 1,459 1,686 745
Non-interest income 6,809 5,850 5,017
Non-interest expense 15,737 13,861 13,494
------- ------- -------
Income before tax - (TE) 7,978 6,963 6,259
Income taxes,
including TE adjustment 2,733 2,386 2,113
------- ------- -------
Net income $ 5,245 $ 4,577 $ 4,146
======= ======= =======
</TABLE>
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> 11
Net Interest Income
Average Balance Sheet, Interest Income/Expense, Average Rates
<TABLE>
<CAPTION>
(in thousands,
taxable equivalent) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans, including fees 1,2 $287,225 $ 27,081 9.43% $259,924 $ 24,552 9.45% $248,165 $ 23,835 9.60%
Securities
Taxable 89,331 5,728 6.41 86,783 5,397 6.22 68,634 4,004 5.83
Tax-exempt 1 5,213 369 7.08 4,989 361 7.24 3,348 286 8.54
-------- -------- -------- -------- -------- --------
Total 94,544 6,097 6.45 91,772 5,758 6.27 71,982 4,290 5.96
Federal funds sold 6,882 376 5.46 7,882 416 5.28 10,072 587 5.83
-------- -------- -------- -------- -------- --------
Total earning assets/
interest income 388,651 33,554 8.63% 359,578 30,726 8.55% 330,219 28,712 8.69%
Cash and due from banks 14,950 13,318 11,972
Other assets 11,181 9,060 9,342
-------- -------- --------
Total $414,782 $381,956 $351,533
======== ======== ========
Liabilities and Equity
CDs over $100,000 $ 10,690 566 5.29% $ 11,204 595 5.31% $ 9,734 589 6.05%
Savings and interest checking 64,526 1,427 2.21 61,987 1,351 2.18 60,703 1,371 2.26
Money market deposits 98,357 4,321 4.39 77,578 3,214 4.14 73,336 3,246 4.43
Time Deposits 134,480 8,119 6.04 130,359 7,908 6.07 120,714 7,210 5.97
-------- -------- -------- -------- -------- --------
Total 308,053 14,433 4.69 281,128 13,068 4.65 264,487 12,416 4.69
Federal funds purchased 651 37 5.68 461 27 5.86 27 1 6.14
FHLB advances 12,219 719 5.88 16,262 971 5.97 11,597 814 7.02
-------- -------- -------- -------- -------- --------
Total interest-bearing
funds/interest expense 320,923 15,189 4.73% 297,851 14,066 4.72% 276,111 13,231 4.79%
-------- -------- -------- -------- -------- --------
Demand deposits 52,794 46,844 42,858
Other liabilities 6,918 6,172 4,568
Shareholders' equity 34,147 31,089 27,996
-------- -------- --------
Total $414,782 $381,956 $351,533
======== ======== ========
Net interest spread (TE) 3.90% 3.83% 3.90%
===== ===== =====
Net interest income (TE) $ 18,365 $ 16,660 $ 15,481
======== ======== ========
Net interest margin (TE) 4.73% 4.63% 4.69%
===== ===== =====
- -----------------------------------------------------------------------------------------------------------------------------
1 Interest income on tax-exempt securities and certain tax-exempt loans has been adjusted to a taxable-equivalent basis.
2 Non-accrual loans are excluded.
</TABLE>
<PAGE> 12
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>
(in thousands, taxable equivalent) 1997 vs. 1996 1996 vs. 1995
- -------------------------------------------------------------------------------------------------------------
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 $ 2,561 $ (32) $ 2,529 $ 1,167 $ (450) $ 717
Securities
Taxable 157 174 331 1,140 253 1,393
Tax-exempt 16 (8) 8 124 (49) 75
-------- -------- -------- -------- -------- --------
Total 173 166 339 1,264 204 1,468
Federal funds sold (56) 16 (40) (118) (53) (171)
-------- -------- -------- -------- -------- --------
Changes in interest income 2,678 150 2,828 2,313 (299) 2,014
- -------------------------------------------------------------------------------------------------------------
Interest expense
CDs over $100,000 (29) -- (29) 112 (106) 6
Savings and interest checking 53 23 76 25 (45) (20)
Money market deposits 904 203 1,107 182 (214) (32)
Time Deposits 249 (38) 211 584 114 698
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 1,177 188 1,365 903 (251) 652
Federal funds purchased 11 (1) 10 26 -- 26
FHLB advances (238) (14) (252) 291 (134) 157
-------- -------- -------- -------- -------- --------
Changes in interest expense 950 173 1,123 1,220 (385) 835
-------- -------- -------- -------- -------- --------
Changes in net interest income $ 1,728 $ (23) $ 1,705 $ 1,093 $ 86 $ 1,179
======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------
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> 13
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>
(in thousands, taxable equivalent) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Average Net Average Net Average Net
Earning Interest Interest Earning Interest Interest Earning Interest Interest
Assets Spread Income Assets Spread Income Assets Spread Income
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Source of funding
Interest-bearing liabilities $320,923 3.90% $ 12,516 $297,851 3.83% $ 11,382 $276,111 3.90% $ 10,779
Non-interest-bearing liabilities
and equity capital 67,728 8.63% 5,849 61,727 8.55% 5,278 54,108 8.69% 4,702
-------- -------- -------- -------- -------- --------
$388,651 $ 18,365 $359,578 $ 16,660 $330,219 $ 15,481
======== ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income (TE) increased $1.7 million, or 10 percent, in 1997
as average earning assets increased $29 million, or 8 percent, and the
net interest margin (net interest income as a percentage of average
earning assets) increased 10 basis points. Earning assets funded with
interest-bearing liabilities increased $23 million, or 8 percent, and
the net interest spread increased by 7 basis points, adding $1.1 million
in net interest income. Earning assets funded with non-interest-bearing
liabilities and equity capital increased $6 million, or 10 percent,
and the earning asset rate increased 8 basis points, contributing
$571,000 to the increase in net interest income.
The increase in average earning assets was principally due to growth in
the loan portfolio, which increased $27 million, or 11 percent, as the
average rate decreased 2 basis points. Mortgage loans increased $10
million, or 15 percent, and commercial loans increased $8 million, or 6
percent. Average consumer loans increased $10 million, or 13 percent,
in 1997, primarily due to home equity lines of credit. Investment
securities increased $3 million, or 3 percent, and the average rate earned
increased 18 basis points.
The primary funding source is interest-bearing deposits. Interest-bearing
deposits increased $27 million, or 10 percent, and the average rate
increased 4 basis points from 1996. The increase in average interest-bearing
deposits was primarily in money market investment accounts, which
increased $21 million, or 27 percent. Average short-term time certificates
in denominations of $100,000 or more approximated 3 percent of average total
deposits in 1997, 1996 and 1995, significantly below the levels of banks
of comparable size. The significant deposit growth in 1997 allowed for
less reliance on Federal Home Loan Bank advances, which on average,
<PAGE> 14
decreased $4 million during 1997, while the average rate decreased 9 basis
points.
In 1996, net interest income increased $1.2 million, or 8 percent, due to
increases in average earning assets of $29 million, or 9 percent, and
the net interest margin decreased 6 basis points. The increase in earning
assets funded with interest-bearing liabilities, at a decreased interest
spread, accounted for $603,000 of the increase in net interest income. The
increase in earning assets funded with non-interest-bearing liabilities, at
a decreased rate, added $576,000 in net interest income.
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, 1997, 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) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 132,310 $ 122,322 $ 120,369 $ 106,447 $ 96,138
Mortgage 80,641 71,346 63,809 56,009 46,967
Consumer 61,850 59,031 63,328 71,023 66,946
Revolving Credit 27,668 19,483 11,596 10,104 8,329
--------- --------- --------- --------- ---------
$ 302,469 $ 272,182 $ 259,102 $ 243,583 $ 218,380
========= ========= ========= ========= =========
</TABLE>
<PAGE> 15
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, 1997, according to scheduled repayments of
principal.
<TABLE>
<CAPTION>
After One
Within But Within After
(in thousands) One Year Five Years Five Years Total
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total loans $51,311 $167,249 $83,909 $302,469
Less:
Residential mortgage
and consumer loans 14,050 88,965 58,814 161,829
------- -------- ------- --------
$37,261 $ 78,283 $25,095 $140,640
======= ======== ======= ========
Loans maturing with:
Fixed interest rates $24,175 $ 65,890 $12,740 $102,804
Variable interest rates 13,087 12,394 12,356 37,836
------- -------- ------- --------
$37,261 $ 78,283 $25,095 $140,640
======= ======== ======= ========
- --------------------------------------------------------------------------
</TABLE>
Non-Performing Assets and Problem Loans
The following table is a summary of non-performing assets as of
December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 893 $2,131 $ 867 $1,228 $1,497
Renegotiated loans 210 408 606 644 486
------ ------ ------ ------ ------
Total non-performing loans 1,103 2,539 1,473 1,872 1,983
Other real estate 177 -- 280 53 838
------ ------ ------ ------ ------
Total non-performing assets $1,280 $2,539 $1,753 $1,925 $2,821
====== ====== ====== ====== ======
Non-performing assets as
a percent of total loans .42% .93% .68% .79% 1.29%
Accruing loans 90 days or
more past due $ 367 $ 172 $ 72 $ 128 $ 1
- --------------------------------------------------------------------------
</TABLE>
In 1997, total non-performing assets decreased $1.3 million, or 50 percent.
The increase in problem loans in 1996 was primarily due to one long-term
credit relationship. In the third quarter of 1997, this credit was
transferred to a new borrower within the reserves established in 1996.
<PAGE> 16
The ratio of non-performing assets as a percent of total loans was 0.42
percent of total loans at December 31, 1997. In addition to loans
classified as non-performing, or 90 days past due, there are other loans
totaling $1.5 million at December 31, 1997, on which management closely
monitors the borrowers' ability to comply with payment terms.
Implementation of SFAS 114 and SFAS 118 in 1995 did not have a material
impact on the above information.
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.
Interest accrual 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 1997 on the $893,000 of non-accrual loans amounted
to $118,000 if the loans would have been current in accordance with their
original terms. The amount of interest income included in net income on
these loans amounted to $14,000.
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, 1997 that would be required
to be disclosed as non-performing or potential problem loans.
There were no foreign loans outstanding at December 31, 1997.
<PAGE> 17
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) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $ 1,459 $ 1,686 $ 745
Net loan losses 859 1,361 445
Year-end allowance for loan losses 4,125 3,525 3,200
Allowance as a percent of
year-end loans 1.36% 1.30% 1.24%
Net loan losses to average loans
outstanding .30% .52% .18%
- --------------------------------------------------------------------------
</TABLE>
In 1997, the allowance for loan losses increased $600,000 to 1.36 percent
of loans. Management believes this increase in the allowance for loan
losses is prudent with the record growth in the loan portfolio of $30
million in 1997, coupled with the sustained period of national and local
economic growth. The allowance was 322 percent of non-performing assets
at year-end, compared to 139 percent and 183 percent at December 31, 1996
and 1995. Net loan losses in 1997 declined to 0.30 percent of average
loans outstanding. The increase in net loan losses in 1996 is related to
the charge-down of the carrying value of the long-term credit relationship
discussed under Non-Performing Assets and Problem Loans.
<PAGE> 18
Summary of Loan Loss Experience
Additional information relative to the allowance for possible loan
losses is presented in the following table. 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) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan
losses, beginning of period $ 3,525 $ 3,200 $ 2,900 $ 2,630 $ 2,450
-------- -------- -------- -------- --------
Loans charged off:
Commercial 556 1,005 17 112 97
Real estate mortgages 49 7
Consumer 408 514 575 539 236
Revolving credit 98 49 51 67 84
- --------------------------------------------------------------------------
Total charge-offs 1,111 1,568 650 718 417
- --------------------------------------------------------------------------
Recoveries:
Commercial 73 11 55 85 3
Real estate mortgages 2
Consumer 161 182 135 89 119
Revolving credit 18 14 13 18 28
- --------------------------------------------------------------------------
Total recoveries 252 207 205 192 150
- --------------------------------------------------------------------------
Net charge-offs 859 1,361 445 526 267
- --------------------------------------------------------------------------
Provision charged to expense 1,459 1,686 745 796 447
- --------------------------------------------------------------------------
Allowance for possible loan
losses, end of period $ 4,125 $ 3,525 $ 3,200 $ 2,900 $ 2,630
==========================================================================
Total loans outstanding at
end of period $302,469 $272,182 $259,102 $243,583 $218,380
======== ======== ======== ======== ========
Average total loans
outstanding for the year $289,305 $260,745 $249,769 $230,251 $205,410
======== ======== ======== ======== ========
Ratio of net charge offs
to daily average loans
outstanding .30% .52% .18% .23% .13%
==== ==== ==== ==== ====
- --------------------------------------------------------------------------
</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>
1997 Allowance amount $1,892 $ 571 $ 128 $1,534 $4,125
% loans/total loans 43.7% 29.6% 26.7% -- 100%
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%
- -------------------------------------------------------------------------
</TABLE>
Non-Interest Income
Total non-interest income increased $959,000, or 16 percent, from 1996.
Trust income increased $549,000, or 26 percent, in 1997 as funds under
management increased $80 million, or 23 percent. Deposit fees
increased $152,000, or 12 percent, and other service charges and fees
increased $130,000, or 23 percent.
Income from the origination, sales and servicing of mortgage loans
increased $185,000, or 12 percent, in 1997. Effective July 1, 1995, the
Bank adopted SFAS No. 122. This statement requires capitalizing the cost
of mortgage servicing rights on loans sold, which is then amortized over
the estimated period of servicing income. Income due to the adoption of
SFAS 122 was $277,000 in 1997, $387,000 in 1996 and $151,000 in 1995.
In 1996, total non-interest income increased $833,000, or 17 percent.
Income from the origination, sales and servicing of mortgage loans
increased $430,000, or 40 percent, as fees and gains on loans sold
increased 71 percent. Trust fees increased $282,000, or 16 percent, due
to an 18 percent increase in assets under management. Other service
charges and fees increased 18 percent, primarily due to income earned
from the sale of credit life insurance.
<PAGE> 20
Non-Interest Expense
In 1997, total non-interest expense increased $1.9 million, or 14 percent.
Total personnel expense increased $1.5 million, or 18 percent. Salaries
and wages increased $567,000, or 10 percent, with increased staffing and
normal salary increases. Benefit costs based upon the 37 percent increase
in the Corporation's stock price during the year increased $457,000, or
68 percent, and the profit sharing incentive award increased $284,000 or
47 percent.
Occupancy costs remained relatively stable in 1997, increasing $28,000, or
3 percent, during the year. Equipment expense for 1997 increased $78,000,
or 10 percent, due primarily to technology costs which increased $91,000,
or 18 percent.
Other operating expense increased $240,000, or 7 percent, in 1997.
Legal and professional fees increased $173,000, or 53 percent, primarily
due to costs attributable to non-earning loans. FDIC insurance expense
decreased $99,000, or 65 percent. Other areas of expense increased due
to the general growth of the Corporation.
The Corporation has implemented a plan relating to anticipated costs,
problems, and uncertainties associated with the Year 2000 issue. In order
to remain competitive and improve efficiency, the Corporation continually
upgrades its computer systems and software. The Corporation does not
create its own software. Strategic alliances with nationally recognized
major software providers with large numbers of banking clients are the
primary source of computer software utilized in the daily operations of
the Corporation. These alliances will be closely monitored and tested,
with documentation of Year 2000 compliance requested from each vendor.
Further, the Corporation is proactively notifying its borrowers of the
Year 2000 issues. It will discuss with those borrowers which may be
materially impacted, their efforts to address the Year 2000 issues.
The Corporation does not anticipate that the cost associated with
addressing the Year 2000 will have a material impact on its future
financial condition or the results of operations.
In 1996, total non-interest expense increased $367,000, or 3 percent.
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 reduction in depreciation expense. Other operating
expense decreased $200,000, or 5 percent, due to a reduction in FDIC
insurance expense.
Federal Income Taxes
Federal income tax expense for 1997 was $2,598,000, compared to $2,259,000
in 1996 and $2,007,000 in 1995, due to the increased profitability of the
Corporation. The Corporation's effective tax rate has been substantially
unchanged from 1995 through 1997 due to the consistency of statutory tax
rates and the relative percentage of tax-exempt income.
<PAGE> 21
Capital Resources and Cash Dividends
The foundation of a strong financial institution is a strong capital base.
Shareholders' equity in 1997 increased $3.5 million, or 11 percent, to
$36.2 million at year-end 1997. During 1996, total shareholders' equity
increased $2.7 million, or 9 percent, over 1995. Shareholders' equity
was 8.2 percent of total assets at December 31, 1997, comparable to 1996.
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.
Note 18 to the Consolidated Financial Statements details the Corporation's
regulatory capital and the capital standards.
Total cash dividends in 1997 were $2,522,000, or $1.30 per share, compared
to $2,100,000, or $1.10 per share, in 1996, a 20 percent increase. The
dividend payout ratio was 48 percent in 1997, 46 percent in 1996 and
40 percent in 1995. A 10 percent and a 5 percent stock dividend were paid
in November of 1997 and 1996. 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 20 to the Consolidated
Financial Statements.
The Corporation maintains a five-year capital plan and utilizes a formal
strategic planning process. Management and the Board 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.
Future Accounting Changes - In 1997, the FASB issued Statement 130,
"Reporting Comprehensive Income," which will require reporting of
comprehensive income (net income plus changes in holding gains and
losses on available-for-sale securities) and Statement 131, "Disclosures
about Segments of an Enterprise and Related Information," which may
require redetermination of industry segment financial information.
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.
<PAGE> 22
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.
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,
changes in the rates of individual interest-rate-sensitive assets and
liabilities and the effect of competition. Through this quarterly
analysis, management estimates 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. The Board of
Directors has established policy limits for the fluctuation of net interest
income due to projected interest rate changes.
The years of 1993 through 1997 included periods of sustained 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 demonstrate the effectiveness of these risk
management techniques.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest margin 4.73% 4.63% 4.69% 4.64% 4.76%
- -----------------------------------------------------------------
</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 $535,000 and $264,000 at
December 31, 1997 and 1996. The price fluctuations experienced during
1997 and 1996 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 future
portfolio management, interest rate risk management and liquidity needs
<PAGE> 23
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) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government
and agency $37,302 $32,119 $27,154 $21,857 $ --
Equity 2,508 2,453 2,425 1,495 --
Other 2,373 -- -- -- --
------- ------- ------- ------- -------
Total $42,183 $34,572 $29,579 $23,352 $ --
======= ======= ======= ======= =======
Mortgage-backed $23,592 $27,202 $18,250 $ 7,980 $ --
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Held to maturity
(in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Government
and agency $ 9,515 $17,489 $23,530 $24,320 $46,148
State and municipal 8,581 7,872 5,171 3,354 6,339
Other 14,883 11,443 7,782 4,414 6,220
------- ------- ------- ------- -------
Total $32,979 $36,804 $36,483 $32,088 $58,707
======= ======= ======= ======= =======
Mortgage-backed $ -- $ -- $ -- $ 811 $ 7,123
======= ======= ======= ======= =======
- -----------------------------------------------------------------------
</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, 1997.
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 of total deposits at December 31, 1997 and 1996.
<PAGE> 24
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 approximately 2 percent of total deposits at December
31, 1997 and 1996.
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
are secured through the pledge of investment securities or mortgage loans.
Federal Home Loan Bank advances totaled $12 million at December 31, 1997
and 1996. Management believes that with the combination of federal funds
lines, 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.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
The Corporation's primary market risk exposure is interest rate risk
and to a lesser extent liquidity risk. See Interest Rate Sensitivity
and Liquidity, above. Business is transacted in U.S. dollars with no
foreign exchange rate risk or any exposure to changes in commodity prices.
There have been no financial instruments obtained for trading purposes.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December
31, 1997. For loans, securities and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-
average interest rates, adjusting the instrument's contractual maturity
date for expectations of payment streams. Similarily, expected
maturity date values and related weighted-average interest rates for
non-maturity core deposits were calculated based upon estimates of the
period over which the deposits would be outstanding. The Corporation has
no derivative financial instruments or trading portfolio at December 31,
1997.
<PAGE> 25
<TABLE>
<CAPTION>
Expected Maturity Date - Year Ended December 31
Fair
There- Value
(in thousands) 1998 1999 2000 2001 2002 after Total 12/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Fixed Rate Loans $39,672 $27,945 $24,224 $30,072 $33,898 $17,915 $173,725 $177,199
Average Interest Rate 8.07% 8.96% 9.34% 9.15% 9.17% 8.92% 8.88%
Variable Rate Loans 37,019 39,616 25,776 9,907 9,925 6,500 128,744 129,022
Average Interest Rate 9.49% 9.59% 9.19% 9.37% 8.16% 8.60% 9.30%
Fixed Rate Debt Securities 36,086 27,914 16,746 7,350 3,634 2,272 94,001 94,593
Average Interest Rate 6.18% 6.35% 6.19% 6.24% 6.33% 5.66% 6.23%
Variable Rate Debt Securities 140 140 140 93 55 1,318 1,888 1,908
Average Interest Rate 6.31% 6.31% 6.31% 6.35% 6.45% 6.88% 6.71%
Equity Securities 2,330 2,330 2,508
Liabilities:
Non-interest-bearing
Checking $28,319 $10,252 $10,252 $ 6,249 $ 6,249 $ 1,171 $ 62,492 $ 62,492
Average Interest Rate
Savings & Interest-bearing
Checking 51,412 47,963 47,963 7,419 7,419 14,838 177,012 177,012
Average Interest Rate 3.61% 3.61% 3.61% 3.61% 3.61% 3.61% 3.61%
Time Deposits 69,079 32,151 17,247 6,485 12,806 9,397 147,166 149,170
Average Interest Rate 5.62% 6.22% 6.97% 6.27% 6.26% 6.78% 6.07%
Fixed Rate Borrowings 5,000 3,000 4,000 12,000 12,054
Average Interest Rate 5.05% 6.09% 6.42% 5.77%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
Item 8 - Financial Statements and Supplementary Data
Consolidated Balance Sheet-Empire Banc Corporation
<TABLE>
<CAPTION>
December 31
(in thousands, except share data) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 25,433 $ 22,603
Federal funds sold 6,800 --
-------- --------
Cash and cash equivalents 32,233 22,603
Securities
Available for sale, at fair value 42,183 34,572
Held to maturity 32,979 36,804
(fair value: 1997-$33,234, 1996-$37,038)
Mortgage-backed securities
Available for sale, at fair value 23,592 27,202
Loans 302,469 272,182
Less: Allowance for loan losses (4,125) (3,525)
-------- --------
Net loans 298,344 268,657
Premises and equipment, net 4,985 3,985
Accrued income and other assets 8,637 6,996
-------- --------
Total assets $442,953 $400,819
======== ========
Liabilities
Deposits
Non-interest-bearing $ 62,492 $ 54,556
Interest-bearing 324,178 289,798
-------- --------
Total deposits 386,670 344,354
Federal funds purchased -- 5,500
Federal Home Loan Bank advances 12,000 12,000
Accrued expense and other liabilities 8,084 6,292
-------- --------
Total liabilities 406,754 368,146
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: 1997-1,943,081; 1996-1,746,009 9,715 8,730
Paid-in-capital 19,810 12,350
Retained earnings 6,321 11,419
Net unrealized gain on securities available for sale,
net of tax: 1997- $182, 1996- $90 353 174
-------- --------
Total shareholders' equity 36,199 32,673
-------- --------
Total liabilities and shareholders' equity $442,953 $400,819
======== ========
- --------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 27
Consolidated Statement of Income-Empire Banc Corporation
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands, except share data) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans, including fees $27,059 $24,536 $23,820
Taxable securities 5,728 5,397 4,004
Tax-exempt securities 256 250 195
Federal funds sold 376 416 587
------- ------- -------
Total interest income 33,419 30,599 28,606
Interest expense
Deposits 14,433 13,068 12,416
Federal Home Loan Bank advances
and other borrowings 756 998 815
------- ------- -------
Total interest expense 15,189 14,066 13,231
------- ------- -------
Net interest income 18,230 16,533 15,375
Provision for loan losses 1,459 1,686 745
------- ------- -------
Net interest income after
provision for loan losses 16,771 14,847 14,630
Non-interest income
Mortgage sales and servicing 1,685 1,500 1,070
Service charges on deposit accounts 1,428 1,276 1,302
Trust income 2,648 2,099 1,817
Other service charges and fees 700 570 482
Other income 354 405 351
Security losses (6) -- (5)
------- ------- -------
Total non-interest income 6,809 5,850 5,017
Non-interest expense
Salaries and employee benefits 9,980 8,450 7,866
Occupancy 1,059 1,031 1,006
Furniture and equipment 895 817 859
Other expense 3,803 3,563 3,763
------- ------- -------
Total non-interest expense 15,737 13,861 13,494
------- ------- -------
Income before federal income taxes 7,843 6,836 6,153
Federal income taxes 2,598 2,259 2,007
------- ------- -------
Net income $ 5,245 $ 4,577 $ 4,146
======= ======= =======
- --------------------------------------------------------------------------
Earnings per share $ 2.71 $ 2.39 $ 2.19
Diluted earnings per share $ 2.52 $ 2.22 $ 2.05
Average shares outstanding 1,934,528 1,912,345 1,890,717
Average diluted shares outstanding 2,085,124 2,063,329 2,025,888
- --------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 28
Consolidated Statement of Cash Flows-Empire Banc Corporation
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 5,245 $ 4,577 $ 4,146
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 727 704 780
Provision for loan losses 1,459 1,686 745
Mortgage loans originated for sale (60,650) (60,761) (42,904)
Sale of mortgage loans 61,516 60,936 42,210
Net loss on securities available for sale 6 -- 5
Net amortization/accretion on securities 146 315 471
Change in:
Deferred taxes (163) (361) (504)
Interest receivable (43) (9) (407)
Interest payable 95 -- 211
Other assets (1,527) 187 216
Other liabilities 1,967 294 1,090
------- ------- -------
Total adjustments 3,533 2,991 1,913
------- ------- -------
Net cash from operating activities 8,778 7,568 6,059
Investing activities
Securities available for sale
Proceeds from sales 992 -- 1,995
Proceeds from maturities 16,876 20,145 10,130
Purchases (12,001) (34,542) (24,645)
Securities held to maturity
Proceeds from maturities 15,749 15,272 17,271
Purchases (21,673) (15,698) (24,028)
Loans granted, net of repayments (32,012) (14,616) (15,270)
Premises and equipment expenditures (1,727) (1,066) (464)
-------- -------- -------
Net cash from investing activities (33,796) (30,505) (35,011)
Financing activities
Net increase in deposits 42,316 24,814 21,550
Change in federal funds purchased (5,500) 5,500 --
Cash dividends paid (2,453) (1,983) (1,698)
Federal Home Loan Bank advances -- (5,000) 9,000
Issuance of common stock 285 351 331
------- ------- -------
Net cash from financing activities 34,648 23,682 29,183
------- ------- -------
Net increase in cash and cash equivalents 9,630 745 231
Beginning cash and cash equivalents 22,603 21,858 21,627
------- ------- -------
Ending cash and cash equivalents $32,233 $22,603 $21,858
======= ======= =======
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
Consolidated Statement of Cash Flows-Empire Banc Corporation (continued)
<TABLE>
<CAPTION>
(in thousands)
Year Ended December 31
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $15,094 $14,066 $13,019
Income taxes paid 2,584 2,575 2,315
Transfer of securities to available
for sale upon adoption of SFAS 115
and interpretations -- -- 2,883
- ---------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 30
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, 1995 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 - $.88 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 - $1.10 per share (2,100) (2,100)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 1,746,009 8,730 12,350 11,419 174 32,673
Net income for 1997 5,245 5,245
Common stock issued 21,314 106 398 504
10% stock dividend 175,758 879 6,942 (7,821) --
Directors' deferred compensation plan 120 120
Change in net unrealized gain/(loss)
on securities available for sale,
net of tax of $92 179 179
Cash dividends - $1.30 per share (2,522) (2,522)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 1,943,081 $ 9,715 $ 19,810 $ 6,321 $ 353 $ 36,199
========= ========= ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 31
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 lower
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.
The Bank is headquartered in Traverse City, Michigan, which is the retail,
medical and financial hub for Michigan's northern lower peninsula. The
Bank's primary market area is the northwestern portion of Michigan's
lower peninsula.
Note 2 - Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
Empire Banc Corporation (the Corporation) and its wholly owned subsidiary,
Empire National Bank (the Bank). Intercompany transactions are eliminated.
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.
They 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 and 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 specific loans (including selected 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.
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-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.
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
<PAGE> 32
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.
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. The carrying value of impaired loans is
periodically adjusted for cash payments, revised estimates of future cash
flow, and changes 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. Beginning July 1, 1995, the cost of mortgage loans originated
with the intent to sell is allocated between the servicing right and the
loan without servicing, based on their relative fair values, under SFAS
No. 122. 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,
<PAGE> 33
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, the carrying value of mortgage servicing rights, the fair
value of financial instruments and the defined benefit pension plan and
supplemental retirement plan liabilities.
Earnings Per Share - Earnings per share is based on weighted-average common
and contingently issuable shares outstanding. Diluted earnings per share
further assumes the dilutive effect of additional common shares issuable
under stock options. The accounting standard for computing earnings per
share was revised for 1997 and all earnings per share previously reported
are restated to follow the new standard. Diluted earnings per share are
consistent with earnings per share disclosure in prior periods. All per-
share data is restated for the 10% and 5% stock dividends in 1997 and 1996
and a 25% stock split in 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 - Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) establishes a
fair-value-based method of accounting for employee stock options but, as
allowed, the Corporation continues measuring compensation cost for such
plans using prior guidelines. No stock options were granted in 1997 or
1996 requiring pro-forma disclosures of net income and earnings per share
under SFAS 123.
Future Accounting Changes - New accounting standards have been issued
which will require future reporting of comprehensive income (net income
plus changes in holding gains and losses on available-for-sale securities)
and may require redetermination of industry segment financial information.
Reclassifications - Certain prior-year amounts have been reclassified
to conform with the 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,
1997 and 1996 were $6,695,000 and $4,849,000.
<PAGE> 34
Note 4 - Securities
Securities and their fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Available for sale
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
U.S. government and agency $ 37,089 $ 235 $ 22 $ 37,302
Other 2,375 -- 2 2,373
Equity 2,330 178 -- 2,508
-------- -------- -------- --------
$ 41,794 $ 413 $ 24 $ 42,183
======== ======== ======== ========
Mortgage-backed $ 23,446 $ 168 $ 22 $ 23,592
======== ======== ======== ========
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
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Held to maturity
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
U.S. government and agency $ 9,515 $ 89 $ -- $ 9,604
State and municipal 8,581 112 -- 8,693
Other 14,883 56 2 14,937
-------- -------- -------- --------
$ 32,979 $ 257 $ 2 $ 33,234
======== ======== ======== ========
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
======== ======== ======== ========
- ---------------------------------------------------------------------------
</TABLE>
<PAGE> 35
Proceeds from sales of available-for-sale securities in 1997 amounted
to $992,000 with realized losses of $6,000. There were no sales of
securities during 1996. Proceeds from sales in 1995 amounted to
$1,995,000 with realized losses of $5,000.
Scheduled maturities of securities at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Available for sale
Amortized Fair
(in thousands) Cost Value Yield
- -----------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $13,103 $13,137 6.25%
Due from one to five years 26,361 26,538 6.16
Equity 2,330 2,508 7.94
------- -------
$41,794 $42,183 6.29%
======= =======
Mortgage-backed $23,446 $23,592 6.54%
======= =======
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
Amortized Fair
(in thousands) Cost Value Yield
- -----------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $15,881 $15,923 6.39%
Due from one to five years 16,461 16,665 6.63
Due from five to ten years 637 646 7.27
------- -------
$32,979 $33,234 6.53%
======= =======
- -----------------------------------------------------------
</TABLE>
Investment securities with a book value of $21,644,000 at December 31,
1997 were pledged to secure public deposits and Federal Home Loan Bank
advances and for other purposes.
<PAGE> 36
Note 5 - Loans
<TABLE>
<CAPTION>
The following is a summary of loans at December 31:
(in thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Commercial $132,310 $122,322
Mortgage 80,641 71,346
Consumer 61,850 59,031
Revolving credit 27,668 19,483
-------- --------
302,469 272,182
Less: Allowance for loan losses (4,125) (3,525)
-------- --------
$298,344 $268,657
======== ========
- --------------------------------------------------------------------------
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1 $3,525 $3,200 $2,900
Loans charged off (1,111) (1,568) (650)
Recoveries 252 207 205
------ ------ ------
Net loans charged off (859) (1,361) (445)
Provision for loan losses 1,459 1,686 745
------ ------ ------
Balance December 31 $4,125 $3,525 $3,200
====== ====== ======
- --------------------------------------------------------------------------
</TABLE>
Impaired loans
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans for which:
Allowance for loan losses allocated $ 312 $ 2,138 $ 1,173
Allowance for loan losses not allocated 562 278 256
------- ------- -------
Impaired loans outstanding at year-end $ 874 $ 2,416 $ 1,429
======= ======= =======
Amount of allowance allocated $ 2,591 $ 2,439 $ 2,055
Average of impaired loans during the year 1,810 1,578 $ 1,919
Interest income recognized during impairment 24 86 98
Cash-basis interest income recognized 17 79 96
- ---------------------------------------------------------------------------
</TABLE>
<PAGE> 37
Note 5 - Loans (continued)
Non-accrual loans
Non-accrual loans outstanding at December 31, 1997 and 1996 were $893,000
and $2,131,000. Substantially all non-accrual loans are considered
impaired. If the non-accrual loans were accruing, additional income of
$104,000, $155,000 and $122,000 would have been recorded in 1997, 1996 and
1995.
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) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation $212,604 $190,817
Federal National Mortgage Association 23,463 26,700
Other investors 7,171 3,073
-------- --------
$243,238 $220,590
======== ========
- --------------------------------------------------------------------------
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 $121,364,000 and $76,378,000 at
December 31, 1997 and 1996. 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. Mortgage loans held for sale at
December 31, 1997 and 1996, at the lower of aggregate cost or market,
were $2,745,000 and $1,879,000.
</TABLE>
<TABLE>
<CAPTION>
The carrying value and fair value of capitalized loan servicing rights
consisted of the following as of December 31:
(in thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Unamortized cost $ 815 $537
Valuation allowance 0 0
------ ----
Carrying value $ 815 $537
====== ====
Fair value $1,169 $840
====== ====
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
Following is an analysis of the activity for loan servicing rights:
(in thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Unamortized cost
Balance January 1 $ 537 $ 151
Additions 434 454
Amortization (156) (68)
----- -----
Balance December 31 $ 815 $ 537
===== =====
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mortgage banking income and expense consists of the following:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net gains on sales of loans $ 965 $ 785 $ 542
Loan servicing income 458 491 481
Net fees 262 224 47
------ ------ ------
Income 1,685 1,500 1,070
------ ------ ------
Salaries and employee benefits 1,063 909 763
Other direct expense 255 249 189
------ ------ ------
Expense 1,318 1,158 952
------ ------ ------
Income before income taxes $ 367 $ 342 $ 118
====== ====== ======
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 39
Note 7 - Premises and Equipment
<TABLE>
<CAPTION>
Premises and equipment at December 31:
(in thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 693 $ 426
Buildings and improvements 4,963 4,645
Equipment 7,588 6,557
------- -------
Total cost 13,244 11,628
Less: Accumulated depreciation and amortization (8,259) (7,643)
------- -------
Net book value $ 4,985 $ 3,985
======= =======
- --------------------------------------------------------------------------
Rental expenses for 1997, 1996 and 1995 were $437,000, $426,000 and
$415,000. Depreciation and amortization for 1997, 1996 and 1995 was
$727,000, $704,000 and $780,000.
</TABLE>
Note 8 - Time Deposits
<TABLE>
<CAPTION>
The aggregate amount of short-term certificates of deposit of $100,000
or more at December 31, 1997 and 1996 was $9,202,000 and $8,334,000.
Following are the scheduled maturities of certificates of deposit at
December 31:
(in thousands) 1997
- --------------------------------------------------------------------
<S> <C>
1998 $ 69,079
1999 32,151
2000 17,247
2001 6,485
2002 12,807
After 9,397
--------
$147,166
========
- --------------------------------------------------------------------
</TABLE>
<PAGE> 40
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) 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
7.15% advance, due March 1997 $ -- $ 4,000
5.05% advance, due January 1998 5,000 5,000
6.09% advance, due March 1999 3,000 3,000
6.42% advance, due March 2000 4,000 --
------- -------
$12,000 $12,000
======= =======
- -------------------------------------------------------------------
</TABLE>
The fixed-rate advances have no prepayment provisions. Loans of
$16,891,000 and securities of $6,218,000 were pledged at December 31, 1997
to collateralize these advances.
Note 10 - Other Non-Interest Expense
<TABLE>
<CAPTION>
Other non-interest expense for the years ended December 31 was:
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Deposit insurance $ 54 $ 153 $ 364
Outside services 618 617 454
Legal and professional 499 326 341
Business taxes 356 336 371
Other 2,276 2,131 2,233
------ ------ ------
$3,803 $3,563 $3,763
====== ====== ======
- -------------------------------------------------------------------
</TABLE>
<PAGE> 41
Note 11 - Federal Income Taxes
<TABLE>
<CAPTION>
Federal income taxes for the years ended December 31 were:
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current expense $3,043 $2,339 $2,511
Deferred benefit (445) (80) (504)
------ ------ ------
Total federal income tax $2,598 $2,259 $2,007
====== ====== ======
- -------------------------------------------------------------------
</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) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income
before federal income tax $2,667 $2,324 $2,092
(Deduct) add:
Effect of tax-exempt interest (89) (83) (69)
Other 20 18 (16)
------ ------ ------
Total federal income tax $2,598 $2,259 $2,007
====== ====== ======
Effective tax rate 33.1% 33.0% 32.6%
====== ====== ======
</TABLE>
<PAGE> 42
<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) 1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 998 $ 794
Deferred compensation 1,581 1,217
Other 164 153
------ ------
Total deferred tax assets 2,743 2,164
------ ------
Deferred tax liabilities
Securities accretion (113) (74)
Cash value of life insurance (34) (34)
Mortgage servicing (277) (183)
Net unrealized appreciation on
securities available for sale (182) (89)
Other (9) (8)
------ ------
Total deferred tax liabilities (615) (388)
------ ------
Net deferred tax asset $2,128 $1,776
====== ======
- ------------------------------------------------------------------
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>
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 participation 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:
<PAGE> 43
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value
Accumulated benefit obligation
Vested $(1,015) $ (782)
Non-vested (75) (68)
------- -------
Total $(1,090) $ (850)
======= =======
Projected benefit obligation
for service rendered to date $(1,760) $(1,374)
Plan assets at fair value 1,342 1,012
------- -------
Funded status (418) (362)
Unrecognized net transition obligation 276 305
Unrecognized prior service cost (14) (16)
Unrecognized loss 131 40
------- -------
Accrued pension liability $ (25) $ (33)
======= =======
</TABLE>
Pension expense includes the following for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned $ 107 $ 103 $ 76
Interest cost on projected benefit
obligation 112 99 79
Actual return on plan assets (182) (119) (119)
Net amortization and deferral 116 83 98
-------- -------- --------
Net pension expense $ 153 $ 166 $ 134
======== ======== ========
- --------------------------------------------------------------------------
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% in 1997 and 1995,
and 7.5% in 1996. The rate of increase in future compensation was 4.5%
in each year. The expected long-term rate of return on assets was 9% for
all years.
<PAGE> 44
A supplemental retirement program for certain executive officers provides
benefits which are integrated with the other benefit plans.
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $ (306) $ (221)
====== ======
Projected benefit obligation $ (897) $ (694)
Unrecognized net transition obligation 125 137
Unrecognized prior service cost 24 26
Unrecognized loss 95 5
------ ------
Accrued pension liability $ (653) $ (526)
====== ======
- ------------------------------------------------------------------------
</TABLE>
Net plan cost includes the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned $ 60 $ 58 $ 50
Interest cost on projected
benefit obligation 54 45 52
Net amortization 14 14 18
------ ------ ------
Net plan cost $ 128 $ 117 $ 120
====== ====== ======
- ------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the projected
benefit obligation was 7% in 1997 and 1995, and 7.5% in 1996. The rate
of increase in future compensation was 5% in each year.
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 1997,
1996 and 1995 were $141,000, $121,000 and $107,000.
An Employee Stock Ownership Plan (ESOP) covers substantially all full-time
employees. At December 31, 1997 the plan held 265,797 shares of stock
allocated and voted by employees. The annual contribution to the ESOP is
determined by the Board of Directors. Contributions for 1997, 1996, and
1995 were $163,000, $142,000 and $129,000.
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.
<PAGE> 45
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, 1997, 187,475 stock options and 86,593
stock appreciation rights were vested. The weighted average exercise
price of the stock options at year-end 1997 was $9.90 and the weighted
average remaining option life was 2.6 years. The expenses on the stock
appreciation rights for 1997, 1996 and 1995 were $1,129,000, $672,000 and
$798,000. 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 - 12/31/94 $6.60 - $14.01 236,807 110,462
Exercised in 1995 6.60 (16,820) (8,408)
------- -------
Outstanding - 12/31/95 6.60 - 14.01 219,987 102,054
Exercised in 1996 6.60 (11,949) (5,975)
------- -------
Outstanding - 12/31/96 6.60 - 14.01 208,038 96,079
Exercised in 1997 6.60 - 8.16 (18,975) (9,486)
------- -------
Outstanding - 12/31/97 6.60 - 15.90 189,063 86,593
======= =======
- -------------------------------------------------------------------------
</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, 1997 amounted to $2,693,000. During 1997,
new loans to such related parties amounted to $1,278,000 and repayments
amounted to $2,662,000.
<PAGE> 46
Note 15 - Off-Balance-Sheet Financial Instruments
The Bank is 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
real estate and personal property. The following is a summary of
commitments as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Commitments to make loans $37,937 $26,285
Unused lines of credit 55,062 45,513
Standby letters of credit 1,591 1,563
- ------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, commitments to make loans included $16.4
million and $7.4 million of fixed and 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 $12.2 million and
$11.7 million at December 31, 1997 and 1996, which are intended for sale
in the secondary market upon closing. Other commitments include variable
rate mortgage loans of $1.8 million and $4.3 million at December 31, 1997
and 1996.
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 of 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 of 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> 47
Note 17 - Fair Value Disclosure
Fair values of financial instruments are 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 amount of borrowings maturing
within 90 days approximates 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.
Estimated fair values of financial instruments at December 31, were:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 32,233 $ 32,233 $ 22,603 $ 22,603
Securities
Available for sale 65,775 65,775 61,774 61,774
Held to maturity 32,979 33,234 36,804 37,038
Loans net of allowance 298,344 302,095 268,657 277,077
Accrued interest receivable 2,674 2,674 2,631 2,631
Financial liabilities
Deposits 386,670 388,674 344,354 345,822
Federal funds purchased -- -- 5,500 5,500
Federal Home Loan Bank advances 12,000 12,054 12,000 11,987
Accrued interest payable 1,128 1,128 1,033 1,033
- -------------------------------------------------------------------------
</TABLE>
The fair value of off-balance-sheet instruments at December 31, 1997 and
1996 is not material.
<PAGE> 48
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) 1997
- ------------------------------------------------------------
<S> <C>
Tier 1 capital
Shareholders' equity $36,199
Less: Goodwill (357)
Net unrealized gains (353)
-------
Total tier 1 capital 35,489
Tier 2 capital 3,971
-------
Total qualifying capital $39,460
=======
Risk-weighted assets $317,559
Average quarterly assets 437,768
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Regulatory
Capital Standards
------------------------
Adequately Well Actual
Capitalized Capitalized 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Risk-based ratios
Tier 1 leverage ratio 4% 5% 8.11%
Tier 1 risk-based capital 4 6 11.18
Total risk-based capital 8 10 12.43
- ---------------------------------------------------------------
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
Regulatory
Capital Standards
-------------------------
Adequately Well Actual
Capitalized Capitalized 1997
- ---------------------------------------------------------------
Risk-based capital amounts
(in thousands)
<S> <C> <C> <C>
Tier 1 leverage $17,511 $21,888 $35,489
Tier 1 risk-based 12,702 19,054 35,489
Total risk-based 25,405 31,756 39,460
- ---------------------------------------------------------------
</TABLE>
Note 19 - Earnings Per Share
A reconciliation of earnings per share and diluted earnings per share
is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<C> <C> <C>
Net income (in thousands) $5,245 $4,577 $4,146
====== ====== ======
Earnings per share:
Shares
Average common shares outstanding 1,930,439 1,910,667 1,890,109
Average contingently issuable shares 4,089 1,678 608
--------- --------- ---------
1,934,528 1,912,345 1,890,717
========= ========= =========
Earnings per share $2.71 $2.39 $2.19
===== ===== =====
Diluted Earnings per share:
Shares
Average outstanding shares, per above 1,934,528 1,912,345 1,890,717
Effect of stock options 150,596 150,984 135,171
--------- --------- ---------
2,085,124 2,063,329 2,025,888
========= ========= =========
Diluted earnings per share $2.52 $2.22 $2.05
===== ===== =====
- ---------------------------------------------------------------------------
<PAGE> 50
Note 20 - Empire Banc Corporation
(Parent Company Only)
Condensed Financial Statements
</TABLE>
<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, 1997, $5,351,000 of retained earnings
were available for dividend declaration without prior regulatory approval.
Dividends paid to the Corporation by the Bank were $2,525,000 in 1997 and
$2,100,000 in 1996.
Following are condensed parent company financial statements:
Condensed Balance Sheet
December 31
(in thousands) 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,394 $ 1,105
Investment in subsidiary 34,605 31,646
Other assets 294 282
------- -------
Total assets $36,293 $33,033
======= =======
Liabilities and shareholders' equity
Other liabilities $ 94 $ 360
Shareholders' equity 36,199 32,673
------- -------
Total liabilities and
shareholders' equity $36,293 $33,033
======= =======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended December 31
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary $2,525 $2,100 $1,700
Net expense (91) (142) (126)
Federal income tax benefit 31 48 43
Equity in undistributed net
income of subsidiary 2,780 2,571 2,529
-------- -------- --------
Net income $5,245 $4,577 $4,146
======== ======== ========
</TABLE>
<PAGE> 51
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) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities
Net income $ 5,245 $ 4,577 $ 4,146
Adjustments
Other (8) (134) 32
Subsidiary net income (5,305) (4,671) (4,229)
------ ------ ------
Net cash from operating activities (68) (228) (51)
Cash flow from investing activities
Subsidiary dividends received 2,525 2,100 1,700
Cash flow from financing activities
Dividends paid (2,453) (1,983) (1,698)
Issuance of common stock 285 351 353
------- ------- -------
Net change in cash and due from banks 289 240 304
Beginning cash and due from banks 1,105 865 561
------- ------- -------
Ending cash and due from banks $ 1,394 $ 1,105 $ 865
======= ======= =======
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 52
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 22, 1998
<PAGE> 53
Quarterly Financial Data
Empire Banc Corporation
The following is a summary of selected quarterly results of operations
for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands, Quarter Ended
except share data) 12/31 9/30 6/30 3/31
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net interest income $4,876 $4,707 $4,482 $4,165
Provision for loan losses 478 188 395 398
Non-interest income 1,856 1,827 1,611 1,515
Non-interest expense 4,086 4,309 3,820 3,522
Income before income taxes 2,168 2,037 1,878 1,760
Net income 1,451 1,361 1,252 1,181
Earnings per share .75 .70 .65 .61
Diluted earnings per share .69 .65 .60 .57
- -----------------------------------------------------------------------
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 .65 .62 .58 .55
Diluted earnings per share .60 .57 .53 .51
- -----------------------------------------------------------------------
Per-share amounts have been adjusted for stock dividends.
</TABLE>
<PAGE> 54
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 5, 1998,
to be filed with the Commission, and is incorporated herein
by reference, as follows:
<TABLE>
<CAPTION>
Pages in 1998
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 6-8, 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: 11
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> 55
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
as of December 31, 1997 and 1996 26
For each of the years in the three-year
period ended December 31, 1997
Consolidated Statement of Income 27
Consolidated Statement of Cash Flows 28-29
Consolidated Statement of Changes
in Shareholders' Equity 30
Notes to Consolidated Financial
Statements 31-51
Independent Auditor's Report 52
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).
<PAGE> 56
(10) Material Contracts. * Denotes executive compensation
plans and arrangements in which the Corporation's
executive officers participate.
(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 Plan (incorporated herein by reference
to the Corporation's Registration Statement dated 9/25/97,
file under Registration No. 333-36747).
(11) Statement re computation of per share earnings.
See Note 19, Note to Consolidated Financial Statements,
Page 49.
(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
(99) Additional exhibits. Not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
</TABLE>
<PAGE> 57
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 19, 1998.
<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 19, 1998.
/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
----------------------------- ------------------------------
John M. Rockwood, Jr. Laurence P. Skendzel, M.D.
Director Director
</TABLE>
<PAGE> 58
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
Statements of Empire Banc Corporation on Form S-8 (Registration Statement
Nos. 33-58578, 333-36747, 333-63759), of our report dated January 22, 1998
on the consolidated financial statements of Empire Banc Corporation, as of
December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, which report is included in the 1997 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 24, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,389
<INT-BEARING-DEPOSITS> 44
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,775
<INVESTMENTS-CARRYING> 32,979
<INVESTMENTS-MARKET> 33,234
<LOANS> 302,469
<ALLOWANCE> 4,125
<TOTAL-ASSETS> 442,953
<DEPOSITS> 386,670
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 8,084
<LONG-TERM> 7,000
0
0
<COMMON> 9,715
<OTHER-SE> 26,484
<TOTAL-LIABILITIES-AND-EQUITY> 422,953
<INTEREST-LOAN> 27,059
<INTEREST-INVEST> 5,984
<INTEREST-OTHER> 376
<INTEREST-TOTAL> 33,419
<INTEREST-DEPOSIT> 14,433
<INTEREST-EXPENSE> 15,189
<INTEREST-INCOME-NET> 18,230
<LOAN-LOSSES> 1,459
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 15,737
<INCOME-PRETAX> 7,843
<INCOME-PRE-EXTRAORDINARY> 7,843
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,245
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.52
<YIELD-ACTUAL> 4.73
<LOANS-NON> 893
<LOANS-PAST> 367
<LOANS-TROUBLED> 210
<LOANS-PROBLEM> 1,507
<ALLOWANCE-OPEN> 3,525
<CHARGE-OFFS> 1,111
<RECOVERIES> 252
<ALLOWANCE-CLOSE> 4,125
<ALLOWANCE-DOMESTIC> 2,491
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,634
</TABLE>
